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KSR Publishing, Inc.
Copyright © 2016
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         Clinical intelligence for supply chain leadership

 
 
 

INSIDE THE CURRENT ISSUE

February 2016

People & Opinions

Worth Repeating

"As GPOs grew larger, they sacrificed their ability to drive contract compliance. This resulted in suppliers not providing the most competitive pricing upfront, which led to GPO tier-level pricing and local IDN contracting. As local IDN contracting became more effective, larger IDNs moved to selfcontracting models, with a few IDNs taking complete ownership of their supply chain by internalizing key supply chain activities."

Gene Kirtser, President and CEO, ROi (Resource Optimization & Innovation)

"As I think back to even 10 years ago the majority of workstations in the sterile processing area did not have a lighted magnifier at each station, now it is the norm. With the advances in the quality and functionality of inspection scopes, sterile processing staff can now look into areas they could not visually inspect before."

Steve Kovach, Director of Education, Healthmark

"Supply Chain leaders should always be in charge of hospital contracts for third-party services because they have extensive contracting experience as well as access to benchmark pricing that may not be available at the department level. Centralized oversight helps ensure that contracts are properly managed — and consolidated in categories where services are required across multiple hospital departments."

Christina Katamay, Assistant Vice President of ServiceTrust, the purchased services
consulting division of HealthTrust

"Our experience has shown that cleaning of high touch objects in the OR is not consistently or thoroughly done. The biggest challenge is the pressure to turn over the room quickly, coupled with a lack of clearly defined processes, roles and responsibilities for this task create a situation where some surfaces are cleaned twice while others are not cleaned at all."

Linda Homan, RN, BSN, CIC, Sr. Mgr., Clinical and Professional Service, Ecolab

"Several things can go wrong in the cleaning and disinfection process. Selecting the right disinfectant is critical. Key selection criteria include the spectrum of kill, the kill time, the disinfectant’s ability to stay wet for the required contact time, and the safety profile."

Carolyn Cooke, Vice President, Healthcare, North America, Sealed Air Diversey Care

 
 
 
 
 

2016 healthcare industry issues impacting the Supply Chain

by John Strong LLC

From time-to-time my clients, and those companies I serve on the boards of, ask "What does this mean for us?"

This year, I have taken a look at some of the most significant topics and challenges facing healthcare in 2016 as they relate to the supply chain.

Mergers across healthcare

Health insurance company mergers grabbed many headlines in 2015, and if the deals on the table move ahead, United, Anthem and Aetna will control 44 percent of the U.S. market.1 Adding the Blues plans brings the total to almost 80 percent of the market today. This aggregated buying power may put pressure on suppliers for larger discounts of pharmaceuticals and implantable medical devices, and create a new market aggregation that we haven’t seen since the advent of the national group purchasing organizations (GPOs) nearly 40 years ago.

Many sources indicate that we will see a continuation of the merger trend among healthcare providers in 2016, yet the Federal Trade Commission (FTC) may have more to say about them in the year ahead. Several large mergers including the planned Advocate Health Care and Northshore University Health System merger in the Chicago area are coming under FTC scrutiny. As these mergers proliferate, supply chain leaders will be called upon with increasing frequency to standardize products across the new systems, reduce inventory and redundant functions such as buying, while improving service levels.

By mid-2015 healthcare had already broken a record set in 2014 for deals, including supplier mergers and acquisitions with more than $400 billion announced.2 Continuing consolidation of both product and service providers may put more pricing pressure on buyers in 2016. This will require new, broad thinking along the healthcare supply chain, and new and more innovative partnerships.3

In the area of retail, the merger of Walgreens and Rite-Aid is but one example of the continuing consolidation here. With many folks predicting that providers will move patients out of more expensive care settings, and into lower cost venues, including their homes, many companies are taking a look at bulking up in healthcare supplies, including Amazon. Expect to see Amazon continue to study the healthcare market in 2016. They have been a game-changer in every market they have entered.

