Why is the Hospital Sourcing Model in Dire Need of Transformation?

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Problems with the Current Model

In a situation where up to fifty percent of a hospital’s operating budget is consumed in medical-surgical supplies, pharmaceuticals and purchased services, paying fair prices for products and services is vital to controlling costs. The traditional hospital sourcing model is outdated, no longer sufficient and was exposed on the onset of the COVID–19 pandemic.   

Lack of Transparency 
To start, there is a major lack of transparency in pricing across the marketplace. BroadJump sourcing applications show there is more than 300% variation in cost for the same products in various categories.1 Currently, twenty to thirty percent of supply purchases are made without a contract or current market pricing visibility, which commonly results in obtaining out-of-market pricing. Additionally, with Physician Preference Items (PPI) representing up to fifty percent of total supply spend, paying out of market pricing for costly devices creates a significant chance of overspending and a healthy reduction in procedure margin and operating cash. 

Lack of Resources 
Another issue lies in the lack of resources available to effectively manage sourcing activities on a timely basis. Most hospital and health system sourcing teams are understaffed and do not have access to the technology to provide real-time data that provides them with actionable market pricing intelligence to swiftly achieve available cost savings. Most hospitals supply chain teams have historically been stretched thin, dealing with product procurement, product shortages and demands for purchasing the latest technologies. This leaves little time for the data analysis and negotiations required to realize available cost savings through obtaining competitive market pricing. What supply chain teams need is a model that makes their tasks much more manageable, while giving them back precious time required to build a cost-competitive product contract portfolio to gain control of supply spend. 

GPO Contracts 
Lastly, but perhaps most significant, GPO contracts typically apply to about thirty-five percent of a hospital’s non-labor expenses. GPO contracts generally carry a three-year to five-year term with fixed tier level pricing that often do not offer best market pricing from the onset of the contract. These lengthy contracts unintentionally trap hospitals into unfavorable product pricing positions, with very limited resources to negotiate better pricing, thereby causing one to miss out on years of savings opportunities. It is quite possible that a newly negotiated GPO contract could have out of market pricing as early as within the first 90 days.  The traditional model design, using long-term GPO contracts, especially for high dollar purchases, creates a pricing disadvantage and a reduced operating margin. 

Problems with the Current Model
In a situation where up to fifty percent of a hospital’s operating budget is consumed in medical-surgical supplies, pharmaceuticals and purchased services, paying fair prices for products and services is vital to controlling costs. The traditional hospital sourcing model is outdated, no longer sufficient and was exposed on the onset of the COVID–19 pandemic.   

Lack of Transparency 
To start, there is a major lack of transparency in pricing across the marketplace. BroadJump sourcing applications show there is more than 300% variation in cost for the same products in various categories.1 Currently, twenty to thirty percent of supply purchases are made without a contract or current market pricing visibility, which commonly results in obtaining out-of-market pricing. Additionally, with Physician Preference Items (PPI) representing up to fifty percent of total supply spend, paying out of market pricing for costly devices creates a significant chance of overspending and a healthy reduction in procedure margin and operating cash. 

Lack of Resources 
Another issue lies in the lack of resources available to effectively manage sourcing activities on a timely basis. Most hospital and health system sourcing teams are understaffed and do not have access to the technology to provide real-time data that provides them with actionable market pricing intelligence to swiftly achieve available cost savings. Most hospitals supply chain teams have historically been stretched thin, dealing with product procurement, product shortages and demands for purchasing the latest technologies. This leaves little time for the data analysis and negotiations required to realize available cost savings through obtaining competitive market pricing. What supply chain teams need is a model that makes their tasks much more manageable, while giving them back precious time required to build a cost-competitive product contract portfolio to gain control of supply spend. 

GPO Contracts 
Lastly, but perhaps most significant, GPO contracts typically apply to about thirty-five percent of a hospital’s non-labor expenses. GPO contracts generally carry a three-year to five-year term with fixed tier level pricing that often do not offer best market pricing from the onset of the contract. These lengthy contracts unintentionally trap hospitals into unfavorable product pricing positions, with very limited resources to negotiate better pricing, thereby causing one to miss out on years of savings opportunities. It is quite possible that a newly negotiated GPO contract could have out of market pricing as early as within the first 90 days.  The traditional model design, using long-term GPO contracts, especially for high dollar purchases, creates a pricing disadvantage and a reduced operating margin. 

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