Medical and surgical supplies represent the second largest expense for hospitals after labor costs1; however, most hospitals lack a complete picture of what they ought to pay for supplies compared to what other hospitals pay for identical items.
As hospitals adapt to new payment models, how can they gain greater insights into their supply chain costs and identify opportunities for savings?
As bundled payments and other new reimbursement models become more common, hospitals need more transparency and flexibility in managing their supply chain spend. Supply costs will have a far greater impact on profitability for healthcare providers and traditional contracting strategies may not position hospitals to respond effectively to meet the financial goals of their organizations.
Hospital leaders must take a closer look at these four common tactics that can obscure true pricing in the hospital supply chain:
1. Rebates: Suppliers frequently offer rebates to entice hospitals to purchase certain items. While safe harbor provisions allow rebates under specific conditions, rebates can complicate efforts by supply chain executives to calculate and track the actual prices paid for medical and surgical supplies over a period of time. Additionally, the hospital is essentially overpaying up front (with the hope or expectation of a rebate in the future); in a margin-sensitive climate, this may be an unsustainable practice for some organizations.
2. Capitated Pricing: Discounts offered under capitated pricing arrangements create similar challenges for supply chain leaders. Products can be packaged together differently from provider to provider. This makes it difficult to pinpoint an item's true cost and compare it to what others are paying for the same item.
3. Gag Clauses: Sometimes manufacturers will seek to impose confidentiality requirements – or "gag clauses" – in exchange for "special" or "preferred" pricing on medical and surgical supplies. This kind of contract language can hamper price transparency and lead to greater price confusion. After all, when pricing is kept a secret, how can the hospital validate that the pricing it is receiving under its "special" or "preferred" terms is a fair price to pay?
4. Off-Contract Items: The introduction of new or off-contract items in the hospital supply chain can pose another important challenge for supply chain executives. Without a purchase history on a particular item, hospitals have no frame of reference for evaluating pricing on the item.
To eliminate these blind spots in the hospital supply chain, Ricker urges hospital leaders to seek out objective, third-party data on actual prices paid by other hospitals. Armed with actionable, timely data, supply chain executives can renegotiate prices and contracts to achieve significant reductions in operating expense.
References:
1 Jaimy Lee, "Breaking the chain: Hospitals set supply cost-cutting targets, push physicians to change behavior," Modern Healthcare, August 17, 2013.
2 Sherry Glied, Stephanie Ma, Claudia Solis-Román, "Where the Money Goes: The Evolving Expenses of the U.S. Health Care System," Health Affairs, July 2016.
3 Internal Data Analysis, BroadJump, LLC.
David Ricker is the founder and CEO of BroadJump, which delivers supply chain analytics that drive greater efficiency and enable hospitals and health systems to manage their supply costs on-demand.
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