Independent general line distributors are becoming harder to find. MMS, a medical supply company, announced plans to acquire Kreiser’s and Seneca Medical in late 2015. This places most of the medical distributors focused in the acute care market in the hands of four companies and is indicative of the rate of consolidation of all parts of the healthcare supply chain. Look for more private-label products and continued expansion into more profitable sophisticated medical devices from the remaining distributors. Traditional branded-distribution doesn’t carry the margins for them to survive.

The high cost of healthcare

Cost pressures continue to come from all angles both inside and outside healthcare. Employers are increasingly looking for relief from high healthcare costs, and these will continue in 2016. External price pressures such as these will continue to put pressure on provider’s supply chain executives to reduce cost. Unfortunately, most of the easy work has already been done, but expect to continue to see unrelenting cost pressure placed on provider supply chains and their leaders.

The Centers for Medicare and Medicaid Services noted that 27 percent of all U.S. hospitals were in the red (negative margins) in 2013, and they project that by 2040 more than half of all hospitals will be in the same position.5 Clearly, this is unsustainable, and requires change across the healthcare supply chain.

"Bar none, the healthcare supply chain is the most inefficient anywhere."4 While everyone along the healthcare supply chain recognizes the problem, expect to see more buyer-seller collaboration in 2016 to try to take process costs out of the supply chain. Providers and suppliers must work together to reduce redundancy, transportation expenses, waste, inventory and obsolete products going forward, and these reductions must be reflected in pricing, while benefiting both sides of the chain.

Escalating drug prices continue to be a major concern across the healthcare delivery system, and among consumers. With 2016 being an election year, expect to see the candidates talking about this issue, and Washington contemplating action. Don’t expect much relief. Instead, watch pharmaceutical companies devise new ways to try and justify the high costs of their products. Price increases for branded drugs have outpaced inflation in each year since 2006.6 While some price reductions may occur as the result of new biosimilar drugs, the high cost of educating and marketing these drugs may result in more nominal price decreases than expected. More than half of all the top 10 pharmaceutical companies are working on biosimilar drugs, while the price of complex drugs increased by 27 percent in 2014. States saw their Medicaid drug costs increase 24 percent last year.7 Again, this is not sustainable.

Premiums for health insurance will continue to rise until the high cost of care is addressed. Expect to see more new "innovative" products much more carefully scrutinized in 2016 by providers wary of paying more for product-line extensions that fail to provide real value to patients.

With the cost of care continuing to escalate, and reimbursement moving in the opposite direction, expect to see healthcare providers moving patients out of the acute care (and especially academic) setting faster, and into lower-cost venues including community-based hospitals and even their homes. Look for suppliers to find new ways to partner with providers to better educate patients about their products, and care in the home. This may require adjustment of provider purchasing’s age old mantra of "price, price, and price."

Technology and information technology

It seems like cyber security is on everyone’s agenda for 2016. While that may seem obvious, by 2020 the U.S. will have spent more than $285 billion on Internet connected products,8 and there is growing concern that patient care equipment—such as I.V. pumps—may be vulnerable to a wide-spread cyber-attack if they are connected to the Internet. Because of interconnectivity, suppliers need to be more vigilant and proactive than ever, and providers should insure that their due diligence and product evaluation consider threats of attack more than ever. Security will become a key selling point for medical devices in 2016 and beyond.

More widespread data breaches can be expected in 2016. According to cyber security experts, medical records are worth 10 times more than credit card numbers on the black market.9

Expect to see more applications for Universal Device Identification (UDI) in 2016. On September 24, 2016, medical device manufacturers will need to have UDIs on their packaging for all Class II medical devices, and their data submitted to the Food and Drug administration’s (FDAs) GUDID data base. The UDI holds great promise for increasing patient safety.

There is growing dissatisfaction among providers with electronic health records (EHRs) and large enterprise systems.10 Both are seen as clunky and ineffective, and with consolidation occurring, merging these large systems has become more time- and cost-consuming than ever. Expect to see more flexible "bolt-on" solutions that can communicate and interact with these large-scale systems in 2016.

Consumer-driven healthcare

Wearables are a key topic and include those items that can follow and monitor patients in all sorts of settings outside the acute care hospital. The next generation could be a $6 billion market11 by some estimates. They will be designed to extend the patient experience and be "humanized." Purchasing and supply chain executives should assist in carefully comparing the features and benefits of these systems, and seeking market competition to the full extent possible.

