Healthcare and the Supply Chain: Compromising Buying Leverage Healthcare Supply Chain Style

In an earlier post I touched on the confusion in the health care supply chain related to suppliers trying to figure out who the real customer is. But suppliers also face other financial complications related to the nature of the hospital world.

Hospitals and the provider world as a whole create conflicts of interest for their own suppliers by forcing them to first determine how many mouths they will have to feed and constructing their margins accordingly, preventing them from being as competitive in their pricing as they could be. Suppliers know that out of their margin they will have to pay fees to a GPO, perhaps pay additional fees to a state hospital association run GPO or an IDN contracting entity. On top of that they will be asked to negotiate a variety of performance/utilization rebates with the money going to the same entities. Finally, they will be asked to fund/sponsor trade shows, conferences, industry associations, membership groups, research projects, etc. The fact is that virtually everything that happens in the industry is funded in part or in whole by suppliers. Suppliers must also build in the cost of money when pricing because hospitals don't always pay on time. The result is that a multitude of players have collectively largely compromised whatever real buying leverage a hospital purchasing manager could have hoped to assemble. All of these fees and sponsorships have created an additional layer of overhead for suppliers that they must fund each and every year. Ironically, if hospitals don't think they are paying for all of these things they are less likely to value test them. Several years ago a large GPO tried to find out what its members would pay for its services if the supplier funded model ever went away. They were not encouraged by the response.

Want to reform health care? A great place to start would be realigning financial incentives in the supply chain. Let suppliers go back to being suppliers and let those who benefit from the many vital and beneficial organizations and initiatives be the ones who fund them. After all, if suppliers don't have to fund it all they will be in a better position to lower their prices and then hospitals can decide where to put their money based on the value they derive.

Your turn: If you are in a buying capacity outside of health care, how many conflicts of interest has your company or industry created for your suppliers?

Does your organization or someone you know need a speaker for a company meeting or would your senior management like a private briefing on some of the key issues that will affect health care reform and the business climate? If so, please send an email to: leverard[at]bellsouth[dot]net

Lynn James Everard

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