Unraveling the Mysteries of Healthcare Supply Chain Pricing
by Kyle Gaspar, Janet Holland and Sara Crittenden
As individual consumers, we routinely access online market price comparisons before buying a car, a house, a television, airline tickets, hotel accommodations, or even basic commodities. But those of us in the healthcare industry know that details about current market prices for hospital supplies can be a thing of mystery. Hospitals make purchasing decisions every day without knowing best price in the market. The healthcare industry lags behind almost every other industry in this regard, and is long overdue to have unbiased, powerful data with which to make informed purchasing decisions. Given the current economic conditions of hospitals and health systems, it cannot come soon enough.
Product costs represent the second most significant component of hospital operating costs, following labor expense. Modern Healthcarereports nearly 40 percent of a hospital’s expense budget is attributed to medical/surgical supplies.a Supplies are a significant contributor to escalating healthcare expenditures, a fact supported by a recent study that revealed supplies and devices represented 24.4 percent of the average increase in cost per discharge.b
At the same time, hospital priorities are focused more than ever on new methods for mitigating the financial impact of the Affordable Care Act. It is no surprise that when asked how they plan to maintain margins in the face of revenue erosion, Sara Crittenden51 percent of the CEOs and other senior decision makers responding indicated they will reduce costs by renegotiating with suppliers (a response rate second only to increasing efficiency).c
The Problem: No Baseline
Hospitals experience substantial variation in prices paid for supplies and products. Healthcare pricing is designed to be complicated and confusing, with built-in distractions such as rebates, bonuses, and tiers—leaving hospitals without resources to monitor prevailing market pricing. Adding to the mystery, analytics have shown that price variations cannot be justified by normal market factors such as volume, economies of scale, commitment level, or group purchasing organization (GPO) relationship. As a result, a small stand-alone hospital can realize a lower product price than a 25-hospital system.
Reliable, unbiased pricing information has been absent across the hospital supply chain. Access to trusted sources for pricing—whether for new items such as trans-catheter heart valve kits, or basic items such as needles and syringes—has long been missing. Why not apply the same technology-driven access that is available for consumer purchases? It may be a challenging undertaking, but certainly not inconceivable. Hold that thought.
Hospitals order and pay for supplies based on their best efforts to negotiate pricing, or end up paying prices determined by third-party aggregators (e.g., GPOs). Again, the price of a product often is mired with confusing variables, such as bonus tiers, rebates, and other commitment level incentives. New products entering the market often are purchased without any price negotiation whatsoever, with hospitals merely accepting suppliers’ quotes. Due to the number of contracts required, it is nearly impossible to keep a contract portfolio current, or properly tracked and managed, by hospital staff or their third-party aggregators.
With no incentive or obligation for suppliers to share what other hospitals are paying for the exact same items, hospitals are left working in the dark, operating under a veil of mystery with no idea whether the best price has been achieved, or if they have overpaid. The hospital is left to accept whatever price the organization is willing to tolerate, or look for a substitute product.
Prior attempts at demystifying market prices for medical/surgical supplies have yielded some directional guidance, such as a range of prices (high/medium/low) being paid by others; however, data quality historically has lacked rigorous monitoring, with the number of data points collected generally insufficient to produce reliable results. Also, earlier attempts failed to account for important elements such as commitment level and volume. With increasing cost pressure, ongoing efforts to advance the sophistication of price transparency information and analytics has become an important strategy for the future. With the rapid advancement of sophisticated, analytical data processing, reliable, actionable data are well within grasp.
The Importance of Current Market Data
Traditionally, GPOs and health systems negotiate contracts based on a contracting cycle, which often is three years. Most do not audit or benchmark pricing for the duration of the contract. Typically, once the contract is signed, pricing is not reviewed until the expiration date approaches and the category is taken back to bid. Currently, 90 percent of all hospitals belong to GPOs; however, hospitals increasingly elect to negotiate physician preference items (PPI) locally because they can drive standardization with the cooperation of their physicians. Often, this results in lower pricing than attainable with the hospital’s GPO base prices. However, regardless of the contract type, how does a hospital know if its contract pricing is competitive?
