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A 2019 Wish: U.S. Healthcare Supply Chain Leadership Will Learn to ‘Just Say No’

01/07/2019 By

“The price of doing the same old things is higher than the price of change.”

Although Bill Clinton is credited with the quote, that same wisdom has been cleverly conveyed hundreds of different ways throughout history. Regarding change in a healthcare supply chain context, it’s about knowing that it must be continuously pursued, or face failure. In that same vein, it’s also about understanding that capturing meaningful opportunity requires equally meaningful action — even the occasional, willful supplier disruption.

My 2019 wish is directed at healthcare’s supply chain leadership. More than encouraging investments aimed at making their supply chains more dynamic, I would like to see the gloves finally taken off and the bullying behavior of major suppliers called out for what it is. To make that happen, healthcare’s supply chain leadership must think more strategically about their supply rationalization strategies across their most important service lines. If for no reason other than to establish balance in important relationships, the effort is essential. Finally, staff must be remotivated to challenge the established order, so programs that reward them for doing it must be instituted, promoted and monitored for results.

It’s Time to Oversimplify

As most of us know, U.S. healthcare is nearly twice as costly to deliver than most anywhere else in the developed world. Costs are tracking to nearly 20% of our GDP. It’s not a sustainable trend and everyone knows it.

Interestingly, however, many of the more common narratives aimed at explaining America’s high cost of healthcare are getting sacked. Ideas that pin the blame on fee for service as the driver of all things evil (e.g. over-utilization, over-specialization, primary care deficiencies) are no longer supported by the data.

Dr. Ashish Jha, director of the Harvard Global Health Institute, is on the front line of this research. His team has compiled detailed data from the healthcare systems of the U.S. and other developed nations confirming that America’s system of healthcare isn’t necessarily the international outlier that we have been led to believe. He points out that most other country systems suffer from over-utilization for many of the same reasons that we do here in the U.S. In a simple summary of his findings, Dr. Jha explains the problem: “It’s not that the rest of the world doesn’t eat pizza too, it’s just that we pay a lot more for every pie.”

And there it is. The U.S. pays a lot more for almost everything. We pay substantially higher prices for prescription drugs, medical devices and services. And while there’s no getting around how the administrative complexities of our billing systems also add significant costs, there is no escaping the fact that higher food costs result in higher meal costs. Why something so simple continues to be debated is nonsensical.

The Usual Suspects

Drug pricing would seem an easy place to start, as the discrepancy in pricing between the U.S. and other countries is stunning. While you would think that those who view price controls as the way to lower U.S. pharmaceutical spending would have an easy argument to make, again, we’re told that it’s not that simple. We’re warned that price controls will adversely impact innovation and ultimately raise costs.

In fact, there are “experts” who say that, because the U.S. pays about 42% of the global tab, it’s actually in our long-term self-interest to keep paying more. It’s described delicately as an innovative-access tradeoff — a hypothetical argument that says suppliers will stop innovating and refuse to adapt if prices are regulated down.

This argument makes perfect sense to the academics and politicians who rely on pharma money for research and campaign financing, and it even works for those who believe it’s America’s moral duty to pay more. Unfortunately, it makes no sense to anyone else, as the logic flies in the face of every historical corollary.

In addition, it ignores how well the pharmaceutical and biotech companies are performing and how they are actually allocating their money. A quick read of their annual reports shows that spending on R&D is much lower than spending on SG&A (selling costs, such as sales rep compensation); so, at least theoretically, we already know that drug prices can come down without sacrificing innovation.

In fact, there is a bottomless pit of meaningful opportunity for healthcare’s supply chain leadership to close the door on supplier-led measures that undermine its need for more effective cost management. On one end of the spectrum we have an unhelpful alliance between physicians and the supplier sales representatives of high physician preference items (PPI). On the other, we have durable goods that still aren’t competitively bid due to the strength of supplier lobbies aimed at preventing it. Do people still believe that commodity items like walkers, canes and compression socks cannot be effectively bid?

Let’s examine some middle ground: medical devices. It’s yet another area of the healthcare supply chain where it’s obvious that suppliers have received a hall pass. This is a favorite topic of mine, as the medical device industry complex only makes sense if you happen to be a medical device OEM or one of its shareholders. These companies operate on margins that are 10X more than even their most successful hospital customers and yet they continue to confound customers’ efforts to reduce costs. When they’re not forcing hospitals into more expensive, senseless innovation (a.k.a. “restrictive innovation”), they’re working to thwart reprocessing and other programs designed to reduce waste.

Consider this example. Remember how Apple threatened to void smartphone warranties if customers didn’t use certified Apple technicians to repair cracked glass? For good reasons, these and other restrictive practices were quickly outlawed, with even the most vocal free market economists welcoming the regulation.

As taxpayers who foot more than half of the healthcare bill, isn’t it fair to insist that the sellers of medical devices either knock it off or face a similar, regulated outcome? In previous articles I’ve written on the subject, I’ve suggested that U.S. healthcare providers play victims to a Stockholm-like Syndrome. They’ve been beaten down by their “captors” for so long that they not only identify with them but, in some cases, they actually defend such practices.

