Unraveling the Mysteries of Healthcare Supply Chain Pricing
By Kyle Gaspar, Janet Holland, and Sara Crittenden
As individual consumers, we routinely access online market price comparisons before buying a car, a house, a television, airline tickets, hotel accommodations, or even basic commodities. But those of us in the healthcare industry know that details about current market prices for hospital supplies can be a thing of mystery. Hospitals make purchasing decisions every day without knowing the best price in the market. The healthcare industry lags behind almost every other industry in this regard and is long overdue to have unbiased, powerful data with which to make informed purchasing decisions. Given the current economic conditions of hospitals and health systems, it cannot come soon enough.
Product costs represent the second most significant component of hospital operating costs, following labor expense. Modern Healthcare reports nearly 40 percent of a hospital’s expense budget is attributed to medical/surgical supplies.a Supplies are a significant contributor to escalating healthcare expenditures, a fact supported by a recent study that revealed supplies and devices represented 24.4 percent of the average increase in cost per discharge.b
At the same time, hospital priorities are focused more than ever on new methods for mitigating the financial impact of the Affordable Care Act. It is no surprise that when asked how they plan to maintain margins in the face of revenue erosion, Sara Crittenden51 percent of the CEOs and other senior decision-makers responding indicated they will reduce costs by renegotiating with suppliers (a response rate second only to increasing efficiency).c
The Problem: No Baseline
Hospitals experience substantial variation in prices paid for supplies and products. Healthcare pricing is designed to be complicated and confusing, with built-in distractions such as rebates, bonuses, and tiers—leaving hospitals without resources to monitor prevailing market pricing. Adding to the mystery, analytics have shown that price variations cannot be justified by normal market factors such as volume, economies of scale, commitment level, or group purchasing organization (GPO) relationship. As a result, a small stand-alone hospital can realize a lower product price than a 25-hospital system.
Reliable, unbiased pricing information has been absent across the hospital supply chain. Access to trusted sources for pricing—whether for new items such as transcatheter heart valve kits, or basic items such as needles and syringes—has long been missing. Why not apply the same technology-driven access that is available for consumer purchases? It may be a challenging undertaking, but certainly not inconceivable. Hold that thought.
Hospitals order and pay for supplies based on their best efforts to negotiate pricing, or end up paying prices determined by third-party aggregators (e.g., GPOs). Again, the price of a product often is mired with confusing variables, such as bonus tiers, rebates, and other commitment level incentives. New products entering the market often are purchased without any price negotiation whatsoever, with hospitals merely accepting suppliers’ quotes. Due to the number of contracts required, it is nearly impossible to keep a contract portfolio current, or properly tracked and managed, by hospital staff or their third-party aggregators.
With no incentive or obligation for suppliers to share what other hospitals are paying for the exact same items, hospitals are left working in the dark, operating under a veil of mystery with no idea whether the best price has been achieved, or if they have overpaid. The hospital is left to accept whatever price the organization is willing to tolerate or look for a substitute product.
Prior attempts at demystifying market prices for medical/surgical supplies have yielded some directional guidance, such as a range of prices (high/medium/low) being paid by others; however, data quality historically has lacked rigorous monitoring, with the number of data points collected generally insufficient to produce reliable results. Also, earlier attempts failed to account for important elements such as commitment level and volume. With increasing cost pressure, ongoing efforts to advance the sophistication of price transparency information and analytics has become an important strategy for the future. With the rapid advancement of sophisticated, analytical data processing, reliable, actionable data are well within grasp.
The Importance of Current Market Data
Traditionally, GPOs and health systems negotiate contracts based on a contracting cycle, which often is three years. Most do not audit or benchmark pricing for the duration of the contract. Typically, once the contract is signed, pricing is not reviewed until the expiration date approaches and the category is taken back to bid. Currently, 90 percent of all hospitals belong to GPOs; however, hospitals increasingly elect to negotiate physician preference items (PPI) locally because they can drive standardization with the cooperation of their physicians. Often, this results in lower pricing than attainable with the hospital’s GPO base prices. However, regardless of the contract type, how does a hospital know if its contract pricing is competitive?
Here is a surprising phenomenon: There is a widely held perception in the hospital industry that revealing market prices for medical/surgical supplies will expose the “special” pricing that individual hospitals and systems have managed to negotiate with suppliers. Perhaps to perpetuate this belief, suppliers tell their customers they have uniquely preferred pricing, in some cases asking for confidentiality as part of this perceived secret pricing. It stands to reason a supplier could not afford to provide special pricing to everyone; however, no correlation is seen between best price/bottom-of-the-market pricing and confidentiality agreements.d Such contract language clearly benefits suppliers only by hampering transparency and preserving pricing confusion.
And the fact of the matter is, this is no small problem. For example, an estimated $5 billion is lost annually in the implantable device arena as a result of waste, inefficiency, and lack of visibility into market-based pricing of supplies.e According to the IT research and advisory firm Gartner Inc., many providers can increase profits by 2 to 7 percent by reducing supply chain cost by 5 to 15 percent simply through better analysis, planning, and controlling their purchase and use of goods and services.f
Comparing Invoice Prices Paid
The scatterplot in the exhibit illustrates the huge variability in prices paid for a common bone screw. With data organized in this manner, pricing variation is readily apparent, allowing a hospital to quickly see where it is paying a higher (or lower) price than the market bears. This information can also be augmented to reveal rebates, special “deals,” which ultimately will disappear as the industry embraces price knowledge.
For hospitals and health systems, supply pricing transparency should not be seen as an attractive but improbable prospect, but as an immediate and critical need—one that requires a transformation of industry practices around the pricing of essential medical supplies.
a. Modern Healthcare’s 2012 Survey of Executive Opinions on Supply Chain Issues, August 2012.
b. Fauntleroy, G., “Rising Cost of Inpatient Care Linked to Medical Devices and Supplies,” Health Behavior News Service, Center for Advancing Health, August 29, 2012.
c. Pain, L., and Funk, J., L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions, L.E.K. Consulting, 2014.
d. Source: BroadJump client database
e. Pennic, J., “5 Ways Supply Chain Can Reduce Rising Healthcare Costs,” HIT Consultant Media, May 13, 2015.
f. Supply Chain Consultants and Outsourcing Providers for Healthcare Delivery Organizations, Gartner, Inc., July, 2011.
Publication Date: Wednesday, January 27, 2016