th-17U.S. Hospitals are under tremendous pressure to reduce costs, enhance quality, and improve outcomes. If you think this is an exaggeration, look at the American College of Healthcare Executives’ most recent annual survey on issues facing hospitals. Three of the top five concerns of hospital CEOs are financial, healthcare reform, and quality.

The hospital supply chain is now coming into focus as a potential source of value and way of helping to meet these challenges. The Association for Healthcare Resource & Materials Management has initiatives underway to better align the supply chain with costs, quality, and outcomes. Despite spending $300 billion on drugs, devices, and other supplies, the U.S. hospital industry has traditionally lagged behind other industries in supply chain and purchasing sophistication. For hospital suppliers who feel like they are under lots of pricing or value pressure now, you haven’t seen anything yet.

One of the challenges many hospitals face is to align the clinical side with supply chain. Usually, the individual with the most influence in the buying process is the physician. A recent report in Health Affairs showed physicians have very low awareness of prices of certain implants. Beyond price awareness, transparency to prices and value has been an issue. Some have argued that the lack of transparency in value, and opaque pricing has led to higher healthcare costs. In fact, opaque pricing in parts of the medical device industry has been the focus of U.S. Congressional studies.

Whether you agree or not that a lack of transparency has contributed to higher costs, it’s hard to argue against the idea that better transparency will help hospitals in negotiations and in buying decisions. Price transparency could be a lever for purchasing people to negotiate deeper discounts from suppliers. Likewise, value transparency, leveraged by value analysis committees, will help hospitals decide which device, drug, or supply item is the best choice for their circumstances.

One might argue that hospitals have already had access to transparency. In the past, hospitals could have leveraged their group purchasing organization (GPO) for basic price benchmarking. Likewise, hospital buyers could have turned to other third parties for basic price, performance, and feature comparisons for many capital equipment and other supply items. Also, there have been many health technology assessments done for important new or controversial technologies. So, what’s different now?

Now there is a convergence of forces that make transparency more of a threat than ever for hospital suppliers. This is especially true for suppliers who sell physician preference items (PPI). The forces converging to make transparency more of a threat than ever are:

  • Accountable care and value-based purchasing: The movement from fee-for-service to accountable care and value-based purchasing makes hospitals increasingly accountable for patient outcomes and downstream costs. This means outcomes and understanding value are more important than ever.
  • New start-ups: with $300 billion in supply spending annually in the U.S. alone, there’s a huge business opportunity to help hospitals take cost out and bring value into the buying decision. New start-ups like ProcuredHealth and SharedClarity are helping to bring transparency to outcomes and value, and share it across hospitals.
  • Physician employment: physicians are increasingly being employed by hospitals. Physician employment helps align hospital-physician interests and create shared destiny around buying and utilization decisions
  • Maturing hospital supply chain: more mature supply chain organizations will have the political clout, best practice tools, and skills to leverage transparency like never before.
  • Consolidation: hospitals continue to consolidate. In addition, in the U.S., many hospital systems and hospitals are partnering to form regional shared services centers to focus on leveraging purchasing power and creating common care pathways.
  • Government activism: governments, struggling with debt and rising healthcare costs, are turning to price referencing as a means for reducing healthcare costs.

What does all this mean for suppliers? How should you prepare? We’ll discuss implications and recommended actions in Part II of this series.

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