Friday Rant: Three Reasons the Healthcare Supply Chain is So Backwards

Earlier today, we formally announced Spend Matters' latest venture exploring the healthcare supply chain: Healthcare Matters. Collectively, the Spend Matters and Healthcare Matters team is stoked to tackle an industry and set of business issues that has long deserved a voice in the market. Here at Azul Partners (Spend Matters' parent company), healthcare is by far and away our largest employee (and non-employee) cost outside of regular compensation. I could buy a mint condition, low mileage, air-cooled Porsche 911 (maybe two) for what we spend each year on the line item. It's a huge portion of our revenue that seemingly goes into a black hole every year. And even when we "take advantage" of our insurance by seeing a doctor, going to the ER or having a procedure done, it seems we're paying far more than our insurance.

Speaking for myself, I'm personally excited to shed some light on a sector that appears to waste and overspend absurd sums with little or no improvement in patient outcomes -- and one where my own business continues to spend more and more for what seems like less and less. But why? Why is the healthcare supply chain such a mess? Here are three reasons why I personally believe the system is so backwards:

  1. Relative to other industries, there is no transparency into supply chain and other costs -- at every level in the supply chain (including: patient, provider, clinician, hospital, payer, etc.). Organizations and individuals have little or no visibility into what a service or item should cost, let alone what it does cost (or what the mark-up is at any stage in the value chain). For example, I recently went to an ER in Seattle for an ear infection; the hospital was "out of network." Of course the ER could not tell me what it would cost when I was admitted (I asked, based on my insurance). What was it in the end for 20 minutes and two scripts? Roughly $950 out of pocket. I have no doubt that the nurses, PAs and physicians who looked at me had a clue into their costs to deliver the service, either.
  2. In healthcare, measurement often still relies on gut (and training), not analytics and data. Within a clinical setting, things are often done "the way they always were" based on physician training, instinct and past experience. Moreover, there is rarely any attempt to tie cost and consumption to patient outcomes. I was having lunch with a colleague in the sector yesterday (Bravo's Paul Martyn) who shared with me the following hypothetical example: perhaps the use (and excessive consumption) of certain items can have a negative correlation with a patient outcome. Consider the case of gauze, for example, in a certain procedure. When physicians or nurses use excessive gauze on a regular basis, it turns out that they might actually have less successful patient outcomes than those who use less (and also spend less, mind you). Yet without insight into this data -- which does exist, but is rarely considered -- they'd never know this.
  3. The healthcare cost buck continually gets passed around without clear ownership of spend reduction. Whether it's helping surface and target physician preference items, consolidating spend into a single analytical platform to understand patterns and take action or examining the role of particular practices and consumption patterns in patient outcomes (see above), the healthcare cost buck is still routinely passed around inside the healthcare environment today. Sometimes, it's a lack of centralized leadership within procurement and supply chains that's responsible for this. In other cases, leadership exists, but it's limited in influence. And in others, third parties (e.g., GPOs) become the strategy when in fact they should only be one element of a portfolio. Hospitals and IDNs must stop passing the ultimate patient (and payer) buck and take control of spend and spending data just as CFOs, CPOs and VPs of supply chains do in other industries.

Jason Busch

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