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!

Today I’d like to thank Dave Stephens of Coupa for letting me re-post his thoughts on efficiency vs. cost in health-care providers.

Coupa has been working with a number of healthcare organizations lately, and so we thought we’d share some of the e-procurement challenges that we see as unique to that industry.

We’ll start with a simple question that has a surprisingly un-simple answer: Should healthcare providers prioritize quality over efficiency when in comes to patient care? Yes, you say, of course! But what does that really mean? Let’s take this question past the typical sound bite by using a specific example –

Discussion Point: Orthopedic casts

There are two different “technologies” used in the casting process. The casts are most frequently made from plaster, but fiberglass bandages are viewed as an increasingly popular and more modern alternative.

So what if you take a fresh batch of physicians, straight out of medical school, and plug them into a system where plaster is mandated (let’s say due to the presumption of lower cost due to “part” and “procedure” standardization)? Let’s say these newer physicians are inexperienced in plaster because they’ve always used the “newer” fiberglass bandage method in their residency programs. What you’ll most likely find is both quality and efficiency of casting by these new physicians is very low. Compound that with a low frequency of performing the casting procedures, and you’ll realize it will take a long time for proficiency to rise to adequate levels. The original goals of standardizing will have failed – costs will be higher, procedures will take too long, and quality of care won’t be high enough.

The obvious answer, to use fiberglass for casts, has a hidden problem. The hidden problem is the more senior physicians. They have used plaster for years and are very proficient at it. These physicians can give a higher quality of care at a lower cost using plaster – without a doubt. Not only that, they may have a perspective that fiberglass is not as good as plaster and may be fairly unwilling to move to what they view as a lower quality method of casting.

At this point some hospitals and clinics just give up and carry both fiberglass and plaster. And maybe that’s the right decision. Perhaps over time fiberglass may displace plaster altogether. What is the real cost / benefit for pushing one method over the other, especially once the true costs of switching for your professionals are factored in?

Conclusion for Healthcare organizations adopting e-procurement initiatives

An efficient e-procurement program recognizes the need for a high quality of care and supplies the necessary goods to practitioners even if it means sacrificing on the admirable goals of part standardization. We’d assert that being flexible with physicians results in lower total cost by reducing rework and increasing the operational efficiency of a healthcare organization’s high value assets (its professionals).

The same story can be told across a wide variety of supplies and procedure kits. From sutures to bandages, from scalpels to IV needles, the best supplies are those that your physicians and nurses are most comfortable using.

So consider your e-procurement goals before embarking on your programs in healthcare organizations. Focus first on convenience. With e-procurement your cycle times for receiving materials should be cut by weeks. Focus next on inventory management. With e-procurement you should have a much better handle on min/max reorder points and on your inventory levels and carrying costs.

And then where you can do so without impacting quality, reduce costs further by standardizing – with care.