Smart procurement strategy: The secret to overcoming financial strain in healthcare

Due to industry-wide economic constraints, purchasing decisions are under heavy scrutiny at healthcare organizations across the country. According to JPMorgan Chase’s 2023 Business Leaders Outlook for healthcare, 67% of executives experiencing inflation identified their supply chain as the source of rising business costs—not far behind workforce constraints.

Organizational leaders find themselves in a difficult position where they must avoid future supply shortages, while having to navigate widespread price increases and unpredictable ordering processes. “We’re seeing more stress than ever before on supply chain departments,” said Bill Kopitke, General Manager and Head of Healthcare for Amazon Business. “Healthcare organizations are challenged financially in ways that require them to make changes.”

Several financial factors are influencing the heightened pressure on provider organizations and their procurement teams, healthcare leaders told Modern Healthcare. These challenges include:

• High labor expenses. Many organizations experienced substantial profit decreases throughout 2022, driven largely by spikes in spending on salaries and wages. While beginning to normalize after a peak in September, contract labor costs continue to affect financial stability.
• Rising costs and inflation. Health systems are also seeing rises in expenses for various medical supplies, pharmaceuticals, and purchased services. For example, citing “strong economic headwinds,” Oakland, Calif.-based Kaiser Permanente recorded a net loss of $4.5 billion in 2022. And Rochester, Minn.-based Mayo Clinic logged a drastic 8.1% increase in annual expenses of over $1 billion in 2021. Between soaring labor costs and progressively worsening supply disruptions, analysts predict there will be continued price inflation impacting healthcare throughout 2023.
• Net operating losses. Rises in expenses are outpacing reimbursement increases, creating additional financial problems for health systems, according to Lori Kalic, Partner and a Healthcare Senior Analyst at RSM US LLP. Combined with delayed payments from patients and payers, and amid the threat of recession, the negative impact on organizations’ bottom line is undeniable.

Each of these financial constraints is compounding the need for organizations to pursue cost-saving opportunities, especially in the supply chain. Of the JPMorgan survey respondents who indicated they are experiencing inflation, 48% said they are adapting by making changes to purchasing.

The urgent need to reevaluate buying strategies

In recent decades, economic improvement drove procurement teams to consolidate their spend to achieve cost savings and operational efficiencies, whether through group purchasing organizations (GPOs), primary distributors, or suppliers, according to Kopitke. However, that siloed approach in the current environment has produced diminishing returns and unintended consequences. It is unable to meet demands of the ongoing financial crisis.

Today, chief financial officers are taking a microscope to any and all spending, and they are more open to exploring non-traditional saving opportunities. This has forced procurement teams to look beyond the current operational models while balancing numerous other priorities and constraints. Unfortunately, the traditional procurement practice, built around long contracting cycles, static contracts, and limited options, is ill-equipped to meet the evolving demands.

“Because organizations are being challenged with cost reduction, they're having to break apart some of what they've been buying and whom they’ve been buying from,” Kopitke said. “They’re asking, ʹCould we buy a comparable supply at better value elsewhere? Do we have too many intermediaries involved? Is there a better fulfillment model?' Everything is being questioned, from medical surgical and capital, to business commodities such as laptops.”

Common supplier shortcomings and key opportunities

Amid the increased scrutiny, it’s tempting for leaders to hastily slash spending and juggle multiple supplier relationships in an attempt to secure the lowest possible prices. But this approach could cause more complications in the long run, such as clinical variation and limited visibility into actual spend. Procurement teams are already working with limited staffing resources, and adding fragmentation to the purchasing process—introducing multiple contracts, timelines and price points—would exacerbate the burden.

Healthcare organizations cannot afford to forge ahead with business as usual. Kopitke said he regularly hears complaints about customers on allocation, supply chain delays, or traditional players not evolving their model to meet the need. As the instability of the healthcare supply chain persists in 2023 and into 2024, providers have no choice but to find alternative, innovative buying strategies. “Crises, catastrophic events, and other supply chain disruptions will likely continue to occur, and possibly at a more frequent rate in the future. It’s more important than ever for healthcare organizations to build resilient supply chains that can withstand these disruptions and emerge stronger,” Deloitte analysts concluded.