Consumers are expecting to see greater pricing transparency among providers in 2016, and the ability to post procedure charges for consumers will become more important than ever. This form of shopping will make obtaining the best possible pricing and value from pharmaceutical and medical device manufacturers more important than ever for purchasing executives. This trend may also further erode the confidentiality agreements that some suppliers have required providers to sign in the past five years, and expect the cost and price of medical devices to come under consumer scrutiny in the future.

Better cost accounting will be required by all healthcare providers—and they will require the assistance and collaboration of purchasing and supply chain management to be successful. Supply chain leaders should be proactively working with finance on ways to improve the cost accounting for all materials, but especially those with a high price tag. Suppliers can be mindful of this need, and collaborate with providers to accurately reflect the real cost of their products. Expect to see patients becoming more cost-conscious, requiring better communication with purchasing, and better rationale for high-cost items.

Video consultations and examinations are expected to continue to grow in 2016, especially among the younger population. Such consultations at rural and critical access hospitals may change the material requirements for some of them—and add a layer of complexity in the provider’s supply chain program.

Healthcare providers will continue to take cues from their communities around environmentalism in 2016 and continue to explore ways to foster recycling programs, sustainability initiatives, and purchasing products with fewer or no harmful chemicals. A typical hospital generates about 4 million to 4.5 million pounds of waste annually…or about 42 pounds per patient day at median levels. Because trash costs more per pound to dispose of than recycling does, and because hospitals must sort their waste according to federal rules that require its safe disposal, the concern of what to do with it isn’t just financial, it’s logistic.12

Healthier menus and food will also be on the table for hospitals and other providers in 2016. Expect the "greenest" health systems, like Dignity Health, to ramp up their efforts to specify and source even better products than those available on the market today. It’s better for patients, staff, visitors and our planet.

Group purchasing organizations

The merger of University Healthsystems Consortium (UHC) and VHA was big GPO news in 2015, topped by the VHA acquisition of MedAsset’s supply chain programs, creating a new company called Vizient. Many argue that MedAssets had not successfully completed their assimilation of the contracts written by Broadlane from their merger several years ago. The speculation is that it will take a great deal of effort and time for Vizient to sort everything out. My experience with these types of mergers suggest that it may take three to five years to gain sea legs and capitalize on all of the assets and leverage that has been gained in this transaction.

GPOs were on the minds of many suppliers during 2015, and are sure to figure prominently in their 2016 plans. Many are asking whether they need both national and regional GPO contracts—with some suggesting that at least some of the regional purchasing groups (RPGs) provide better value than the national GPOs. I would argue that we remain at the doorstep of seeing significant change in the GPO business model, with them offering more fee-for-service programs in 2016 and beyond. With big data playing an ever-larger role, Premier seems well positioned. Healthcare provider consolidation remains a threat to the GPOs, but it is hard to imagine that they will not continue to prosper, albeit with slower growth in the future. In addition, there is a large cadre of health systems and independent hospitals, including many critical access hospitals that find real value in the GPO product portfolios and other services they provide.

Supply Chain management department focus

With the drumbeat from the C-Suite of taking cost out of their health system, many supply chain and purchasing executives will continue to focus on pricing in 2016, but many are now conceding that price alone will not solve our cost problems. This means thinking broadly, better typing materials and strategic planning together, and re-engineering long and ponderous supply chain processes for greater efficiency and economy.

With the low-hanging fruit of lower prices already harvested, there may be more buyer-seller collaboration in healthcare in 2016. Everyone is talking about doing it, but many folks have questions about how to best execute on this. Beware of the old 1990’s "corporate programs," many of which incented more purchasing but did not return enough value. They will not cut it this time around. These programs should be roughly balanced to provide equal benefits to both parties.

