Today’s post is from a contributor, who’s a buyer and not a cutter, who wishes to remain anonymous.

The Canadian medical and healthcare landscape is a patchwork of publicly funded services (which, for the most part, operate as a legal monopoly) and privately funded services. With some exceptions, the traditional, physician-based, services are generally provided through the publicly funded health services (that include funding for community based hospitals).

Based on my personal observation of the state of healthcare procurement in Canada, I give the industry a solid “C” performance rating. There are three reasons why healthcare procurement is an “average performer”.

Technology constraints

Hospitals and regional healthcare authorities have not made investments in supply chain technology.

What my recent experiences show is that the funding has typically, and rightly, focused on improving specific patient outcomes such as reducing “waiting times”. In a publicly funded system, costs are contained through restraining supply. Hence, critics argue that the waiting times for medical procedures are a proxy for “underfunding”. Healthcare funding for activities not easily connected to improving patient outcomes has continued to lag. The status of healthcare supply chains is slowly beginning to get recognized as a priority investment item.

Many of the country’s largest hospitals and healthcare regional authorities would struggle to report basic supply chain information such as the volume of purchasing by vendor, whether the costs per employee – or per patient – vary by hospital for standard medical procedures, and whether a supplier charges one department – or one hospital – a different price than another within the same regional authority.

Physician Preference

There are few professional situations where individuals wield more personal power than that of a surgeon in a hospital. Quite simply, most hospital staff are encouraged to treat a physician’s requests as an infallible demand. While working with one of the largest hospital corporations in the US, our team found that getting physicians to comply with approved suppliers was not difficult – if you could gain direct access to the physician. However, the supply chain staff were adamant that they would not even consider initiating a discussion about compliance with the doctors. The smartest decision that the hospital chain’s CEO made was to appoint a highly regarded Epidemiologist as the Chief Purchasing Officer as this gave the position a level of respect that allowed compliance programs to become effective.

Talent

I don’t think that there is much more that needs to be said about this that hasn’t already been covered by the doctor here on this blog. Let me simply agree that in order to move beyond average results, we will require the ability to attract and retain above average talent. My observations are that healthcare procurement is basically at the “three bids and a buy” stage of maturity.

Let me share some data on why I think healthcare procurement is important and why I think it’s only an average performer.

The Canadian Institute for Healthcare Information (CIHI) tracks and publishes healthcare information in Canada. In their 2007 report, “National Health Expenditures 1975-2007“, they show that while real spending in healthcare in Canada has been rising dramatically, with a 300% increase between 1975 and 2005 (from $40B in 1975 to $120B in 2005 stated in 1997 dollars), healthcare’s share of GDP has been a more modest rise from about 7% to about 10% in 2005. The data also shows that healthcare spending can change rapidly. During Canada’s recession in the early 1990’s, healthcare spending peaked at about 10% of GDP in 1991 and then subsided to about 9%, where it remained for about ten years until healthcare once again exceeded 10% if GDP in the early noughts.

Three factors have been driving an increase in the costs of publicly funded healthcare: an increase in the size of the population, an increase in medical services as new treatments and new surgeries are brought forward, and an aging population. In 2000, the Conference Board of Canada forecast that expenditures on healthcare would rise to 42% of total provincial and federal government revenues by 2020, from 31% in 2000. The full report can be found on-line.

So, healthcare is big business and its relative importance to our economy is growing.

That decade of healthcare spending restraint was followed by several years of increased healthcare funding, with a particular focus on increased hospital spending, followed by increased spending on drugs, relative to physician spending that increased more slowly.

The Ontario Ministry of Finance is one of the early movers on trying to understand healthcare spending for non-medical areas. Under the auspices of Ontario Buys, they funded six healthcare supply chain projects. The investment was rather modest at $12.8M ($9.8M from Ontario Buys) and covered $973M in annual purchasing. They are claiming a 10 year savings of $92.4M and an average payback time of 1.5 years. Partly based on the success of these trials, they issued an RFP (BPS-071212) in December 2007 to receive support in evaluating additional healthcare supply chain business cases.

Investments in supply chain technology do not have to be expensive to add value.

The business cases are significantly improved if procurement savings are added to the plan. In looking at the case for two regional authorities, both representing about 15 hospitals with annual purchases on goods and services in the range of $300-$500M, procurement savings are being realized at about 1.5%-2% on an annual basis. This puts those regions squarely in the middle of the pack for procurement organizations (see ISM’s annual Cross Industry Summary reports – gated at http://knowledge.capsresearch.org/).

Again drawing on personal experience, procurement savings can be accelerated to well above the 1.5%-2% annual rate, and a range of 5%-8% on a one time improvement maintained over several years is possible. I recently performed two benchmarking exercises with thousands of purchased items representing in excess of $50M in annual purchases for a regional healthcare organization. While performing the benchmarking, it was apparent that those basic supply chain information questions I referenced above could not be answered. More telling, however, was a lack of interest in trying to answer the questions. If you are running a “three-bid and a buy” organization, why would you care about the cost per patient for the consumables in a medical procedure, even if you could access the information? Isn’t that the sort of thing the Chief Surgeon or the nurse in charge of a ward is responsible for?

Supply chain and purchasing are considered, and therefore staffed as, junior support.

The results of the benchmarking tests indicated that joining one or more of the group purchasing organizations (GPO) in Canada (the two market leaders are Medbuy and Healthpro) would provide immediate savings of 4%-10% in medical-surgical and pharmaceutical categories, and that was for purchasing identical items. Additional work in identifying functionally equivalent items had the potential to add another level of savings.

While the GPO model is not perfect, for the right class of goods, the average healthcare procurement organization should take a hard look to see if they have supported their staff with the right technologies, and, if so, ask if their staff have the capacity and skill level to perform better than a GPO. Plexxus, a non-profit shared supply chain services organization, owned by 12 hospitals in the Toronto area, has selectively used a GPO for items that have volume sensitive pricing.

Condensing these notes to a few take away thoughts, we arrive at:

• This is a good time to be in the healthcare supply chain technology business in Canada.
• Homegrown procurement departments in regional authorities and hospitals are performing with expected results for average procurement organizations.
• Higher performance can be achieved, and in some cases can be achieved quite easily, by using a GPO.
• A broader, more sustainable, approach will require more investment in technology, policy changes, and staff talent than are likely to be made available to local healthcare administrators.

Thank you anonymous. Hopefully you’ll have more thoughts to share with us in the future!