Here is a surprising phenomenon: There is a widely held perception in the hospital industry that revealing market prices for medical/surgical supplies will expose the “special” pricing that individual hospitals and systems have managed to negotiate with suppliers. Perhaps to perpetuate this belief, suppliers tell their customers they have uniquely preferred pricing, in some cases asking for confidentiality as part of this perceived secret pricing. It stands to reason a supplier could not afford to provide special pricing to everyone; however, no correlation is seen between best price/bottom-of-the-market pricing and confidentiality agreements.d Such contract language clearly benefits suppliers only by hampering transparency and preserving pricing confusion.
And the fact of the matter is, this is no small problem. For example, an estimated $5 billion is lost annually in the implantable device arena as a result of waste, inefficiency, and lack of visibility into market based pricing of supplies.e According to the IT research and advisory firm Gartner Inc., many providers can increase profits by 2 to 7 percent by reducing supply chain cost by 5 to 15 percent simply through better analysis, planning, and controlling their purchase and use of goods and services.f
Comparing Invoice Prices Paid
The scatterplot in the exhibit illustrates the huge variability in prices paid for a common bone screw. With data organized in this manner, pricing variation is readily apparent, allowing a hospital to quickly see where it is paying a higher (or lower) price than the market bears. This information can also be augmented to reveal rebates, special “deals,” which ultimately will disappear as the industry embraces price knowledge.
For hospitals and health systems, supply pricing transparency should not be seen as an attractive but improbable prospect, but as an immediate and critical need—one that requires a transformation of industry practices around pricing of essential medical supplies.
a. Modern Healthcare’s 2012 Survey of Executive Opinions on Supply Chain Issues, August 2012.
b. Fauntleroy, G., "Rising Cost of Inpatient Care Linked to Medical Devices and Supplies," Health Behavior News Service, Center for Advancing Health, August 29, 2012.
c. Pain, L., and Funk, J., L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions, L.E.K. Consulting, 2014.
d. Source: BroadJump client database
e. Pennic, J., "5 Ways Supply Chain Can Reduce Rising Healthcare Costs," HIT Consultant Media, May 13, 2015.
f. Supply Chain Consultants and Outsourcing Providers for Healthcare Delivery Organizations, Gartner, Inc., July, 2011.
Publication Date: Wednesday, January 27, 2016
Blog Top ↑
Fixing the Weak Link in the Healthcare Supply Chain
Anyone who has been involved in purchasing supplies for the healthcare industry knows that the pricing structure is shrouded in mystery. Actually, that may understate the problem: Researching healthcare supply pricing is like peering into a huge black hole. Unlike consumer markets, where online pricing data are readily available at the click of a mouse, or the touch of an app, the healthcare supply chain offers no such points of reference. But that’s in the process of changing, and it can’t happen too soon.
In a previous blog post, we shed some light on the nature of the mysteries of healthcare supply chain pricing.a Here, we offer a strategy for determining whether you are paying competitive prices and describe some tools for negotiating better deals.
Hospitals as Smart Shoppers
The need for healthcare systems to manage costs efficiently to preserve operating margin has never been greater, especially as the market shifts toward prospective payments for value-based care. Supplies represent nearly 40 percent of a hospital’s budget and are a prime place to look for cost-cutting opportunities.b Of course, the fastest way to save money in the healthcare supply chain is to reduce the cost of the products you are already purchasing.
Unlike a few years ago, technology is not the problem. Today’s cloud-based processing capabilities enable the assimilation of massive quantities of data. Web-based analytics can create complete market transparency, previously unavailable to hospital executives. The real challenge: Coming up with good data in the first place.
But is all this information truly necessary? Well, yes, it is.
It should be obvious how helpful comparative pricing information would be in negotiating with suppliers, especially when correlated to purchasing volume and commitment level. Whether you are looking up one item or evaluating data for entire product categories (e.g., orthopedics, cardiac rhythm management, drug-eluting stents), this type of information drives informed, analytical decision making.
There are hundreds of categories for which hospitals must typically conduct lengthy bid processes, and they are normally driven by the expiration date of current contracts. Conducting a request for proposal (RFP) process for a particular category can take months to complete and includes:
- Launching the analysis process
- Meeting with physicians/clinicians
- Crafting and sending out RFPs
- Analyzing RFP responses
- Loading pricing into an ERP system
- Implementing and confirming the new pricing
The RFP process requires time, drains resources, and delays attainment of price savings. Unfortunately, even after completing this process, there is no assurance that the provider has secured competitive pricing.
