Daily Archives: March 15, 2008

Why do Hospitals Struggle to Run like a Business?

Today’s guest post is courtesy of Andy Monin, President and CEO of VendorMate and fellow blogger over on Vendor Compliance.

I’ll join Michael Lamoureux et al. in opining that of all industries, healthcare has the greatest opportunity to benefit from e-Procurement.

In my opinion, Healthcare Materials Management professionals have the toughest job in all of supply chain management. These professionals could only wish that their job was merely to find the best products at the best prices. Unfortunately, they have many more pressing factors that dictate their daily activities and purchasing decisions, and it’s the combination of these factors that would make the centralization and automation of e-Procurement particularly beneficial. Here are just a few of the complicating factors that trouble hospital materials managers.

#1 Compliance

Hospital Materials Management professionals have a myriad of regulatory and compliance requirements that put a strain on their operations, staff and resources.

To start with, unique government regulations burden hospital materials management professionals by requiring extensive data collection and process modifications.

  • Stark Law/Anti Kick-back Statute
  • OIG Medicaid/Medicare Fraud/Sanction List
  • OFAC (Patriot Act)
  • FDA/USDA Recall Management
  • Pandemic/Epidemic Readiness

Few other industries have to deal with these uncoordinated requirements. Each one is an independent initiative. On top of that, these and other regulations begin to impact not just who the hospital does business with but also who can come into the facilities.

For example, vendor representatives that have access to procedural areas are required to provide immunization documentation, product competency information, HIPPA/privacy policy acknowledgements and Operating Room safety documentation prior to gaining access. Failure to capture and monitor these thousands of documents from hundreds of representatives that are coming and going from year to year puts the hospital at risk of failing internal/external audits that can jeopardize Medicare/Medicaid reimbursements.

#2 Reimbursement Dependency

Do not underestimate the importance of Medicare/Medicaid reimbursements. Hospitals across the nation are suffering from revenue that does not keep pace with the rising cost of service. Increasingly stringent and flat levels of reimbursement from Medicaid, Medicare and insurance companies continue to erode hospital revenues and jeopardize the solvency of many health systems; however, the vendors selling to hospitals continue to report rising revenue and earnings year-over-year.

The documentation — of compliance, of diagnostic codes, etc. — means that the inflows and outflows of cash are not as simple as the typical procurement flow from purchase order to invoice to payment. A slip in any one of these steps leads at best to a dispute with Medicaid, Medicare and insurance companies. At worst, it’s a legal issue.

#3 Taking Advantage of a Fragmented Space

There are over 5,000 hospitals in the United States. This means that a large percentage of a hospital’s supplier base and subsequent spend is with vendors that are significantly larger than the hospital. Individual hospitals have little negotiating leverage for pricing or service. Add to this the fact that many medical devices and drugs are sole sourced due to the proprietary nature of these technologies, hospitals are beholden to the suppliers despite the fact that hospitals are the largest distribution channel for those same suppliers.

Group Purchasing Organizations (GPOs) have stepped in to play a role in reducing costs. Hospitals are typically members of at least one GPO. Just as the name suggests, these GPOs reduce hospital costs by aggregating the spend of their participating hospital members. However, these organizations have squeezed the suppliers and most GPOs are realizing that you can only squeeze so much blood out of a turnip. Therefore, they are now attempting to deliver value tools to enable hospitals to more efficiently manage their operations. Time will tell if GPOs can morph their place in the hospital supply chain and deliver on the promise of being a trusted advisor rather than just a middle man for band aids and gauze pads.

#4 Physician Preference Items 

Managing the complexity of physician preference items where patient care can be impacted is a restriction that is unique to healthcare purchasing. Frequently, Physician preferred items take precedence over cost savings, innovation, and efficiencies. Unfortunately, these items may be tied to conflicts of interest that are difficult to uncover and monitor. Is that same “more senior physician choosing to continue to use plaster casts because it is in the best interest of patients and quality of care? Or has the physician neglected to take on more innovative products from other vendors because the existing vendor of plaster casts takes him to elaborate “education sessions” in Lake Tahoe every year? Who knows?

#5 And a Mint on the Pillow

A few months back, I heard from one doctor that said his hospital is moving away from calling patients “a patient” and using the term “customer”. Wow!!!! That is a change of philosophy that might not be the in the best interest of patient care. Sure, individuals have to take charge of their healthcare and become educated consumers of these services. But the phrase “the customer is always right” doesn’t jive when dealing with patient care issues. Physicians are making life and death decisions based on years of experience and education and shouldn’t have to debate with a patient’s “WebMD, Google search, Super Bowl ad self-diagnosis and prescription”.

Vendors are a necessary and critical extension of the health system and therefore place a delicate balance on vendor/buyer/doctor/patient relationships that require greater scrutiny. If e-Procurement can eliminate some of the distractions — by holding down costs so that more people can receive quality care, by documenting compliance and sniffing out conflicts of interest — then the benefit of moving to this model cannot be denied.

Thanks, Andy!