Hospitals Can No Longer Afford to Pay the Bill for Increased Manufacturer Profitability

locum tenens

I recently read a Forbes piece penned by my friend Paul Martyn. Essentially, it took hospitals to the woodshed, pointing out how many of them remain victims of Stockholm syndrome. It’s an unfortunate analogy meant to describe the state of mind of far too many acute care supply chain practitioners.

If you’re not familiar with the Stockholm syndrome procurement context, the implication here is that hospital purchasing staffers tend to identify with the goals and objectives of their “captors.” In this case, the captors are the major pharmaceutical and device manufacturers (OEMs). Of course, the problem is, they’re doing so at their own expense. And while the acute care market is not alone in providing a high-powered example of an industry dominated by its largest suppliers, this is a particularly painful one, given how plainly unsustainable healthcare’s current economics are.

How did this happen? For far too long, hospital procurement professionals have put their energies into managing their group purchasing organizations (GPOs). Because practitioners outsourced the lion’s share of their supply chain management responsibility to GPOs, this made sense. At the same time, however, they also allowed major suppliers free reign — and they got too close.

OEM sales representatives developed deep relationships with the physicians who used their products. It turned out to be a terrific business strategy for the OEMs, as the OEM/physician alliance has proved nearly impenetrable by procurement professionals, making it all but impossible to effectively address the largest buckets of spend. The relationship has been described as “bread and circuses,” a figure of speech describing superficial appeasement. (The bread is the shiny new device and the sales rep’s “necessary presence” in the OR is the circus.) Regardless, from a SCM practitioner’s perspective, normalizing the nature of these relationships continues to be extremely difficult.

But it’s necessary.

To be clear, the power of these relationships is both good and bad. When it serves as an irrational block to otherwise good supply chain management practice, that’s where the trouble lies.  Procurement doesn’t relish a tug of war with high earning physicians. As a result, they will walk past low-hanging opportunities frequently missing badly needed savings improvements.

There has, however, been some recent relief. Value-based purchasing (VBP) initiatives are now redefining the behavior of hospital supply chains. It is happening because VBP is a common thread across all of the current reimbursement models, meaning hospitals have no choice other than to get on board. Fortunately, their physicians now know this. Simply put, U.S. hospitals can no longer afford the rhythms that previously defined their supplier relationships, and, thankfully, changes in reimbursement policy are helping.

The concept of VBP references a broad set of performance-based payment strategies that link financial reimbursement incentives to healthcare providers' performance. Dr. Lars Thording, a senior marketing and public affairs executive with Innovative Health put it nicely: “They [hospitals] can no longer afford to pick up the bill for increased manufacturer profitability without experiencing the dramatic increases in efficacy to justify it.” And with device costs eating nearly 60% of many reimbursements, it’s about time.

Under VBP, program-based performance targets are essential. Hospitals must select initiatives where improvements can actually be measured. The medical device reprocessing industry provides an excellent example of one such opportunity, as reprocessing is highly dependent on effective program management. Reprocessing medical devices for re-use is a long-proven cost containment strategy. So effective, in fact, that the device manufacturers bought the industry’s largest players several years back in an attempt to control the business. The OEMs viewed the reprocessors as threats to the high margins to which they had grown accustomed, so they did something about it.

Suffice to say, the device manufacturers are still doing everything they can to delay commoditization and keep prices high. As a result, several of the entrepreneurs that originally established the reprocessing industry have re-entered the marketplace, responding with two types of business models:

  • Commodity reprocessors selling discount devices (low savings, high volume)
  • Specialty reprocessors with targeted programs and advanced technological and regulatory competencies (high savings, medium volume)

Cardiology and electrophysiology (EP) are two related areas of specialization that happen to be booming. Procedural demand is exploding, and premium-priced single-use device technologies are rampant (i.e., a reprocessor’s dream). Most important, an average hospital today can derive 80%–90% of its savings from an EP/cardiology reprocessing program. And that’s not all. Because the adoption of curative methodologies are inevitably governed by cost, the availability of less expensive reprocessed devices actually has the effect of increasing procedural volumes.

Not surprisingly, the OEMs are at it again, doing what they can to confound the trend. But they’re executing the same playbook, so hospital SCM executives should recognize the pattern. It’s just plain obvious. The OEMs continue to shorten the technology lifecycles of their products. They are so brazen about introducing “new and improved” devices that are not, in fact, new or improved, that noted Princeton economist Uwe Reinhardt openly called them out, saying, “unnecessary innovation is one of the industry’s biggest cost drivers — a tax on the system that protects OEM profits and confounds customer strategies to save money.”

Remember Moore’s Law, where product performance doubles every two years while prices are cut in half? Well, let’s just say that Moore’s promise has not been realized in healthcare supply chains. The unnecessary and rapid launch of “new” products designed to confound commoditization places constant pressure on hospitals to spend more money — money they cannot afford.

If hospitals are expected to do more with less, then so should their “partner” suppliers. Device reprocessing strikes at the heart, because it not only provides a sustainable, program-based cost savings but also helps level a playing field that has been tilted one way for far too long.

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Voices (2)

  1. Fred J. Pane, R.Ph, FASHP, FABC:

    As a Pharmacy Leader for over 25 years in a hospital, health-system, IDN and Pharmacy and Therapeutics Committee Chairperson, I can say that my pharmacy team and physicians I worked with, rarely fell prey to the OEMs/captors. The physicians said “did you talk to pharmacy first, if not, we won’t speak with you”. Because of our clinical background in pharmacy, we are very capable of analyzing clinical and financial studies, while setting up our own studies to monitor patients who use products, to treat or prevent disease and even set up the labs with the Lab Dept. to monitor patients. Most of the time, we didn’t feel that the studies done by the OEMs were appropriate to how we addressed patient care. The GPOs can contract for products, but they don’t dictate what drugs we select for use in our patient populations and for our Formulary, which is based on Efficacy/Clinical Outcomes, Safety, then impact on overall cost of care. I have been involved with payer Risk Contracting since 1997 and understand the metrics and how hospitals and physician groups were rewarded. Also, we published the first article on Risk/Value Based Contracting for drugs in 2004. The influence of OEMs varies by organization, which today, is different than in past with IDNs.

    1. Tom Finn:

      Based on your comment, you clearly appreciate the problem (generalized obviously) that I highlighted. I focused more on the device market, as I have witnessed the way the OEMs use short product lifecycles to confound SCM professionals –making an already difficult data/item master/contract mgmt. challenge even worse (e.g. changing the lead wire color on a device and calling it “an improvement,” forcing a new SKU to be added, confounding volume rebate opportunities, etc.). It is also a fact, which I did not mention, that devices that are actually viewed as commodities are regularly jacked up in price/not reduced. As the market consolidates, the systems get larger and hospital SCM maturity is realized, these problems will go away. I suppose my point is, it should have never happened in the first place. The FDA only makes approvals or denials. It is not in the business of forcing the OEMs to play fair –and it probably shouldn’t be. But no business is immune from social pressures. Thanks for your comment. I appreciate it.

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