With reimbursements falling and expenses growing, hospitals and health systems are feeling the squeeze, and cutting supply chain costs is one of the first things systems are doing to handle the unprecedented margin pressure they're facing.
Cutting costs is essential for both nonprofit and for-profit healthcare organizations, and administrators are often times put in an extremely difficult position when deciding where those savings need to come from.
The Association for Healthcare Resource & Materials Management predicts that around the year 2020, medical supplies will outpace labor as the biggest expense for hospitals and health systems. Therefore, when systems are looking to reduce costs, supplies is a natural place to turn to.
Supply costs are also in the crosshairs of hospital and health system administrators. When trying to eliminate expenses, they have to look to "staff or stuff," says Igor Belokrinitsky, partner with Strategy&. It's essential hospital executives make their numbers because not doing so has many negative repercussions, such as experiencing a credit downgrade or losing their ability to borrow money. To make their numbers, "administrators would much rather play hardball with a supplier than fire a bunch of staff," says Mr. Belokrinitsky.
Health systems 'flexing their muscle' with suppliers
Asking suppliers to lower their prices is the easiest and most straightforward method for health systems to chip away at supply costs. This is a tactic that systems across the nation have used for many years, but it made its way into headlines in 2014 when Ohio State University Wexner Medical Center in Columbus requested 300 of its largest vendors slash their prices by 20 percent.
Peter Geier, COO of Wexner Medical Center and CEO of OSU Health System, asked the suppliers for half of the price cuts by Nov. 15, 2014 and the remaining 10 percent by June 30, 2015. The cuts are part of the medical center's larger plan to reduce annual supplies and services costs by $40 million.
In December 2014, Mr. Geier told The Columbus Dispatch Wexner Medical Center had secured at least $20 million in savings, largely as a result of requesting the discounts.
The letters to suppliers requesting the price reductions stated "alternative sources" would be considered for suppliers that didn't meet the medical center's expectations.
Although the discounts OSU Wexner asked for are more dramatic than those most systems request, significant price cuts may be more frequent in coming years, according to Mr. Belokrinitsky.
"Over the past two decades there has been a greater amount of consolidation and much stronger integration in the healthcare industry, and combined systems are buying supplies together," says Mr. Belokrinitsky. "That allows systems to assert more pressure on the supplier when demanding price cuts."
He says hospitals are also becoming much more willing to make good on threats to break ties with suppliers if they don't offer discounts.
Although collective buying power is typically viewed as a good thing, Mr. Belokrinitsky says he is seeing a trend of hospitals becoming dissatisfied and pulling out of group purchasing organizations and "going directly to suppliers to flex their muscle."
One downside to demanding price cuts is it puts hospitals in an adversarial position with suppliers. However, if that is the only option left other than layoffs, the price reduction demand is worth it.
Collaboration is the future of reducing supply costs
Although simply demanding discounts from suppliers requires less energy and resources than developing innovative partnerships with them, Intermountain Healthcare, a 22-hospital nonprofit system based in Salt Lake City, recognizes asking for price cuts isn't a long-term solution.
If a hospital or health system demands suppliers slash their prices year after year, eventually prices can't go any lower.
"We're reaching benchmark pricing for our system and we're seeing that as a concern because we're going to get to a point where we can't get the prices any lower," says Shon Wettstein, senior manager in supply chain solutions at Intermountain. "Over the next couple of years some of the categories we've continuously gotten price reductions in aren't going to be able to go lower anymore."
Health systems and suppliers working together is a long-term solution to supply cost problems. "The more innovative systems and suppliers are partnering to create and redesign procedures with a focus on overall value, rather than just getting the lowest prices," says Mr. Belokrinitisky.
Intermountain was ahead of this trend. About four years ago, the system took seven senior sourcing managers and created a solutions department to start building a framework for collaboration with suppliers. The goal is to reduce the system's costs without just taking suppliers' prices and putting them on its bottom line.
The solutions department at Intermountain is flourishing and has found creative ways to partner with suppliers to cut costs by improving operational effectiveness.
Collaborating with suppliers and using products that truly enhance the patient experience will only become more essential as hospitals try to distinguish themselves by improving the patient experience.
Working together also benefits suppliers because with the shift in the healthcare industry "suppliers either become a strategic partner or they're commoditized," says Mr. Belokrinitsky.
Intermountain's solutions department is also focused on utilization of supplies as a mechanism for cutting costs.
"If we're buying the same supplies from 10 suppliers we're looking at ways to consolidate that to fewer and more strategic suppliers. To do that, we work with our clinicians to identify the product that will drive the best clinical outcomes in the most cost-effective way," says Mr. Wettstein.
The process also involves determining if products are providing a patient benefit. "We're able to compare physician to physician to see if a product has a clinical benefit to the patient. If not, then we begin to have the conversation about trying to eliminate the product all together," says Mr. Wettstein.
Although that process doesn't benefit suppliers every time, Mr. Wettstein says it does show suppliers Intermountain is committed to using the best products available that provide the greatest benefit to patients.
Medline Industries, a supplier based in Mundelein, Ill., sees the bigger picture when it comes to collaboration. As a member of Intermountain's supply chain innovation advisory council, Medline Chief Nursing Officer Martie Moore believes "supply chain needs to be thinking in a larger, more global way about healthcare and perform at a higher level to get meaningful outcomes."
That requires considering not only supply chain costs but also reducing healthcare costs. "We are interdependent and you can't provide healthcare without products," says Ms. Moore. "Products support practice and we need to marry the two to attain outcomes."
By suppliers and health systems collaborating to morph the delivery system the "most optimal levels of health and well-being" will be delivered, Ms. Moore says.
Looking forward
Regardless of whether OSU Wexner is successful in its endeavor to get its suppliers to slash their prices, many systems across the nation will continue to ask suppliers for price cuts year after year, according to Mr. Belokrinitsky. There are a number of factors that will determine how successful systems are in getting the price cuts, such as their size and willingness to concentrate spend with few suppliers. However, when looking at the long term, systems need to look at suppliers as partners in innovation to improve the patient experience rather than as an enemy that needs to lower their prices every year.