As consumers, if we want to lower our rates on car insurance or our mortgage, we can access the Internet, and with a few clicks, we are presented with savings opportunities. The question is: What is preventing hospitals from similarly benefitting from the market intelligence available to and employed by consumers?
Hospitals need trusted, unbiased access to real market pricing, just as consumers do. For accountable analytics, data must be accurate, easily accessible, and current. Yet most hospitals rely on individual group purchasing organization (GPO) data, fragmented data, or internally driven organizational data, resulting in a partial and incomplete view of the market.
Woe Is Us
There is no argument that consistent and logical pricing structures found in other industries have been absent from healthcare practices and processes. How has health care fallen so far behind other industries and direct-to-consumer practices for purchasing? Health care has never had access to extensive market intelligence—referred to as “free trade” knowledge; rather, the industry has been blindly trusting in a process that historically was designed to be vague, complex, and convoluted.
Findings of a recent internal study identified surprising variations in pricing across all GPOs and supply networks. There is significant and pervasive variation—typically represented by 20 to 50 percent pricing bands—in what hospitals pay for their medical/surgical devices and supplies. Typical savings opportunities for hospitals are around 10 percent but have been as high as 20 percent, reflecting pricing opportunities on the exact products they are currently using.c
Crafting a New Normal
Implementing the following best practices will help your health system achieve its savings goals.
Empower supply chain leadership to negotiate based on current market share and spend with incumbent suppliers. Supply chain leaders should conduct negotiations and leverage the overall business portfolio with suppliers that have significant penetration within the organization. Buyers also should have incentives to use available data to reduce the price of non-file purchases before purchase orders are cut.
Have the CFO actively participate in key supplier negotiations and provide additional pressure when suppliers aren’t cooperative.Demonstrating a unified front among supply chain, clinicians, and the C-suite is extremely powerful and often results in pricing concessions.
Ensure pricing is addressed in contracts. All contracts should include a clause allowing the health system to regularly review market pricing and amend contract pricing when market pricing shifts.
Avoid signing supplier pricing confidentiality clauses.These clauses benefit only the supplier and do not result in better pricing for your organization.
These best practices are most successfully accomplished when supported by strong analytics and technology resources, including technology that is incorporated into everyday practice at the operating level and market information and analytics that are routinely used to leverage negotiations with suppliers.
When establishing data resources, the organization should seek four features:
- Rapid access, via a few keystrokes, to comprehensive market data comparisons by price, volume, and commitment level
- Capability to calculate savings quickly by comparing utilization and prices with prices paid by other hospitals
- Category schema emulating hospital contracting practices, allowing for expedited price negotiations
- Peer filters allowing users to compare pricing among a wide variety of health systems
Words of Reassurance
The old supply chain purchasing processes are being redesigned; analytical information is a cornerstone. No longer do hospitals have to work in the dark.
With the power of market-based pricing intelligence, all organizations, regardless of size, can benefit from a balanced playing field. Supply chain technology is advancing rapidly, and information is power. Strategies must be supported and driven with unbiased and comprehensive information and analytics.
Implementation will require some resources, but there are real benefits of market intelligence, including:
- Knowledge of exact prices other hospitals are paying for the same items
- Access to current portfolio of contracts to ensure market competitiveness
- Price checks for products that are new, or are not listed, in the item master
- Ability to leverage actionable intelligence to enhance negotiation power and reduce supply costs
- Understanding of the changes in supply spend through powerful reporting tools and target work plans based on categories with the largest savings opportunities
Although information about market-based pricing has been elusive within the healthcare supply chain, technology and sophisticated software now being deployed are bringing about a disruptive, but also welcome change to the strategic contracting process. Thought leaders in health care are using unique, innovative software and technologies to transform processes, strengthen negotiation strategy, improve productivity, and dramatically reduce cost. The time has come to provide health care the same market intelligence and power long enjoyed by consumers.
a. Gaspar, K., Holland, J., and Crittenden, S., “Unraveling the Mysteries of Healthcare Supply Chain Pricing,” hfm Blog, posted Jan. 27, 2016.
b. Modern Healthcare’s 2012 Survey of Executive Opinions on Supply Chain Issues, August 2012.
c. Internal analysis of closed invoice data obtained from more than 400 acute care hospitals.
Publication Date: Monday, February 29, 2016
Blog Top ↑