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!

Join me in welcoming another guest author to Sourcing Innovation with his post questioning where GPOs will fit in the Health Care industry of tomorrow!

Where will GPOs fit as the Health Care industry starts leveraginge-procurement and the Internet to the level other industries have? Beforeanswering this, let’s start by quickly summarize the value proposition GPOs offer Health Care entities today, and then look at potential flaws in that value proposition and why these flaws exist … or more appropriately, what has changed.

Because most Health Care entities are small regional businesses, they don’thave the purchasing power of Global 2000 companies. One value that Health Care GPOs bring is their ability to leverage the purchasing requirements of multiple Health Care entities (based on the premise that greater volume will bring better prices). Also, many GPOs offer an additional service by processing the POs and invoices. So, by having the GPOs take over the strategic sourcing function as well as the transactional purchasing function, Health Care entities can focus their resources on what’s most important … patient care. Also, GPO services are usually free to Health Care entities.

For suppliers, they can reach hundreds of customers through a single organization, the GPO … and they pay the GPO a commission … which is how the GPOs make money.

Value Proposition Flaw #1: How do Health Care entities know whether they areactually getting the best possible price from the GPO? They don’t,especially if they have outsourced both strategic sourcing and transactional purchasing to the GPO. Today, the Internet has created price transparency in many markets (IT, office supplies, MRO … and some health care categories as well). Purchasing folks at Health Care entities go on the Internet and see lower prices than they are paying from their GPO right on a supplier’s website! Simply put, this price transparency created by the Internet has madeit hard for GPOs, especially with the supplier markup included, to ensure they are offering the best price to Health Care entities, especially when large, multi-national suppliers / distributors are involved (Sigma-Aldrich,Fisher-Scientific, VWR, Staples, Grainger, etc.). The result? Higher prices paid on both direct and indirect materials by the Health Care entity.

Value Proposition Flaw #2: The way GPOs manage transactional purchasing is still a manual process. There is still a large redundancy of resources betweenthe GPO and the Health Care entity, long lead times (which creates the well known and costly industry phenomenon of stockpiling inventory), and issues with compliance. Compare that to how leading Fortune 500 companies purchase using systems like Oracle iProcurement, Ariba Buyer, or SAP EBP, where the purchasing department is basically taken out of the process, which is automated, in most cases, from “requisition to check”, and totally compliant! The result? The cost of redundant resources, too much inventory and inefficient processes increase the operational costs at Health Care entities

So what needs to happen? It’s simple – the same thing that has already happened in other industries … the Health Care entities need to adopt e-procurement! It will not only lower their operational costs, but will let them take advantage of the aforementioned price transparency, which will result in lower prices. Also, the use of e-procurement doesn’t preclude the use of GPOs, but it gives the Health Care entity the option of dealing with certain categories directly, if that’s where the better prices lie!

And where can GPOs add value? One obvious place is with small suppliers. Although many large suppliers will be able to now “go direct” to clients, not every supplier has a web site, a punchout site, or the ability to support a client using an e-procurement system, so small suppliers still need an “on ramp” to their clients … and the GPOs can provide that.

A not so obvious opportunity is for the GPOs to get with the e-procurement program and provide the capability for the Health Care entities to buy from them in a self-service manner. After an initial technology investment, a GPO would also have lower operating costs, which could potentially make it more price competitive.

In closing, please be aware that there are Health Care entities that have already adopted the e-procurement best practices of other industries, and they are already reaping the rewards. One common thread I see across these market leaders is that they have successfully recruited both purchasing and IT professionals from other industry sectors that have been successful with e-procurement.

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!