Two health giants recently announced a global alliance, and it wasn't to create a center of excellence or collaborate on academic research: It was to drive down supplier costs. St. Louis-based Ascension and Sydney-based Ramsay Health have formed a joint venture to create a "global health care buying group."
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It is hard to keep track of the innovative disruptors proclaiming to turn the industry inside out (Amazon, Comcast, CVS, Apple). But suppliers should not overlook the Ascension-Ramsay announcement, because it may point to the future of health care purchasing.
Ascension leads most health systems in terms of bold responses to relentless margin pressure. It recently announced a restructuring to reduce its cost base and its dependency on hospitals. Few health system management teams have the intestinal fortitude to initiate such drastic measures. But with the majority of hospitals projected to be losing money by 2025, suppliers should expect more health systems to embrace unconventional supply chain strategies.
The global purchasing venture is not an oddity, but rather a logical response from Ascension. In it, suppliers should see three threats and three lessons that serve as a beacon.
3 threats to suppliers
Once up and running, the venture should reduce the selling price of many purchased goods. Here's why:
- Cost transparency: Health systems have more to gain from cost transparency than price transparency. The platform will give Ascension-Ramsay—and other providers that use it—a global perspective on the cost of purchased goods.
- More suppliers: The venture will serve providers on four continents, which means suppliers from four continents. Smaller, local suppliers will use the platform to gain economies of scale needed to compete globally.
- Fewer purchases: Not purchasers—purchases. A platform will allow smaller providers to consolidate purchases to realize discounts, effectively creating a cross-border GPO. For suppliers, this approach means fewer rabbits and more elephants.
3 lessons for suppliers
Although the venture may feel geographically distant, it gives suppliers an opportunity to break the chains of traditional zero-sum economics. Leaders will learn these lessons:
- Efficiency reigns: Health systems have no choice but to reduce cost growth, and suppliers must comply or they will vanish. Value analysis committees will continue to evaluate new products against a range of criteria, but, increasingly, money matters. Comparative effectiveness today is denominated in dollars (or pounds, or euros).
- Creativity counts. The days of differentiating through features and functionality are behind most successful suppliers. Leaders will partner with providers through long-term total cost relationships, such as Philips and Georgia Regents, or Medtronic and KU.
- Incumbency is ephemeral. So long as suppliers ignore the previous two points, that is. A properly designed purchasing platform should make it cheaper for suppliers to sell into new markets. The venture will have an interest in maintaining a healthy stable of suppliers, which could prove beneficial for start-ups and smaller firms.
As health systems struggle to provide care profitably, many—such as Ascension—will branch beyond the hospital business and find new ways to make money. Reducing supply chain costs will be a likely stop on the road to establishing sustainable economics. Suppliers can either profit from the inevitable future or cling to the past—but they cannot do both.
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Today's health system CFO must implement and monitor dozens of financially-focused initiatives at once, only a few of which we could review in this post.
Check out our infographic, "The Blueprint for Revenue Cycle Transformation," to learn what we're telling providers about our three-pillared, best practice approach to improve overall revenue cycle performance by enhancing performance visibility, elevating operational efficiencies, and ensuring across the board accountability.