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Healthcare Supply Chain Has Its Own Needs, Challenges: An Insider’s View

04/29/2019 By and

With companies like Amazon and Walmart trying to break into the healthcare supply chain sector, it’s curious why they haven’t made great strides. It turns out that what works in many supply chains doesn’t automatically translate to the healthcare provider supply chain.

Mike DeLuca, executive vice president of operations at Prodigo Solutions, learned that lesson well from his work at UPMC, a $19 billion healthcare provider and insurer based in Pittsburgh and his current experience serving the technology needs of some of largest healthcare provider organizations in the country that are Prodigo’s clients. DeLuca was able to juxtapose the experiences after working in supply chain for Motorola and Alcoa.

“I naively thought supply chain was supply chain,” DeLuca said, “but what I learned over time is that’s not the case in healthcare.”

The key differences include physical and technical issues, like:

  • The complexity of the end product, the human body, and the complexities involved with caring for people instead of building or delivering a finished product
  • The difficulty of getting value from the thousands of contracts for medical supplies
  • The lack an adopted data standard
  • The lack of transparency between providers and their suppliers
  • The tough economic climate for health systems.

In this Q&A, DeLuca delves into the unique supply chain requirements of healthcare providers and explains how Prodigo, a technology solution that deals solely with healthcare clients, is working to drive savings with its procurement technology so caregivers can focus on patients.

Spend Matters: Could you give us some background on Prodigo and its roots?

Mike DeLuca, left: Prodigo’s roots stem from UPMC (University of Pittsburgh Medical Center), which was trying to diversify its revenue stream through for-profit companies incubated inside the organization. UPMC saw far enough ahead to realize that the business transition in healthcare from volume-based to value-based care would directly attack the revenue streams involved in treating patients. They looked across the company to find for-profit business opportunities that would help diversify their revenue streams and leverage their operations.

And the timing was right. We had just deployed a technology that we validated was working very well at UPMC and could be portable and provide value to other healthcare providers. We organized as a company in 2008, finished the foundation in 2009 and officially launched to the industry in 2010. I was involved in that entire process.

What do you see as the differences in the supply chains between a typical supply chain and one that’s in healthcare?

You can see the differences manifested in the ways that companies like Amazon are struggling to make significant headway in this industry. While the concept of sourcing, transactional purchasing and paying exists in healthcare as they do in every industry, there are other concepts that are noticeably missing.

Take advanced planning, demand planning, sales and operations planning, cognitive analytics and AI, those simply don’t exist in the healthcare industry. It’s why you have excess inventory throughout the supply chain and inflated SG&A allocations.

When you look at what does exist, it’s multiple intermediaries. It’s an industry where you don’t have a producer or a manufacturer dealing directly with vendors. You have intermediaries that are up and down the supply chain. You’ve got distributors, you’ve got GPOs, you’ve got payers. Payers are contracting with providers, markups are applied by providers. You see an industry that’s laden with vendor rebates. It’s not a supply chain or an industry where true costs are apparent to either the industry players or the consumers. For example, rebates: When I was at Alcoa and a vendor offered a rebate, most folks in sourcing would say, “Just give me a better price.”

This is still an industry where every one of the physician preference vendors layers in rebates and complex volume commitments and terms and conditions, and so when you’re figuring out true cost, when you’re figuring out price savings, you’ve got to look at that. The contract may look great on paper, but operationalizing it is complex. In healthcare, you still have an industry, because of the multiple intermediaries, where true cost analysis and transparency in the industry are difficult and put the manufacturer and provider at odds. And while you see and hear a lot of case studies and holding hands at the conferences, what is happening behind closed doors is completely the opposite. This is not an industry where Dell invites Seagate into its product facilities to work on TCO opportunities, not even close.

For example, medical devices have a huge price markup, which happens for a variety of reasons that aren’t always clear. And you’ve got an industry where they want to protect that margin that’s existed for a long, long time. If there’s price transparency happening, it has been happening slowly.

Do you think digitalization will chip away at the huge margins?

I do think the adoption of technology will help. In general, your supply chain and the healthcare industry tend to be lagging behind other industries. The adoption of widespread ERP, they were sort of late to the game on that.

But the main healthcare-specific difficulty to some of the savings we see in supply chain is operationalizing the contract.

In healthcare there’s approximately 40 million SKUs that can be contracted for by a health system. Many clients don’t contract for all 40 million, but that is still many more SKUs than you see in other industries; as a result, the number of contracts needing to be managed are also considerably higher. Depending on the hospital system, you’ll see 2,000 to 6,000 contracts that exist inside the system.

