The best-kept, value-based secret is in your hospital supplies

March 3, 2016
Lorne Tritt
Lorne Tritt

How one $1.62 billion healthcare network uses global sourcing to simultaneously improve quality and wring costs out of its purchasing program and supply chain.

The seismic shift from fee-for-service to value-based healthcare has placed outcomes and costs front-and-center for all stakeholders in the continuum. Healthcare providers and managed care executives face continuous challenges including increasing costs, risk mitigation, reimbursement reductions and an ever-growing population of patients requiring care.

Tritt

Can your supply chain and medical product purchasing programs affect the value-based healthcare equation where value equals outcomes divided by costs in a positive way? Absolutely. Savings of 20% to 50% plus improvements in clinical utility and quality of healthcare consumables are possible through global sourcing. For most large hospitals and integrated delivery networks (IDNs), those rates translate into millions of dollars in potential annual savings.

Relationships with traditional suppliers and distributors of hospital medical products are convenient, but come at a cost. As much as 30% of the medical products IDNs, hospitals and large group practices purchase are not manufactured by the companies that market and sell them.

As a result, as much as 50% of the cost a provider pays for many disposable products can be related to the middlemen who take profit, but add no value with little or no transparency about the cost or the conditions in which the products were produced. Quality and design decisions are made far away from the patient experience.

“It is amazing how expensive it is to get relatively low-cost products to the right places in healthcare,” Connor says.

A veteran of the manufacturing industry, Connor knew there were millions of dollars waiting to be saved through his healthcare supply chain and purchasing program if he could find transparent, capable partners committed to unlocking them.

Until recently, knowledge of global sourcing strategies and tactics existed far outside of the expertise of most healthcare executives. How do you enter the complex world of global trade, supply chain and logistics in order to efficiently mine the savings and quality improvements available by sourcing medical supplies directly?

When Jim Connor joined Westchester Medical Center Health Network, a $1.62 billion network in New York’s Hudson Valley, as vice president of Supply Chain Operations in 2008, he discovered the following:

  • 11,000+ SKUs in the purchasing ledger

  • Complete absence of a purchasing “item master”

  • Payments of $100 to ship one $60 item

  • Absence of extrapolated acquisition costs and distributors unwilling to provide them

“It is amazing how expensive it is to get relatively low-cost products to the right places in healthcare,” Connor says.

A veteran of the manufacturing industry, Connor knew there were millions of dollars waiting to be saved through his healthcare supply chain and purchasing program if he could find transparent, capable partners committed to unlocking them.

Next: Top factors to consider when launching a global outsourcing program

 

 

Here are the top factors to consider when launching a global sourcing program.

1.   Identify the right products.

Hospital medical supplies that originate from multiple factories, ones that have clear cost savings potential, opportunities for clinical improvements and hospital branding are top targets.

“There is not much room to affect big ticket purchasing items like expensive imaging machinery,” Connor says. “There are too few opportunities and too many hurdles. Addressing what is within my control such as ‘med/surg’ is a high-value opportunity for change with the right partner.

“Our distributor makes four levels of a suction catheter. I’ve never understood that. I just want one that works and I want to know exactly how much it costs to get it from the manufacturer into our clinicians hands.”

2.   Mitigate risk and improve quality with an “inside-out” approach.

Given the large number of middlemen between most medical product manufacturers and the clinical end users, there is little transparency about the conditions in which the products were manufactured. This creates significant risk where there should be very little. Global sourcing partners must explicitly understand the quality requirements of the hospital and its clinicians. Your partners should frequently visit the factories actually manufacturing these hospital medical supplies and do independent verification and quality control (QC) inspections prior to each shipment.

Global sourcing programs enable you to flip the legacy “outside-in” approach to purchasing where products are designed and manufactured far away from the patient experience. Rather than simply accepting what your vendors and distributors have to offer, your global sourcing program should gather input from clinical staff before these products are manufactured. Taking an “inside-out” approach to medical product acquisition, starting with clinical input before the products are manufactured, ensures an appropriate cost-quality relationship, clinician buy-in and improvements in patient satisfaction.

“Ultimately my goal is to get the product the clinicians want and get it to them efficiently,” Connor says.

3.   Plan for efficient acquisition.

If a hospital’s receiving areas or warehouses and associated teams are not capable of supporting large containers, enlist other existing suppliers and distributors to provide some support. Done right, this has the capability of smoothing the transition for globally sourced items in a nearly seamless fashion for the end-users in the hospital.

4.   Insist on transparency throughout the acquisition lifecycle.

One of Connor’s first tasks as vice president of supply chain operations was extrapolating the cost of 10,000 items from Westchester’s distributor network. “For 90 days the distributor avoided our requests,” Connor says. “When senior management finally demanded the answers, those answers caused us to find a true partner, not a vendor. That is how costly the absence of transparency can be in healthcare.

“If I’m price checking a distributor’s item every day, they are not a partner. They are a vendor. Everyone will help you get the product you want. But hardly anyone will tell you what it costs to acquire throughout its supply chain lifecycle. I need partners for items I’m acquiring in high volume that must be consistently of very high quality, with full cost transparency especially in the “med/surg” area.

The bottom line: 27% savings and full product control on 33 SKUs in one young global sourcing program.

“If you were to buy 100 items here in 2006, you wouldn’t know what 83 of them actually cost,” Connor says. “We now have 100% acquisition cost visibility and we take product control all the way to the manufacturer.

“We have saved 27% since the launch of the program in 2014. We intend to double those numbers in 2016 with ASP Global.”

 

Lorne Tritt is founder and CEO of ASP Global, a leader in global sourcing strategies and programs with headquarters in Atlanta and operations in the Pacific Rim.