The Bridge

What you need to know about product sourcing: Part 2 of our 2019 update on the hospital purchasing process

by Jessie Goldman and Raj Thrarakan

Editor's note: This post is the second in a three-part series about shifts in hospitals' service, product, and IT sourcing processes.

Last week's blog dug into the non-clinical purchased service market. For the second installment of our purchasing Q&A series, I sat down with Raj Tharakan, a director within Optum Advisory Services who helps hospitals improve clinical product sourcing processes. While we haven't seen any dramatic shifts, Raj confirmed a continued movement towards centralization and standardization and explained how those trends impact hospital value-analysis, GPO contracting, and more.

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Jessie Goldman: When I think about product sourcing, I think about value-analysis committees. What changes have you seen with regard to committee composition and scope of responsibility?

Raj Tharakan: Three things to note in this space. First is a shift from value analysis to value management. It might sound semantic, but the name change underscores the fact that the process is more comprehensive than evaluating new-to-market technologies. Sourcing leaders are continually evaluating product utilization and trying to drive out unnecessary spend.

Second: Value management teams include physicians and other clinical leaders on a permanent, ongoing basis. It's not revolutionary for supply chain leaders to seek physicians' input when a relevant category comes up for renegotiation, but it is new to include physicians in ongoing sourcing conversations, even without a request for proposal (RFP) underway. At one institution I worked with, hospital leaders actually tasked some physicians with ongoing reporting about product utilization. Their goal was to determine, for example, whether physicians were using the product because it demonstrated better long-term outcomes or because a new doctor came on staff with a strong preference.

Finally, sourcing teams are increasingly relying on technology to root out physician-level variation. While calling out individual physicians used to be taboo, health system leaders now have analytic capabilities to identify cost outliers and target those lacking clinical justification. That said, provider organizations have found these conversations to be far more effective when conducted physician-to-physician (versus supply-chain-administrator-to-physician), further underscoring the importance of ongoing clinician involvement.

Goldman: What's your current read on the risk-based contracting market?

Tharakan: We see risk-based proposals get submitted but few providers base a sourcing decision on whether or not vendors are willing to tie their payment to outcomes. Either it's too hard to quantify the potential value of these contracts, or—when hospitals see the value—it's often not worth tracking. However, providers are still holding suppliers accountable for outcomes. Because almost no one is sole sourcing, they can hold vendors accountable by shifting volumes. Suppliers may leverage their willingness to go at risk as one way to prove value versus a competitor, but my hunch is that they'll still need to focus on proving value through cost or other volume commitments.

Goldman: If not sole sourcing, are you seeing any move towards vendor consolidation? And how does this differ from what we may have seen a few years ago?

Tharakan: Historically, very few hospitals would have dared to standardize products across an entire category because removing a vendor might mean losing a physician. Now, with historically high-margin procedures shifting outpatient, providers are under more pressure to reduce input costs. As a result, many are shrinking their vendor rolodex as a way to drive down unit cost.

That said, there are two categorical exceptions to the consolidation trend. First: niche, lower-spend clinical items, such as stent grafts used in aortic aneurism. The wide range of designs makes consolidation challenging, plus there's little financial upside because they're relatively low spend. Second: new-to-market products used in specialized procedures. Take trans-catheter aortic valve replacement (TAVR)—right now, there are only two FDA-approved TAVR products. So, among providers offering the service, there isn't much leverage to tackle spend. That said, these products may be insulated, but they won't remain untouchable. It may take another supplier entering the market but I think a procedure such as TAVR will eventually put enough strain on provider budgets that these products will come under the same scrutiny as others.  

Goldman: Are you seeing the same movement towards centralized purchasing and vendor consolidation in the outpatient space?

Tharakan: Ambulatory surgery centers (ASCs) owned by health systems are probably subject to the larger system's centralized purchasing decisions. But physician-owned ASCs may be even more cost conscious, given that the physicians are directly accountable for the center's profits and losses. While a hospital may not have been able to convince a physician to standardize implants to save the facility money, physicians may be willing to do it if it means saving themselves money. It's still early to tell, but we could see strategies that failed to take hold in hospitals—such as rep-less models—proliferate where physicians have more financial skin in the game.

Goldman: Are you seeing any changes in providers' reliance on group purchasing organizations (GPOs)?

Tharakan: Generally, we're seeing fewer and fewer providers use GPOs to source things such as implants. Systems still rely heavily on GPOs to source commodities, but as they get bigger they may build out self-contracting models to supplant the GPO altogether. For example, a large IDN may negotiate a few product tiers based on market share or volume commitments and then let their affiliated facilities tap into pre-negotiated contract rates. It'll be interesting to see whether some systems even go so far as to commoditize that network, and offer it to non-system affiliates. Also, Amazon's entry is the elephant in the room when it comes to commodity supplies. Amazon has indicated that it's investing in the ability to distribute commodity medical supplies to hospitals, potentially threatening GPOs' core business even further.

Goldman: What should suppliers do to keep business in an increasingly centralized and standardized market?

Tharakan: First and foremost, suppliers need to remember that convincing a clinician of your product's technical value won't be enough to succeed in the value management process. Suppliers need to articulate the value of their product using metrics that matter to non-clinical leaders. How will the product impact 30-day readmission rates or procedure time? How will it impact system's ability to treat otherwise untreatable patients or reduce utilization of other drugs?

Second, when trying to articulate that value, the best thing suppliers can do is provide honest and accurate comparisons between themselves and competitors. I see a lot of suppliers come in to VAC meetings and claim there's no alternative to their product. Sure, there are some cases of truly revolutionary technologies. But, at the end of the day, the sourcing team is going to make a side-by-side comparison between two products, and the supplier would benefit from choosing what it's lined up against. Plus, creating an open channel for communication can help establish supplier credibility and demonstrate willingness to be a trustworthy counterpart in the negotiation process.

Editor's note:  Keep an eye out for next week's post, which will explore how providers approach health IT investment decisions.

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