Optimizing Direct Spend Management For More Sustainable And Innovative Healthcare Systems

By Alex Saric, Ivalua

In the U.S., healthcare costs too much. It consumes 20 percent of GDP and costs twice what it does in other developed countries, despite the scale of the U.S. market. This is neither sustainable nor efficient – and we see the individual, collective, and political ramifications playing out every day in the headlines. We pay more than other countries for prescription medications, medical devices, and healthcare services. It goes without saying that the complexities of our healthcare and insurance systems are problematic in this regard, but much of the opportunity to cut costs lies at the source – literally. Smarter sourcing and procurement of direct materials should be addressed as a major strategic factor in reducing healthcare costs.

Healthcare Is Seeking A New Way To Source, Especially When It Comes To PPI

Sourcing and supply chain management (SCM) for hospitals, surgery centers, and clinics is obviously going to be more nuanced and complex than it is for, say, consumer electronics. For one thing, physicians have a significant degree of control over which medical and surgical supplies (and even which vendor) they prefer to use, especially when it comes to things like orthopedic implants. These supplies are labeled as physician preference items (PPIs) and traditionally have been procured through group purchasing organizations (GPOs). In response to increasing pressure to standardize supplies, protocols, and contracts, healthcare providers are moving away from their reliance on GPOs to negotiate directly with their most critical and strategic suppliers. They’ve realized that the potential increase in control and decrease in costs that can be gained through direct “local contracting” are too significant to ignore. Just as the rest of the healthcare industry, including insurance companies, are increasingly geared toward value-based care, healthcare SCMs need to show that medical device and supply costs are aligned with patient outcomes.

Patient outcomes, of course, take precedence and are a complicating factor in reducing costs. These sourcing decisions cannot be taken lightly and must be backed by well-governed data and analytics. Physicians need quality, up-to-date tools, and they know better than most how the medical supplies they use can impact patient treatment outcomes. In the case of implants in particular, there are long-lasting ramifications. On the other hand, medical device technology evolves quickly, so the sourcing process must be adaptable and agile enough to stay on top of advances in medical science and treatment protocols. Getting it right with PPI sourcing requires ongoing collaboration between administrators, procurement and SCM teams, subject matter experts, physicians, and vendors.

The Challenges Of Optimizing Direct Healthcare Spending

In the modern era, hospitals and healthcare groups are consolidating into larger and larger networks of providers, services, and physicians. Manual or one-off sourcing and procurement processes are simply unsustainable at this scale. An entire market of software solutions and platforms have emerged to address indirect spend management across many industries; there is, in fact, a competitive and thriving solutions market to explore. The same has not happened for direct spend, which is why PPI procurement has become such a visible and expensive problem as an aging population continues to replace knees, hips, and shoulders at an unprecedented rate.

Optimizing direct spend is a challenge for many industries, but healthcare has been particularly slow to find solutions via supply chain collaboration. Vendor lobbies are particularly powerful in the medical industry, and R&D budgets are often cited as a reason for rising device and pharmaceutical costs. On the flip side, healthcare organizations and the software companies that support the industry have failed to develop the capabilities they need to gain greater leverage and control in the sourcing and procurement process.

Data Drives Better Sourcing And Negotiations

Solutions to manage direct spend are emerging, however, and proving to be worth the investment — in healthcare as well as other industries like manufacturing. Healthcare providers can better integrate their SCM efforts by identifying solutions that target and optimize both indirect and direct spend. Sourcing solutions tailored for the healthcare industry, or flexible enough to meet its requirements, can help build the structure for more streamlined, directly negotiated PPI sourcing and purchased services.

To improve PPI and other healthcare sourcing, you need actionable data so that you can look more deeply into spend details, including what PPI products are used and how, and what their cumulative financial impact is. Product utilization should be tracked to ensure negotiated savings are being realized over the course of the contract. This includes tracking to ensure that products are being used as expected, which may involve compliance and auditing efforts.

Procurement has to build stronger relationships with physicians, developing trust so that they will listen to recommendations and updates about PPI vendors and alternatives. Many times, physicians are using certain items because they trained with those devices or simply because it’s what’s always been done. Armed with comprehensive data, procurement can assure doctors that patient outcomes won’t be affected if a different vendor or product is used. Procurement can continue to build trust and collaborative efforts by checking in with physicians regularly to review product quality, share metrics, and gather performance and ease-of-use feedback for the supplier.

It's also important to go into negotiations with vendors fully prepared with data on quality, financials, utilization, and patient outcomes. The way the system currently works, suppliers are not always properly motivated to participate in healthy give-and-take. They will come to negotiations prepared to create pressure, incentives, or obstacles, so procurement and SCM pros have to come to the table ready to say no and switch to a new (already vetted) vendor. While this approach has in the past been considered too difficult because it required domain expertise and specialized software, healthcare is learning how to do local contracting (direct sourcing) from other industries that have been successful with it. Talented SCM recruits from other industries are crossing over to healthcare to shape and accelerate these efforts.

Using data-driven, comprehensive, and flexible platforms, to support a more nuanced approach to PPI sourcing, healthcare administrators will be empowered to advance their mission: managing costs and supplier relationships in order to protect both the bottom line and patient health; driving innovation by sourcing from best-in-class vendors; and raising the overall standard of care by optimizing resource utilization. It’s high time, as healthcare supply chain expert Tom Finn points out, to develop sourcing and procurement processes that align with the value-based cost of care delivery instead of being geared solely to the performance and profit objectives of the supply side.

About The Author

Alex Saric is the Chief Marketing Officer at Ivalua, a provider of Cloud-based Spend Management solutions.