Observation Deck – How Low Can You Go?

Remember the “Limbo Rock?” You extend a bar across two uprights, and then see if you can dance under it without falling on your rear end. In the song, Chubby Checker sings, “Don’t move that limbo bar/You’ll be a limbo star/How low can you go?”

I thought of that song while researching this issue’s article about validating contract savings. I wondered if a hospital or IDN can expect to achieve savings from its GPO contracts year after year, or if it will reach a point below which it just can’t go. Put another way, I wondered if it’s ever legitimate for a supply chain executive to say to his boss, “We’ve reached absolute bottom; from now on, we’re working at holding the line on prices.”

“From all appearances, everyone would think we would reach that point,” says Joe Volpe, VP of supply chain, Wheaton Franciscan Services in Wheaton, Ill.

But he says the industry changes too much and too fast for that to occur. In other words, the limbo stick still has a way to go.

That’s not to say that prices for a specific product can drop indefinitely. Sooner or later, vendors either draw the line or get out of the business. (Some argue that this is the lesson of the current flu vaccine shortage. Vaccine prices kept dropping, forcing some manufacturers to flee the business, leaving just two suppliers left.) It is to say, however, that new developments always crop up, erasing old market dynamics and opening the door for new savings opportunities.

“Our industry is dynamic,” says Dennis Robb, VP of neuroscience, Health Alliance of Greater Cincinnati (and the IDN’s executive liaison to its GPO, Broadlane Inc.). Buyers will pay full freight for new, innovative medical technologies. But sooner or later, another technology will crop up that will put severe pricing pressure on the contender.

The sage of the stent illustrates the point. When stents were first introduced, manufacturers charged what the market would bear. Enter the drug-eluting stent, said to guard against restenosis, the Achilles heel of angioplasty. Its introduction dramatically affected pricing on the existing technology. The challenge for providers, of course, is to make a judgment as to whether that new technology is, in fact, as revolutionary as the manufacturer claims.

But even in the absence of new technology, companies will always find a way into the market with “me too” products. It is the job of GPOs and IDNs to find these new competitors and, assuming the quality is there, use them to their pricing advantages. “Competition is a great thing,” says Robb. For providers, it sure is.

Robb points to another market “wild card” that can affect pricing – the reprocessing of single-use devices. “It holds a lot of merit for hospitals that are evaluating the potential of reusing expensive supplies, if they can be retooled and brought up to a level of quality that is equal to or higher than that of the original manufacturer,” he says.

Obviously, providers are under pressure to keep costs down. “Healthcare is going in the wrong direction,” says Lou Fierens, senior VP for supply chain and capital projects management for Novi, Mich.-based Trinity Health. “Costs keep going up.” He also says with most non-healthcare industries costs usually drop as quality goes up. But in healthcare, it’s just the opposite. “We have to get acceptance of that model – quality can lead to lower costs.”

It’s for that reason Trinity expects year-after-year savings in its contracts. “We don’t accept inflators or price increases when we renew contracts,” says Director of Strategic Sourcing Craig Killingbeck. “Vendors have to be doing the same thing we are – lowering their costs, and then sharing a portion of that with us.”

How low can you go? Apparently, lower and lower.

About the Author

Mark Thill
Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.