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Thinking about standardizing suppliers? This might change your mind.

December 7, 2017

    It's that time of year again when you might be thinking about ways to stretch your dollar, where to find that perfect device that will bring joy to those who receive it, and how you're going to meet all of your year-end obligations.

    You might think we're talking about the holiday season, but those of us who work in supply chain know we're telling a different story. For many organizations clinical supplies have come to the forefront as a starting place for reducing unwarranted care variation, resulting in heightened scrutiny of physician preference items (PPI), and more pressure to reduce costs while maintaining high quality of care.

    Balancing cost, quality, and preference in discussions with physicians has long been a challenge for health care organizations. We've seen many organizations standardize their supplier base for certain procedures in order to receive the best pricing for implants and theoretically improve clinical outcomes. But that got us thinking: Does standardizing your suppliers really drive the best price and outcomes?

    We agree that some form of contractual commitment can drive additional value, but we've also seen committed contracts that aren't in the top quartile for pricing. In order to take a deeper look, we recently ran an analysis for all total knee replacement procedures throughout 2016 using data from our Surgical Profitability Compass customer network.

    In the analysis, we identified both high- (top quartile) and low-performers across all cost and quality measures and primary suppliers per case to determine per-supplier market share. We hypothesized that organizations who were high-performing on cost and outcomes would have a low number of suppliers and high contract compliance. We supposed that if surgeons were primarily working with the same vendor representatives and using the same products repeatedly, it would result in a more standardized procedure leading to better outcomes.

    While organizations with the best outcomes and pricing were in a committed model with their suppliers, they weren't as committed as we anticipated, with just 75-85% market share instead of 90-100%. Interestingly, low performers with the highest supplier commitment actually had more competitive pricing, but their cost-per-case was much higher due utilization of higher priced products (e.g. premium or even revision components in basic primary cases).

    So, what does this mean? Here are two takeaways from this analysis to rethink your category management strategy:

    1. Think beyond line-level pricing. One low-performer we looked at had very competitive pricing from their key supplier, but their average supply-cost-per-procedure was significantly higher than the national benchmark. Price-to-price benchmarking gives you only part of the picture; top organizations benchmark their performance at the procedure-level. If you don't engage your physicians to understand why they are using one product over another, you're not looking at this the right way.

    2. Have frequent, transparent discussions with your physicians. If you aren't able to have thoughtful conversations with your physicians to understand their preferences and engage them in cost reduction, then you are going to miss out on potential cost and quality improvements opportunities. Physicians should be involved with category management on a regular basis, not every two to three years when contracts are due to be renewed.

    Reducing unwarranted care variation is a meaningful cultural shift; it's challenging but rewarding when you do it right. Start by engaging your physicians in cost and supply utilization conversations. If you don't have buy-in from your docs, you won't see results. Next, carefully evaluate all of your pricing opportunities and engage category experts to help ensure both you and your suppliers are happy with contract terms. With some expert guidance and the right data to support PPI decisions, making meaningful gains in reducing unwarranted variation is well within your reach.

    Learn more about our total knee replacement analysis

    Check out our latest whitepaper for a deeper dive into the analysis as well as next steps on how your organization can overcome the cost and quality balance.

    Get the Whitepaper.

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