What we see as an organization is that providers can negotiate the contracts and savings but they have a hard time operationalizing those contracts.

The more geographically dispersed an organization is, the larger its continuum of care, meaning providers that own hospice care, physician practices, women’s care clinics, rehab clinics, urban hospitals, rural hospitals; the harder it becomes for them to herd the cattle and drive the contracted savings. Their contract utilization typically hovers between 50% and 60%. If you’re a sourcing person in any industry and you put a contract in place that you work six to eight months to obtain and you’re supposed to save your employer millions of dollars over three to five years and you’re getting 55% utilization, you’re probably really not happy with the job that you’ve done.

Our approach is to hand them that playbook of contracts, if you will, and operationalize them by making them purchasable for the client to drive their contract utilization numbers to north of 85%.

To me, that’s doing the basics — you’ve put a contract in place, then you want to make sure you’re paying the contracted price on every transaction that rolls through your shop.

Can supply chain efficiency help doctors focus on the quality of care?

Our products are directly involved with attacking the cost side of the equation and helping our clients save money — in some cases millions of dollars. And that allows them to invest in patient care and new equipment — those aspects of the health system that allow them to be cutting edge.

If you talk with CFOs in this climate, they know it’s much easier to attack cost than it is to chase revenue, especially in a climate of declining reimbursements.

But the other aspect is the decrease in time that healthcare providers have to spend on procurement tasks.

Take BJC Healthcare, one of our clients. That was a huge win for Prodigo because what we showed at BJC was not only could we derive costs savings for our client, but we were also saving hours for BJC’s folks across their hospital system, many of whom are patient-facing.

The caregivers should not be spending two hours or an hour inside of a procurement system; they should be caring for patients.

We’re saving time and money, right. If you move a client from 60% utilization to 75%, you have a win. Technology must provide value and pay for itself, especially in this industry where provider OM’s in even the best health systems now average 3.5%.

Prodigo was founded to address pain points in healthcare, like contract compliance, automation, data quality and user experience. Where do you think Prodigo has made strides in addressing those?

We are not an organization that talks about technology for the sake of technology. We know that there has to be a tangible return on investment, and we save a hospital system an estimated 5%-12.5% on every additional dollar of spend under management. When we meet with the C-suite, we don’t lead with products, we lead with value, because if they can’t see the value, the technology does not matter.

One of the greatest strides we’ve taken in addressing pain points is what we’ve achieved for our clients. We’re helping them survive this decline in revenue to allow them to contribute that money to the parts of their business that are patient-facing.

Are there other areas that make healthcare supply chain different from other industries?

Open buy vs. directed buy. We focus on directed and we’ve got the largest market share, from a healthcare marketplace standpoint.
In many cases you’ll see folks who don’t understand the industry talk about open buy. You’ll see competitors who work cross-industry talk about the principles of open buy, or “punch-outs.”

That’s very different from what healthcare providers need, which is directed buys.

Healthcare providers are not just buying indirect materials. When I ran Alcoa’s global mall, it was really for the 37% of spend that was indirect. But for a healthcare provider, there is no distinct line between a direct material and an indirect material because there’s no true bill of material, there’s no planning engine.

The idea of a controlled buy or directed buy is critically important where the items being purchased directly impact the patient. Our focus has to be cost, quality and outcomes — procurement in healthcare is not just a financial equation.

How do suppliers fit in?

The suppliers want to drive quicker payment. And that’s really where we see our primary mechanism for what we believe is the golden egg for suppliers: getting the price right on the front end, meaning our ProdigoContracts module is synchronized to our Marketplace module.

By getting that price right up front, the vendor is assured that the purchase order is going to be accurate. They’re assured that when they submit an invoice that it’s going to match the PO, and then they’re going to get paid according to terms. We don’t push reconciliation down the P2P path, we tackle it at what we argue is the most critical time, when a requestor drops an item into their shopping cart. Additionally, contracted manufacturers and distributors have the ability to showcase themselves by providing us with product attributes that we synchronize to our clients’ Marketplaces and with other downstream clinical work processes.

How has your technology and software evolved?

We were incubated in the healthcare system, so our products are healthcare-provider focused.

For that reason, our connectivity points to the ERP system are straightforward. Our implementations are not a full year. They tend to be three to six months. So that’s helped us generate references from our clients. Success depends on execution. Sales and Operations are a “one plus one equals 2” game. You need to be able to sell, but if you can’t deploy (execute), you won’t be in this familial industry that long. There are a long list of failed attempts in the healthcare supply chain industry.

And your software has to be able to do things that are industry-specific. Ours does.