Healthcare Procurement: Why the Healthcare Industry Needs to Modernize Supply Chains to Meet Today’s Challenges

di Vishal Patel

Healthcare Procurement: Why the Healthcare Industry Needs to Modernize Supply Chains to Meet Today’s Challenges

Healthcare providers, more than most, are continuously under pressure to manage costs and do so in a market where physicians and their patients expect more. That is why it is no surprise that 98% of all U.S. hospitals use the combined purchasing power of group purchasing organization, or GPOs, to save money.  Their mission is to aggregate product purchases from member healthcare providers and secure lower product prices for them, particularly on commodity-type items, like flu vaccine.

If your hospital is relatively small, it will almost certainly save money using the combined buying power of group purchasing organizations, or GPOs.  There are approximately 600 GPOs serving the U.S. healthcare industry today.  Their mission is to aggregate product purchases from member healthcare providers and secure lower product prices for them, particularly on commodity-type items, like flu vaccine.  

In return for a relatively modest membership fee, which typically ranges from 1 to 3 percent of their negotiated contract size, hospitals and healthcare systems using GPOs save an average of 13.1 percent on most categories of supplies compared to those who don’t, according to the Healthcare Supply Chain Association.  Nationwide, that amounts to an impressive $34.1 billion annually.  It’s no surprise, particularly at a time when hospitals are being squeezed financially, that more than 95 percent of America’s healthcare organizations use them with many hospitals belonging to two or more GPOs.  

One notable outcome of the prevalence of the GPO model in healthcare is a somewhat lower maturity level of many hospital supply chain functions particularly when compared to other sectors, even though there are important distinctions. This is something Baylor Scott & White – the largest not-for-profit healthcare system in Texas – understood well. Ivalua was tasked with helping them build up a leading supply chain function in order to reduce the financial burden on its patients.  This involved taking more ownership of their supply chain and building self-distribution and self-contracting capabilities. It involved a detailed analysis to understand where it makes sense to use a GPO and where it doesn’t, where there is a need for physician preference items (PPI) and where there isn’t. Baylor developed relationships directly with manufacturers in an effort to standardize across its 48-hospital system. Overall, they were incredibly successful and generated millions in savings through this initiative and improved their margins.  

Not surprisingly, contracting directly with manufacturers and suppliers of healthcare items – as with products of just about of any kind – works best for organizations with significant marketplace clout but it also helps them be more agile and responsive to market shifts.  A hospital chain as large as Baylor Scott & White can leverage its critical mass to secure favorable pricing and even some degree of product customization, which smaller healthcare organizations simply can’t match.  But for it to work on a consistent basis, the health system needs to make a significant investment in the supply chain function, people, processes and technology.  

There are some important lessons to be learned from the Baylor Scott & White healthcare procurement experience.  One, hospitals can in fact build leading supply chain functions and processes allowing them to be more in control as well as nimble and generate significant value. Two, being a little more selective about which products and services may be good candidates for GPOs, self-contracting, self-distribution or truly understanding when PPI is appropriate or not all form the foundation of a more strategic procurement and supply chain organization that ultimately better aligns the supply chain to patient and physician needs.