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IDEA LOUNGE

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SOURCING AND PROCUREMENT’S ROLE IN THE FUTURE OF HEALTHCARE

December 2nd, 2021 By Steve Schmitchel | Thought Leadership | Industry Ideas
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This article was originally published by Healthcare Business Today.

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America’s hospitals are projected to lose $54 billion in net income in 2021,
with more than one-third of these institutions maintaining negative operating
margins through the year, according to the American Hospital Association. Some
of the healthcare industry’s financial instability can be traced back to
expenses related to the COVID-19 pandemic — severely sick patients require more
costly care and supplies, the price of these critical supplies is surging and
labor shortages are driving up healthcare salaries. There’s also less revenue
coming into healthcare systems. Staggering patient appointments to maintain
social distancing means facilities book fewer patient appointments, and the
insurance industry is starting to pay less for virtual care. As pandemic-related
pressures mount, government scrutiny is also increasing, with regulators setting
upper limits on what healthcare providers can charge for procedures.

This ongoing revenue pressure and increased complexity magnify the need for
bottom-line cost management and profit improvement across the healthcare
industry. Many healthcare institutions are responding to the pressure by
participating in buying programs that leverage scale to negotiate best-in-market
pricing on the clinical supplies that directly impact patient outcomes. 

This strategy for managing clinical spending and streamlining suppliers is
typically successful for healthcare facilities, which begs the question, why
isn’t the same model as successful with non-clinical spend? While healthcare
facilities benefit from a centralized, strategic buying approach for clinical
expenditures, the industry is taxed by patient care, and lacks the category
expertise to optimally manage non-clinical spending, or the goods and services a
healthcare facility needs to continue business operations.

Non-clinical expenditures span all departments within a healthcare provider and
include diverse products like office supplies, linens, and printed brochures,
and services, like IT development, payment processing and janitorial services.
These non-clinical expenditures are significant, equating to as much as 20% of
total revenue. True spend management of these goods and services can drive
significant profit improvement that lifts the institution’s bottom line —
without impacting patient care. In fact, strategic procurement can stretch
dollars further and enable investment in enhancing overall patient outcomes and
experiences.

Unique industry spend challenges

The healthcare industry faces particular challenges in managing costs. Record
merger and acquisition (M&A) activity in the sector has complicated many
administrative functions, making disparate spending systems even more
decentralized.

Increased M&A activity has strengthened the collective buying power for clinical
supplies, but non-clinical spending, which has historically received less
attention, has only become more complicated and fragmented. Unlike clinical
spending, which is typically centralized under supply chain groups, non-clinical
spending tends to fall under stakeholders from across the organization that
manages their own departmental spending and partner with their own preferred
network of suppliers. Because non-clinical spend management is decentralized,
bringing together various administrative functions magnifies inefficiencies,
requiring disciplined oversight and spend visibility. 

M&A activity creates unique buying challenges in itself. In the private sector,
facilities in many privately owned businesses are identical in every market, and
their procurement activities can easily be replicated across locations. Medical
facilities vary, even in the same market. Many have different systems, different
operating models, and different ownership structures.  As a result, these highly
technical but physically different facilities have different demand
requirements, which adds a layer of complexity to non-clinical buying.

Healthcare systems also tend to be part of the fabric of their communities and
often favor buying non-clinical supplies from local vs. large national or global
suppliers. More robust local economies typically support healthier populations,
which is in the industry’s best interest, but locally-sourced products and
services can be more expensive. 

Procurement strategies, and the technology that optimizes value generation, can
help the healthcare industry address their unique buying challenges, streamline
contractors and find the deep savings in non-clinical expenditures typically
seen in the system’s clinical spending. And the money that’s usually left on the
table each quarter from mismanaged non-clinical spending can help alleviate the
financial instability currently challenging organizations within the industry. 

Lower costs without lowering the quality of care

A thoughtful, well-implemented procurement strategy is an effective way to drive
meaningful and sustainable value through profit improvement, process efficiency
and supplier management. Disciplined procurement centralizes company-wide
non-clinical spending, streamlines processes and procedures for spend management
and assures quality from supply partners.

Collecting and aggregating spend data like invoices, purchase orders, contracts,
budgets and historical spend gives healthcare stakeholders a broad picture of
organization-wide spending, the first step towards making better buying
decisions. But manual processes are too slow and cumbersome to sift through the
volumes of data or provide a real-time picture of spending. Purpose-built
procurement technology collects disparate data, cleans the information,
categorizes it to create an accurate, real-time picture of spend and raises the
visibility of supplier information. 

By leveraging automation, procurement technology can categorize thousands of
organization-wide vendors and invoices and provide powerful data analytics
around non-clinical inventories, suppliers, contracts, payment structures and
more. With this data, stakeholders can identify more efficient sourcing and
buying strategies and find opportunities for profit improvements. Although
non-clinical spending spans business functions, most healthcare systems find the
most significant savings opportunities in the areas of corporate services, IT
and facilities. 

Partner for success

Even in the best of times, healthcare professionals don’t usually have the time
and resources to manage non-clinical costs since their success is principally
defined by patient outcomes — as it should be. And with the current state of
healthcare, some systems are nearing a breaking point, and there’s no bandwidth
to implement a comprehensive non-clinical spending strategy. I recently met a
hospital group CFO to discuss how a non-clinical procurement strategy could save
his hospital system millions of dollars each year while he was focused on more
pressing needs, e.g. how to transform the cafeteria into an ICU overflow. 

Many institutions outsource to third-party procurement partners that can offer
their experience and knowledge to analyze indirect expenditures, create a
strategy around streamlined spending and roll out a procurement implementation
plan to ensure optimal results. While the medical facility focuses on its
broader objective, third-party procurement experts can offer an unbiased,
outsiders’ perspective, provide industry insights and even use their leverage to
negotiate with local vendors. Procurement experts can also present market
intelligence from companies in other sectors that procure goods and services at
volume and density and compare healthcare facilities’ buying efficiencies
against these organizations. 

In healthcare, if you can’t diagnose a problem, you can’t fix it. The same is
true for managing non-clinical spending. If the healthcare industry wants to
come out of the pandemic stronger than ever, medical institutions must analyze
their non-clinical spending and suppliers and apply the same discipline to these
goods and services as it does to clinical buying. Management of non-clinical
spend and suppliers can alleviate some of the industry’s financial strain and
unlock funds that can support a greater standard of patient care.

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About LogicSource:
LogicSource is purpose-built to drive profit improvement through better buying.
LogicSource focuses exclusively on the sourcing and procurement of goods and
services not-for-resale, which typically represents 20% of a company’s revenue
and the area of greatest spending inefficiency. Tested time and again in the
marketplace, their proven engagement model builds profitable partnerships that
achieve 4-15x ROI. 

 

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