- Jan 13, 2016
by Hani Elias, JD, MPH
Successfully navigating the turbulent waters of value-based care in 2016 requires a realignment of priorities across the hospital system. Administrative leaders must make a deliberate effort to retool in order to thrive. They must take action to impact costs, quality, and outcomes in innovative ways. They must be willing to embrace strategies that are unfamiliar but also incredibly important and effective.
For hospital supply chain organizations, clinical spend management is the newest core competency that must be mastered. The numbers help explain why.
Clinical supplies typically represent the second largest and fastest growing cost category for hospitals. Uninformed clinical supply decisions account for more than $35 billion in wasteful spending annually. At the same time, it’s widely known that hospital margins are narrower than ever before, with one-third even reporting negative margins.
However, margins look very different for the medical device companies that hospitals are paying over $185 million each year. Over the past decade, these manufacturers have enjoyed average gross margins of 65 percent. That’s on par with luxury goods manufacturers, like Louis Vuitton, and almost twice that of technology companies like Apple. There is clearly a significant opportunity to reduce spend within these supply costs, and still allow device vendors to perform well financially.
The high profits of medical device companies are in part due to an imbalance in investment. They collectively spend between $10 and $15 million in sales and marketing per individual U.S. hospital while clinical spend management programs have budgets that represent a fraction of those dollars. Manufacturers invest resources because their sales are rewarded by Wall Street but that isn’t true for hospitals where investments don’t pay off in the same way. But the shift towards value-based reimbursement requires hospitals to take clinical spend management just as seriously as vendors take sales growth.
Moving forward, hospitals must combat device companies’ massive sales and marketing machines to protect both patients and already fragile margins. In practice, this means expanding their resources, leveraging technology, and upgrading their talent. Hospitals that have made the shift have seen a significant return on investment.
With the reason to invest in better clinical spend management now very clear, the bigger question is where to focus. From our experience, hospital underinvest in three areas within their supply chain organizations that lead to wasteful spending or less than ideal patient outcomes,
Product Knowledge – When armed with a comprehensive understanding of how products are used within their hospitals and the market landscape, supply chain can be far more impactful. Unfortunately, supply chain organizations often lack data and insights on when and why specific supplies are used. Additionally, device selection and utilization decisions are too heavily reliant on vendor information.
A Procured Health survey of over 150 hospitals found that 75% of product decisions are made on the basis of vendor claims and less than one-third of decisions reflect a review of safety metrics or clinical evidence. That’s a dangerous way to operate—especially in the world of value-based care where poor outcomes are extremely costly.
Product knowledge also allows supply chain to step into the role of product expert, which has often been played by the vendor sales rep. By staying current on emerging evidence, monitoring the market landscape for comparable products, and analyzing utilization patterns, supply chain substantially improves the hospital’s negotiating leverage. Through these efforts, supply chain can drive standardization of care and cost savings.
Process – The supply chain has historically concentrated on transactional responsibilities like guaranteeing that purchase orders are processed and that prices paid reflect contractual agreements. In a value-based care environment where there is so much work to do, unprocessed PO’s are less urgent.
It’s much more critical to focus on process improvements with larger, strategic benefit. Smart organizations have dedicated resources to designing a more efficient governance model that facilitates clinician engagement and enables the health system to leverage its scale. Similarly, they have focused on establishing a more robust analytical approach centered on evidence-based medicine and Total Cost of Ownership. This rigor ensures the best decisions are made, rather than ill-informed ones based solely on physician preference, price, or the vendor brochure.
Physician Engagement – The ability to engage physicians is perhaps the biggest shortcoming of supply chain as compared to device vendors. A Procured Health survey of 101 orthopedic surgeons and electrophysiologists shows that one-third of physicians rated their vendor as valuable while less than 10% said the same about supply chain leaders.
The key differentiator is that vendors are continuously building relationships with physicians, whereas physicians complain that administrators only approach them when they’re asking them to make sacrifices. To make a difference, supply chain must be proactive in aligning with physicians around value to help them identify opportunities to improve patient outcomes and eliminate wasteful expenditures. In practice, this means supply chain leaders should focus on bringing forward recommendations that deliver value to patients, even if it means adopting higher-priced devices when they are proven to deliver better results for patients.
Ultimately, this investment is most vital because it’s rebranding supply chain as the go-to source for physicians who are seeking guidance on which devices will allow them to practice medicine in the most efficient and effective way possible.
And isn’t that what healthcare is all about?