Reforming the Supply Chain

By Harry Kirschner, Managing Director, Supply Chain Solutions at The Advisory Board Company, Washington, DC

Healthcare reform and national demographic shifts have set transformative market changes in motion. While the final Supreme Court ruling on the Affordable Care Act and political instability add some degree of uncertainty, there is little disagreement that growth in healthcare spending must be modulated. Healthcare administrators are squarely focused on initiatives to increase the quality of outcomes while aggressively reducing costs across the care continuum.

While labor represents the largest expense category for hospitals, future savings on labor costs appear to be diminishing. Labor productivity has been a perennial focus for many hospitals in recent years, yet administrators are growing wary that further cuts may impact reimbursement if getting “too lean” reduces patient satisfaction or worsen outcomes. Real transformation requires restructuring of care delivery, taking years to implement, but leaders must find immediate cost management strategies to mitigate operating margin challenges in the short term.

Supply and purchased services spend, together representing about half of most hospitals’ operating expenses, offer the next attractive targets. Supply costs, inflected by both price to the hospital and utilization by clinicians, have undoubtedly received attention across the past decade (particularly on utilization control), but many leaders have kept supply chain at arm’s length, relying on traditional tactics to drive only incremental impact. Our price comparison and economic research clearly demonstrates that most hospitals have significant latent price opportunity embedded in their supply costs, findings borne out by the recent General Accounting Office report exposing implant price variation. Through our Strategic Sourcing Management initiative, we’ve uncovered 10-20% price improvements at institutions that were previously performing in the best price decile. While these savings were exclusive of utilization improvements, a key success factor for any cost containment strategy is increased physician alignment.

On a positive front, reform is driving providers to pursue a variety of physician engagement strategies to both capture increased market share and create meaningful incentives for mutual accountability. Whether formally participating in bundled payment initiatives, increasing physician employment, or pursuing co-management agreements, providers are implementing mechanisms to create meaningful financial rewards that spur new levels of collaboration with clinicians. Aligned financial incentives for hospitals and their clinicians will strengthen a sometimes-tenuous alliance, as they share rewards for lower costs and higher quality, or, in some cases, penalties for high costs and low quality.

To achieve transformative change, these themes of collaboration and partnership need to be extended to govern the relationship between providers and suppliers as well. Research with supply chain executives and suppliers alike has demonstrated that negotiations are more often governed by mistrust and a steadfast defense of one-sided priorities. A review of best practices from outside industries demonstrate a more partner-centric approach that values a transparent and data-driven exchange designed to create mutual value. Moving beyond this prevailing “zero-sum” game will require action by hospitals and suppliers alike.

First, supply chain organizations should be thoughtful around providing suppliers with clear visibility into their needs and opportunities to expand business into new categories. Hospitals and their clinicians must partner with suppliers to build efficient, strategically designed sourcing events that create a compelling opportunity for suppliers to be creative and thoughtful around opportunities to drive mutual benefit. They should use strategic sourcing strategies to clearly articulate product, service, legal, and business requirements, taking the guesswork out of supplier proposal development. Hospitals must activate their clinicians and other end-users beyond the level of “engagement” common in committee work, by also building pathways for physicians themselves to lead supply award decisions, with all the relevant price and quality information in hand to make appropriate trade-off decisions. True business partnership with clinicians requires continued access to the supplies that make the hospital their workshop-of-choice, but also control over the sourcing award decisions that will drive the financial gains that reward lower cost.

Suppliers have long been accustomed to serving clinicians’ need for information about clinical performance differentiators. As aligned financial incentives merge hospital and clinician interests, suppliers should be prepared to discuss the cost impact of their products with newly-interested clinicians. As hospitals critically examine spend for total value, suppliers should be prepared to articulate the non-price benefits that support their proposals (quality or performance differentials, favorable service terms, stocking requirements, product support, etc.). Suppliers should also push to clearly understand the hospital and clinicians’ broader objectives, moving beyond standard proposals or commitment requirements to propose more creative offers that drive incentives for both parties to achieve all cost and quality objectives.

“Value” has become a buzzword in health care today, but with good reason – it encapsulates both cost and quality, and attempts to rationalize choices across those targets. As our industry moves into an uncertain future, successful organizations will build true partnerships across the supply chain divide, and capitalize on aligned incentives to build a more efficient supply marketplace, to benefit both buyers and sellers.

To better understand the impact of the Advisory Board’s innovative approach to sourcing – download a copy of a white paper describing how the Advisory Board helped transform the already-excellent supply sourcing function at a distinguished academic medical center in the Midwest, leading to $1.85 million in savings.
To learn more about what the Advisory Board is doing in the supply chain space more broadly, visit