In fairness, there are an increasing number of healthcare supply chain managers who “get it” and are working hard to institute aggressive sourcing, reprocessing and other cost savings strategies. More power to them. But their success is also accelerating the market’s consolidation (yet another matter).

Not surprisingly, profit margins among several of the top-performing systems are better now than at any time in recent history. For example, Mayo Clinic reported 2017 operating margins of nearly 6% (up more than 1% from 2016). However, Mayo’s success would not be possible without having a world-class and fearless supply management capability. The point is, of course, systems whose financial metrics are comparable to Mayo can be counted on one hand.

In light of such evidence, why then are so many in the supply chain management profession still unwilling or unable to rock the necessary boats? Are their own stakeholders stopping them? Perhaps it might help if the buy side, including key organizational influencers, acted like it was their own money on the line.

Additionally, the industry would be well served to stop telling itself how hard change is and switch its focus to the rewards. For example, sharing the fruits of successful savings initiatives with the people who make them happen should no longer be viewed as controversial.

Many service line units at hospitals today are successfully aligning clinical and supply chain goals by putting in place “shared savings” programs with surgeons and other clinicians. Despite how well these programs work, the naysayers continue to squash them using short-sighted arguments that not only ignore what has always worked, but what never has. Ironically, these same executives will agree to arrangements that financially motivate their suppliers to behave better but won’t agree to ones that accelerate the cooperation of their own staff.

The examples are endless. Take the adoption of new technologies in hospital ORs and labs. The medical device OEMs leverage demand growth to constantly launch new technologies, yet hospital adoption continues to lead to higher costs in service lines that are already losing money. While clinicians eagerly grab new technology and start using it without consideration to the cost consequence, supply chain leaders are forced to stand by passively, without the wherewithal to ensure that the “new and improved” technology even translates to better care. Again, there are exceptions, as successful supply chain managers are learning how to support the right clinical alliances but, it’s not the rule.

Buy/sell negotiations cannot remain centered on the countering tactics of each side.  Rather, they must be focused on cost-effective improvements to patient care. Beyond getting prices in line, healthcare’s supply chain professionals must embrace value-based initiatives that support the interests of payors, not payees, because vibrant service lines ensure not only better bottom lines but also better patient outcomes.

Imagine the following scenario:

A sales representative of a major medical OEM with a goal to sell a higher cost, “new and improved” version of a top-selling device is told “no thank you” by the health system’s supply chain management. Unwilling to accept that answer, the rep does a deliberate end-around to the system’s surgeons. The same representative then encounters a cost-effective program to reprocess the device he/she is trying to replace. Now what? Would you believe that threats to prevent access to other assets and disposables where the rep’s employer has a monopoly are common? Even worse, how about a threat to cut off access to the device in question until the system agrees to terminate its reprocessing program?  

I have covered supply chain management practice across industries. Nothing like that scenario could ever happen elsewhere. But variants of that same narrative are a reality of our health system, despite taxpayers footing more than half the tab. No, the solution isn’t about arguing a supplier’s profit motive. Rather, we must recognize that rational checks and balances are reasonable and required. Alternatively, we might also learn to just say “no.”

Just Say No

Nancy Reagan was famous for saying, “Just Say No.” Her three-word mantra was roundly criticized for having oversimplified a deeply complicated social problem. Did her utterance actually harm millions of American children, as was claimed?

In 1964, Justice Potter Stewart tried to explain “hardcore” pornography, or what is obscene, by saying, “I shall not today attempt further to define the kinds of material I understand to be embraced … but I know it when I see it.”

The aforementioned expressions represent a common sensibility that healthcare providers must learn to embrace. Big health systems must develop a cross-functional confidence to call out bad supplier behaviors and support colleagues who are willing to punish it.

Beyond investing in management systems that drive compliance to standards and cut waste, initiatives like strategic sourcing and reprocessing programs that take aim at the most powerful suppliers should be pursued unapologetically. Although U.S. taxpayers don’t see the details, they do know that they’re paying twice the price of pizza, despite buying twice as many pies. There should be no patience for the rhetoric employed to obfuscate such truth.

Furthermore, translating the benefits of effective supply chain management strategies should take months, not years. For example, conducting a comprehensive value-analysis effort on a device or program that has been “value-analyzed” to death by the market’s leading health systems is simply not necessary. In these cases, where the risk is arguably higher to not make the change, a dollar-driven program to secure staff support will beat a redundant data-driven incentive every time.

The pursuit of the clinically integrated supply chain is real, as payment models are shifting in ways that compel it. Simply put, the corresponding change management gauntlet that supply chain professionals continue to run is costly and often antithetical to the effort.

If U.S. healthcare lets itself remain in the grips of unchecked supplier oligarchies — if it continues to pay more for things it doesn’t need and accept the competition-stifling interference that no other government-funded health systems tolerate — then our costs will remain indexed to the performance objectives of the supply side, not the true cost of care delivery. 

Tom Finn has been covering supply chain technology transfer across industries for 25 years. His coverage includes the acute care market, where he has also served as an industry analyst for more than a decade.