Discovery Blog by Andy Perry

The Supply Chain Leadership Problem

Fri, 17 Oct 2008 21:03:08 -0500

When we consider Supply Chain Management, the most important question we need to ask ourselves is, “Is Supply Chain a Strategic function of our hospital?” I cannot imagine a hospital that doesn’t have a strategic directive to lower costs, but how much agreement do we often have between that objective and our organizational capabilities, organizational control, our personnel and expectations?

Clinical preference items (namely implants) escalate in cost significantly every year. To solve this problem, Materials Management needs innovative leadership that bring inter-departmental teams to the table with physicians and suppliers to align interests and achieve workable, cost-effective sourcing and contracting based on core service lines and patient value. And they need the strategic endorsement of senior management to get it done.

The problem is, years ago we abdicated in-house leadership of supply chain management and outsourced it to GPOs. We took what is an essential, strategic function and reduced its in-house role to often a purely transactional one. What a shame. GPOs are great resources and partners for data and analysis, but the supply costs that require the most innovation and leadership are for these clinical preference items--the decisions for which are not based on national contracts, but on local, organically networked, facility-level clinical personnel and their allegiances.

Dr. Eugene Schneller at Arizona State University is doing great work on this subject. He’s identifying leadership in health care supply chain and evangelizing it to the materials management community. We should all take heed, as well as a critical look at our strategic handling of supply chain management.

Market-Competitive Clauses: Price Floors?

Fri, 13 Jun 2008 22:50:00 -0500

If you have spent anytime dealing with your Group Purchasing Organization, you have likely encountered the concept of market-competitive pricing clauses. A market-competitive clause in a GPO’s contract with a supplier stipulates, essentially, that any price break (or non-price value added) the supplier provides to a member below the GPO-contracted rate must be extended to ALL members of the GPO. Another key element is that suppliers must revise downward their pricing if they begin to offer products at a lower rate in the marketplace at all (for instance, a more favorable price for another GPO).

We can look at this notion and think, “Sounds good,” right? If a supplier can offer that price to one organization, the GPO can ensure it is extended to all members. Or better still, if lower pricing is available outside of the GPO, a downward adjustment benefits members, right? But let’s look at this from a supplier’s perspective. If I am trying to win or keep a key client account, prepare a competitive bid, or establish a price book for my catalogue, I cannot offer more competitive pricing without fear of triggering this clause. The stakes of the market-competitive clause have become a strong deterrent for the supplier to lower its prices. What results is an effective price floor. Where a member could normally use GPO pricing as a jumping off point in negotiation with suppliers, they are now more limited due to the clause.

Cost of Capital in the Coming Years (subtext: Huh? Huuuuh?)

Wed, 30 Apr 2008 12:03:06 -0500

A recent post on the HFMA Views blog (a reprint of an article in Mississippi Medical News by David A. Williams CPA, FHFMA), made me look and sound like my daughter when I read it (I will elaborate). The author makes some notable points, but I wanted to discuss one particular aspect that caught my eye. The assertions Mr. Williams makes about the cost of capital in the coming years just don’t resonate with me (excerpted directly from Cost of Capital section):

Cost of capital - operating margin slippage and quality indicators for debt issues will drive up the cost of borrowing
The increasing threat to health care providers' tax-exempt status resulting from scrutiny over charity care and community benefit
Increased private equity investments in health care will force up the costs of capital overall as investors seek to participate in profitable service lines
Surplus in bed capacity in some markets will require conversion of excess bed space to areas of other patient care activities. This renovation cost will be in addition to the routine capital improvements health care organizations are required to make to keep pace with rapid technological and medical practice changes.

“Increased private equity investments in health care will force up the costs of capital overall…” My daughter does this cute little move where she tilts her head to the side, throws up her hands and says, “Huh?...Huuuuh?” First of all, will Private Equity money flow into businesses whose customers he claim have such unsustainable and distressed fundamentals (see his sections “Costs of Care” and “Pricing and Payments”)? Wouldn’t the same fundamentals and credit quality issues that will supposedly “drive up the cost of borrowing” for providers also deter private investment in suppliers who will be selling to providers?

Mr. Williams uses the word “overall” to describe capital markets. In fact, overall, an infusion of private equity money into capital markets would decrease the cost of capital. See Figure 1. The only rationale for an increase would be not in the “overall” capital market, but isolated only in the capital market for providers via the substitution effect. In other words, we would have to assume the returns investors will get in the private equity market will cause them to exit the capital markets available to providers and thus increase the price. See Figure 2. We also see that if this is indeed the case in the capital market, providers will actually demand less capital (an amount of capital issue rather than a cost of capital that contrasts with Williams implication that “routine capital improvements” will be unchanged).

One other assumption we must make for this to be true is that none of the private equity money would be available to providers. Is he saying that this infusion won’t be accessible to providers because it’s not bond money? What about joint-ventures with physicians, PIPE funding for publicly traded providers, etc.?

Another of Williams’ points: Fallow inpatient bed-space will require new capital to convert (again, an amount of capital issue rather than a cost of capital issue). But the cost (price) of capital movement he predicts will change the business case for any capex project. To reiterate, existing capital demand will decrease if the price increases. See Figure 2 again. New capital demand due to bed-space conversions will shift the curve entirely but will still be sensitive to the price increase.

How can we postulate the “overall” impact of these very disparate, distinct, and even incompatible possibilities? I need much more data and clarification to support the conclusions. Otherwise, I’m just like cute little Sophie Perry with my hands in the air saying, “Huh?...Huuuuh?”

GPOs and Organizational Knowledge

Wed, 23 Apr 2008 15:46:05 -0500

A post I read today by Michael Lamoureux about GPOs got me thinking. We all have seen the value of GPOs and collaborative contracting and sourcing. In fact, I am quite a bell-ringer for their utilization. Also, in my first post, I discussed Business Process Outsourcing and whether or not hospitals and health systems had adopted the practice for back-office functions as readily as other industries. When you get down to brass tacks, GPOs are outsourced functions of the materials management department—a divestiture of much of the sourcing and contract management work.

My question is, what does this outsourcing do for organizational knowledge and learning? We can talk about the economies of spreading research and due diligence costs across a vast network of members and we can easily cite volume discounts—nobody is decrying those rationales—but I am curious about the organizational knowledge component. In effect, the GPO model has centralized knowledge and expertise that at one time was much more heavily localized, as it is in other industries. If aligning clinical preference and financial value are key components to successful service lines, what strategic assets or competencies might be forgone by a hospital using a GPO? Do we know how to analyze spend, source, contract, and transact in a hospital as well as we would in a more decentralized model? Food for thought.

AHP and Physician Preference

Thu, 17 Apr 2008 21:37:28 -0500

Not long after I learned about the Analytical Hierarchy Process (AHP), I immediately related its utility to physician preference items and value analysis. For those of you unfamiliar, AHP is the process of making pair-wise comparisons of decision alternatives (i.e. “how does alternative X compare to alternative Y”), based on the pertinent factors (clinical outcomes, price/lifecycle costs, fill rates/distribution, etc) you select, comparing the factors with one another to establish relative priority, and then evaluating your rankings for consistency. In the value analysis models I have come across, I have not seen any explicit mention of AHP, but it could be a nice fit.