Resilient supply chain management will require agility that existing, contract-dependent procurement processes are unable to offer. Therefore, healthcare organizations are increasingly open to finding substitutions and lower prices outside of contracted spend.

Innovating for supply chain flexibility amid instability

When reshaping their procurement strategy, leaders should take a multipronged approach defined by a simplified cost operating model, digitized purchasing, and the flexibility to act on value. Amazon, through Amazon Business, is helping create a new supply chain era that can achieve all three pursuits. Amazon Business has been developing new capabilities for Bulk and Contracted Spend categories, which cover a wide selection of essential supplies—from medical materials to peripherals such as office, IT and breakroom items.

Simplified cost operating model

To ensure they can purchase all needed inventory at competitive prices, Amazon Business customers can easily compare products across suppliers. Even if a single supplier has enough inventory to fulfill an entire order, Amazon Business customers can combine offers from multiple suppliers.

For example, if you want to purchase 800 keyboards but the lower-priced supplier doesn’t have enough to fulfill that order, the Bulk Buying Tool (BBT) helps you buy more inventory at a lower cost—so, 500 from the less expensive supplier, and 300 from the more expensive one.

“The ability to go to an Amazon Business store to see comparative offers, to look quickly at price and specifications, ensures health systems are not artificially constrained,” Kopitke said. “They can quickly source to have the resiliency they need.” Amazon Business also helps procurement leaders document spending, which they must do more consistently and clearly today amid the various financial pressures on health systems.

“There's a central place to source, compare offers, procure, and conduct spend analysis in real-time,” Kopitke said. “Antiquated systems hospitals use for procurement often are static supply offers with lagging and incomplete spend data. We are establishing a new way of achieving supply chain transparency.”

Digitized purchasing

The workload for procurement teams has gotten heavier in recent years, often without additional resources to keep up. Therefore, simplifying processes and eliminating barriers are critical for procurement teams to realistically meet demand.

Amazon Business’s solution for Bulk Spend ensures organizations always have adequate supply on hand, despite any disruptions by consolidating inventory from multiple suppliers if a single supplier lacks the needed inventory. Importantly, buyers can purchase and track large quantities all in one place, rather than pulling together several separate orders from many suppliers.

While Amazon Business allows customers to streamline purchasing, this doesn’t mean they have a limited selection. “It surprises people when they realize we have a high parity of what they're buying today—and we have even more selection including medical supplies that they could switch to at a lower price, including shipping costs," Kopitke said.

Flexibility to act on value

In addition to the existing standard bulk offers, organizations can request a custom quote with Amazon Business’ Request for Quote (RFQ) tool. This provides healthcare organizations with the ability to request a discounted price on single-SKU purchases greater than $10,000 or 999 units—helping to support spot buys and buying in bulk. With the RFQ tool, customers can submit a bulk offer with their specified terms, and sellers can reply with an offer that matches. Customers can then decide to place their order for purchase.

The tool meets the needs of buyers seeking a better price or a bulk discount when buying in volume. It is also an effective solution if an organization requires desk-side delivery or installation services, which may be appealing for larger, multi-facility entities.

Improving healthcare supply chains

Amazon Business offers a drastically different purchasing model than what healthcare organizations now experience. Its future-oriented approach incorporates digital transparency, speed, and quality, all helping procurement teams optimize spending.

“We've been creating offers and value propositions within contracted categories to update the old 20th-century model where you say, ‘We'll just create a curated selection of supply with a one-time RFP, then we'll set it and forget it,’” Kopitke said. “Does it work anymore? We have the highest healthcare costs in the world, and we need to modernize our operation.”

By moving to the innovative model offered by Amazon Business, organizations can find a real path toward sustainable cost savings while ensuring they have the right inventory at precisely the right time and place. Amazon Business has been deepening its understanding of healthcare by engaging intimately with its customers, combining these insights with logistics expertise to help usher in a new era for health systems.

“We have a very strong and growing customer base, disrupting the supply chain in healthcare today,” Kopitke said. “We are feeling a heightened sense of customers wanting to work with us in a new way. It’s obvious the current model isn’t closing the gap, and we want to help invent and simplify it for everyone’s personal benefit.”

Originally seen on Modern Healthcare