Yokl: Pricing Myths Explained

3 Big Myths about Price Savings

Understanding the myths and realities of price savings can be a powerful stimulus for learning what really works and doesn’t work to lower your overall supply spend.  It can also give you the necessary insight into what tools, tactics and methods that are necessary to further rein in your supply costs.  To this end, I have listed below three big myths about price to expose these myths for what they are — savings killers — along with some ideas on how to avoid them:

 

Myth #1:  You can always find a better price, a better deal and better terms

The impact of GPOs on the healthcare organizations pricing has been wildly successful over the last 79 years. However, GPOs are running out of new commodity contracts for their members. More importantly, GPOs are running out of new contract savings. One top tier GPO estimates that their contract portfolio will increase by 0.83% in 2010.  While this figure is a much lower rate of inflation than medical supply inflation, it isn’t going to help your own healthcare organization trim its own operating budget for 2011 and beyond.

There is an answer!  Price savings are only the tip of the iceberg representing, 1%, 2% or 3% at best in new savings opportunities for you annually. That’s why attacking your utilization savings has become mission critical for your supply chain savings optimization. Utilization savings or 79% of all new savings available to your healthcare organization is just below the water line.  These new and better savings represent seven to 15% in supply and purchase service savings that are ready and waiting to be harvested.

Myth # 2: Regional GPOs and purchasing alliances are the answer

There are literally hundreds of regional GPOs and purchasing alliances popping up around the country that are sponsored, managed or promoted by national GPOs to wring the last purchasing dollars out of a healthcare organizations’ supply spend.  The philosophy behind these new regional purchasing cooperatives is that by their members’ committing all or most of their purchasing volume on selective purchases to one supplier they will bend the curve a bit more on their price savings.  

This committed volume philosophy works in practice, since suppliers will sharpen their pencils if they know with certainty they will be awarded hundreds of thousands of dollars in new business for one, two or three years — if their price is right.  The flip side of the coin is that universally these consortiums start off with new savings for their members on new committed volume contacts, but within a year or two they find that their savings opportunities shrink to next to nothing.  What should these regional GPOs do when they run out our traditional supply savings?

Purchase services do save!  The only savings left on the table for these regional cooperatives, as I see it, which do save dollars and make good financial sense, is to focus on their members purchase service contracts.  That’s why pooling the cooperative members’ purchase dollars for 10, 20 or even 30 hospitals for bio-medical services, trash removal, record storage, transcription services, etc., can reap huge savings in the range of 18% for all parties involved in these contracts a much bigger savings opportunities than just 3% to 5% in commodity savings.

Myth #3: Nibbling around the edges will keep your price savings flowing

 

I often see GPOs offering special savings programs in “selected” supply categories (i.e., patient bed side kits, can liners, chart paper, etc.) that project one-time savings in the range of 5%, 8% or even 24% for participating members.  While there is nothing wrong with special savings offers, it clearly demonstrates my point that price savings are slowly disappearing and now GPOs are nibbling around the edges to squeeze out new savings for their members. The concern that I have (and you should too) is that these savings are one-time hits, which will be eaten up by inflation over time and won’t have a major impact on your supply budget. Is there a better way to keep your savings flowing?

Look deeper and broader for savings!  We have been focusing on a new savings source to generate double-digit savings for our clients that we call “demand management” or measuring the velocity, intensity and frequency of the products, services and technology utilized over time. As an illustration, one of our client’s anesthesia trays jumped 21 percent (or $8,297) in frequency, over five quarters, even though their patient days (CMI-adjusted) for the same period were actually down by two percent.  This undisputable fact, driven by data, enables our client’s materials manager to start an open and collegial dialogue with their anesthesia department to understand, comment and then receive feedback from them on this obvious anomaly.  In this situation, the anesthesia department quickly discovered the reason for this variance; their staff was throwing out about 20 percent of their disposable anesthesia trays because the spinal needles were falling out when they opened a new 10-pack case of trays due to defective packaging.  I see the “demand management” concept as a more productive savings tactic than just nibbling around the edges.

The simple truth is: If we want to push forward with new and better supply chain savings we all then need to stop listening to the myths perpetuated by the marketplace and which no longer hold water.   And then search out more creative and innovative ways to reduce our total cost of acquisition to disposition, not just being fixated at lowering the price at the pump.

Robert T. Yokl

Chief Value Strategist

Strategic Value Analysis® in Healthcare

www.strategicva.com

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