With many hospitals and providers refocusing their capital spending to follow the patient out of the acute care hospital, capital spending should continue at a brisk pace in 2016. In late 2015, Fitch indicated that 53 percent of hospitals surveyed indicated they would increase capital expenditures in the next five years, up from 45 percent in 2012.13 At the same time, expect more focus on better capital equipment procurement, and an increased use of careful calculations such as determining the Total Cost of Ownership (TCO) for equipment. Alert manufacturers will know how their TCO compares with the competition. Expect to see more "bolt-on" software tools in 2016 to manage capital and expensive implantable products that communicate directly with the EMR.

Including purchasing and supply chain in service contract decisions is a growing trend that will continue in 2016. It often makes sense to have a specialist on the purchasing team who is familiar with writing service contracts—and developing the metrics to hold service contractors accountable for performance.

Some experts have estimated that at least 20 percent of all products purchased in healthcare end up as waste. Expect to see a focus on reducing waste to contain costs, and higher barriers to getting "me-too" products accepted in hospitals, especially in the OR.

Value analysis teams and committees will continue to grow, and more will be physician-led. They should not be operated as traditional "new product committees," and instead focus on existing high-cost goods and services.

More providers will post their procedure prices in 2016 and beyond. As a result, supply chain management must be ready with reliable estimates of material and service costs that factor into these procedures. Look for more questions from consumers about cost and prices—and some of these are certain to land at the purchasing manager’s desk. This trend is being driven by higher deductibles, higher co-insurance premiums and technology that enable patients or potential patients to ask more questions about their care.14

Employed Physicians

Common wisdom suggested several years ago that more employed physicians would become more flexible and likely to participate in product-selection decisions. A telephone survey conducted by SMI during the summer of 2015 suggests that it is the age of physicians—not their employment status that often results in greater flexibility and participation.15 Younger physicians and recent graduates tend to be more participative and flexible around product discussions and decisions than older physicians who are often used to getting what they want in terms of brand and product selection.

Strategic supply chain executives will seek more physician input and collaboration in 2016. They should be on a first-name basis with key physician leaders and the Chief Medical Officer (CMO). Expect to see more physicians playing active roles in supply chain management. The age of "physician champions" long cultivated by medical product and device and pharmaceutical companies is ending with the older generations of physicians, many of whom are retiring. Physicians today are increasingly turning to data, including patient outcome measurements and product evaluation metrics to make purchase decisions.

Conclusion

In my 40-plus years in healthcare, 2016 promises to be the most exciting yet! Those who are willing to embrace change—especially along the healthcare supply chain will be well-equipped for the next five years as a "New Age" of healthcare continues to dawn in the United States. It must dawn—because we cannot afford the old model any longer. HPN


References:

1 Keckly, Paul, "MedCity News", 2015--2016 Predictions.

2 Hirschler, Ben, "Healthcare M & A Tops Full-Year Record—and it’s only July", Reuters, July 22, 2015.

3 PriceWaterhouseCoopers, "Top Industry Issues of 2016", p. 2.

4 SMI--Strategic Marketplace Initiative research during phone interviews with suppliers, et al, 2015.

5 Jump Technologies, EIN News, December 21, 2015, p. 2.

6 Schonelmeyer, Stephen, and Purvis, Leigh, "Rx Price Watch Report: Trends in Retain Prices and Brand Name Prescription Drugs Widely Used by Older Americans", AARP Research Institute, Pubic Policy Research Paper, November, 2014, pp. 3-4.

7 Keckly, Op. Cit., p.2.

8 "Forecast: The Internet of Things, Worldwide", Gartner, 2013.

9 Landi, Heather, "Healthcare top segment at risk for security breach in 2016", "Behavioral Healthcare", December 21, 2015, p.2.

10 Nance, David, writing in ‘MarkLogic’ (Blog), "Three Big Healthcare Predictions for 2016".

11 Das, Reenita, "Top Ten Healthcare Predictions for 2016", "Forbes" Magazine, December 10, 2015, p. 15.

12 Skoufalos, Matt, "Sustainability Practices Pay Dividends", MedicalDealer.com.

13 Shinkman, Ron, "Fitch says hospital capital spending will rise", FierceHealthFinance, September, 2015.

14 Finn, Thomas, PwC and FierceHealth, "Healthcare Trends: PwC’s 2016 predictions.

15 SMI, Op. Cit.