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New procurement model needed to alleviate healthcare challenges

With the economy and supply chain dominating headlines, healthcare leaders must adopt sophisticated procurement strategies to meet industry challenges.

The struggling world economy and on-going supply chain issues continue to dominate front-page headlines. After several challenging years, healthcare leaders know the dangers supply chain vulnerability can pose to their staff and patients. Healthcare procurement leaders will be hard pressed to succeed in this environment. It is time for healthcare to take a more strategic approach to procurement, embracing data and advanced technologies to improve procurement agility.

To start, healthcare leaders must evaluate the myriad economic trends looming on the horizon:

  • According to a recent report from J.P. Morgan, the U.S. economy is likely to slow further in 2023 as we enter into a mild recession. More specifically, the report predicts that inflation will remain above the federal government’s 2% target at the end of 2023.
  • A Grant Thornton survey of more than 250 C-level executives and business owners found more than 75% of respondents expect a recession to occur within the next two years, with the potential to impact a number of critical supply chain attributes, including physical infrastructure planning, new-equipment procurement, and critical research and development investments.
  • On January 30, 2023, the Office of Management and Budget informed Congress that COVID-19 public health emergency (PHE) funding would end on May 11, 2023. As such,  states will begin redetermining eligibility for Medicaid enrolees and up to 18 million people could end up without health coverage over the span of a year. In addition, much of the costs for COVID-19 tests and vaccines, which were completely covered for most Americans during the PHE, will shift to the commercial market in 2023.


While inflation and the end of PHE funding loom as concerns, healthcare leaders are dealing with other pressures as well, such as ongoing pandemic related disruptions, shifts in product demand and unchangeable multiyear reimbursement contracts, according to Dr. David Dobrzykowski, associate professor in the Department of Supply Chain Management and director of healthcare business initiatives at the Sam M. Walton College of Business at the University of Arkansas. He recently coauthored a whitepaper on Inflation and Healthcare Supply Chains.


“When we interviewed leaders for our whitepaper, we expected that everybody would want to talk about inflation. But the reality is there's still much more pain being felt relative to disruptions and product substitutions,” Dobrzykowski said.


Procurement panic

The COVID-19 pandemic revealed the cracks in many industries’ logistics. Hospital executives and supply chain managers broadly agreed the COVID-19 pandemic exposed “significant” vulnerabilities in their organizations' supply chains, according to a 2021 industry survey featured in Fierce Healthcare. Indeed, 93% of 100 respondents said their organizations dealt with shortcomings such as insufficient supply stockpiles, unreliable suppliers, poor visibility into inventory and staff safety risks during the pandemic. In addition, 62% of respondents said their organizations were not doing enough to address these weaknesses.


Patients could start seeing fee hikes for healthcare services in 2023, Dobrzykowski noted. According to statistics from the Producer Price Index that Dobrzykowski cited in his recent University of Arkansas whitepaper, input costs for medical manufacturers have increased by 14.3%, while medical/surgical distributors have passed only 4.2% of these increases on to hospitals. Hospitals, whose fee schedules are typically set via annual or multiannual contracts, have only been able to pass 2.4% of these costs on to payors and patients. However, hospitals often pass on these costs down the line. “So as bad as it has been financially in 2022, a new wave of financial pressure may materialize in 2023 as payor contracts are renegotiated,” Dobrzykowski explained.


During prior tough economic periods, health systems leaned into group purchasing organizations (GPOs) for price savings. However, that GPO model has been commoditized as the selection of suppliers and price savings are more common. The GPO model, given its long contracting cycles and status contracts are often slow to respond to changing buyer needs. This motivates healthcare providers to go off-contract to find substitutions and savings.


Beyond cost cutting

To address these pressures, many executives are likely to turn to cost cutting. But that is not necessarily the best defense.


“Slashing spending while juggling multiple suppliers, each promising lower prices than the last, may seem like the only option in the short term, but could lead to unnecessary complications in the long run. Business leaders should seize the opportunity to rethink their supplier strategy to drive sustained cost optimization and streamline purchasing,” according to an article written by Amazon Business.


Dobrzykowski agreed that HCOs need to move beyond simple strategies. For example, for many years, health system leaders simply assumed that the cost savings associated with acquiring additional hospitals would be enough to move the needle forward.


“They assume [that] if they purchase more, they save more. And that’s pretty much true, but that's not a very sophisticated level of thinking and that doesn’t move beyond, ‘I'm going to get a cheaper widget if I buy more,' type of thinking,” Dobrzykowski said.


To successfully deal with the challenges of a struggling economy and ever more frequent natural disasters, HCOs need to adopt a comprehensive supply chain resilience strategy that prompts them to:

  • Focus on spend visibility. To move forward, organizations need to gain visibility into their purchasing needs and patterns. “Without this insight, your business can miss opportunities to streamline orders, meet quantity limits, and guide employee buying,” Heimes pointed out.
  • Invest in supply chain talent acquisition, development, and retention. To strategically address supply chain issues, HCOs need to develop the internal expertise to manage supply chain functions more proactively, Dobrzykowski noted.
  • Adopt advanced technology. Technology will play a big part as HCOs move forward. Data and analytics are the most important emerging technology for supply chain success, according to a study published in Finances Online.


Dobrzykowski noted that while it is typically “easy to justify revenue generating technologies such as MRI machines, leaders will need to find a way to make a business case for the data and analytics systems that will help to reduce supply chain costs. In order to make data analytics viable, you have to not only convince a CFO that you're going to develop better insights, but you also have to convince them that you're actually going to be able to operationalize some of these insights to reduce costs.”


Amazon Business makes it easy for healthcare leaders to make such a case. The technology empowers HCOs to strategically move their supply chain operations forward while proactively addressing challenges emanating from the struggling economy, COVID-19 and natural disasters. Hospitals and health systems use Amazon Business to track, manage and report on the 20% of their purchases that are non-contractual, boasting a wide selection of items from medical supplies to office equipment, as well as janitorial, sanitation and break room items.


When leveraging Amazon Business, HCOs can:

  • Easily turn data into actionable insights and improve spend visibility with Amazon’s analytics. Healthcare professionals can get what they want, when they need it, using approval workflows to identify the right approver, assign multiple approvers or enable batch approvals.
  • Manage more organizational spend with optimized purchasing processes. HCOs can rely on business lists for frequently purchased items and manage employee spending with guided buying to direct spend to preferred products and sellers.
  • Simplify business buying by making it easy to access selection & pricing, curated custom catalogues, intuitive buying and delivery preference features, which helps find products, place orders and get fast shipping within purchasing guardrails.


This article originally appeared in Fierce Healthcare

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