At the Margins

Stop managing spend like a hospital

Harry Kirschner

Stop managing spend like a hospital, and start managing supply and service spend like a Fortune 500 company in any other industry.

Our research reveals that even top-performing hospitals lose 20-40% of their contracted savings during the first contract year. Worse, their slack spend management is noted by observant suppliers—and leveraged against them in the next contract round. 

Our 400+ supplier partners have told us (and shown us in their bids) that their very best offers are reserved for the "strategic partner" segment of hospitals: those hospitals able to honor their commitments and iterate with the supplier to create more mutual value over time. 

It takes contract vigilance and sustained investment in productive partnership to break into the "strategic partner" tier. Those two capacities together comprise category management, as executed by market leaders outside of healthcare. Hospitals trying to bend the cost curve downward should build category management capabilities.

Hospitals 'sign and hope,' while market leaders use category management

After a lot of hard work, you’re able to secure savings in supply and service spend, but what happens after the contracts are signed?

At hospitals, the savings project team moves on to the next target—fingers crossed that the savings are realized over a two- or even five-year contract.

Outside of health care, a category management team steps in to manage the newly-contracted spend, with the explicit (often written into contract terms) expectation that savings will increase over time, not erode.

What do category managers do?

Maintain contract discipline. Category managers ensure that the right contracted price is paid at the right time for the right product. Unacceptable variance is tightly managed in real-time.

But the biggest value is in their execution of continued improvement.

Drive continuous improvement. Category managers at top organizations don’t accept flat cost growth. They expect to improve beyond the initial savings target, by finding and capitalizing on the unique value surfaced during regular business interaction with their supplier counterparts. All drivers of value and efficiency are continually tested and improved.

Do I need category managers?

You might not need a dedicated team, but every hospital needs category management capabilities built into their cost strategy. Hospitals must invest in technology that flags variance in time to correct course, and create a cost-data-rich, transparent organization that supports productive intervention with physicians, end-users, or suppliers trying to execute a work-around.

Above all, the biggest ROI is in helping to bend the cost curve downward—not flattening it, not making a temporary dent, and not permitting upward growth. This requirement for continuous improvement and efficiency should inform every interaction between the organization and their supplier base.

It’s a radical change from most hospitals’ current operating procedure, but a change we’ll all have to make to reach sustainable cost management.

Learn More

Our white paper, Revisiting Supply Cost Strategies, looks at today's funding model, how GPOs are enforcing volume commitments, and when to explore self-contracting.