The Affordable Care Act Has Reduced Hospital Profit Margins; Healthcare Supply Chains Must Begin Controlling Costs; Procurement Presents an Opportunity; Physician Engagement Is Critical.
At St. Luke’s, Supply Chain Excellence Relies on Physician Engagement
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In 2010, President Obama signed the Affordable Care Act (ACA). This new law meant that healthcare systems had to change their operations. Expanded health insurance coverage led to increased demand for medical services. The ACA shifted healthcare services from a fee-based model to mandatory value-based payment programs. This change reduced hospital profit margins and prompted healthcare systems to begin controlling costs without compromising patient outcomes. Procurement became a key focus area for leading healthcare systems.
Adrian Wengert joined Saint Luke’s Health System in 2014. St. Luke’s hospitals are located across the nation, with Mr. Wengert working at the system headquartered in Boise. It is Idaho’s only non-profit, community-owned and -led healthcare system, employing 16,000 people, making it the state’s largest private employer. The system operates eight acute care hospitals and has over 300 outpatient clinics across the state.
As Vice President of Supply Chain and Procurement, Mr. Wengert was brought in to drive change. Hospital systems lagged behind manufacturers, retailers, and distributors in procurement practices.
“We didn’t have enough strategic personnel,” said Mr. Wengert. “We added about 20 positions, all strategic hires from outside the healthcare industry. This was intentional to help us address issues that required a different perspective.”
Procurement is a natural focus area. In healthcare, large and powerful distributors sell medical supplies to hospitals and deliver them directly to various facilities. In many healthcare systems, these costs are not scrutinized closely and are passed on to patients and insurers. As such, hospital systems often lack procurement capabilities. However, after labor costs, medical supplies represent the second largest expense.
St. Luke’s began establishing new supplier relationships. “We developed strategic supplier partnerships.”
The results achieved over ten years amounted to approximately $100 million in savings.
These are impressive outcomes for those familiar with healthcare systems. Physicians typically have significant autonomy in prescribing and using medical supplies. My wife, who served as a vice president in this industry, told me that hospital executives retain their leadership positions by following one simple rule: “Don’t upset the doctors!”
Mr. Wengert was more diplomatic. He said, “In manufacturing, engineers are typically at the top of the food chain. In healthcare, it’s physicians.”
How did St. Luke’s achieve this? “We rebuilt strong relationships with internal stakeholders, primarily clinical staff and doctors,” Mr. Wengert explained.
“How do you start building these relationships to drive standardization? You make meaningful decisions based on actual performance rather than just cost. They must be based on product efficacy. You have to look at outcomes, quality, and complications, among other factors. So, we began using clinical integration as a pathway” for procurement savings.
Mr. Wengert explained that healthcare systems have two procurement models. “The first is the command-and-control model.” In this model, “the supply chain goes out to negotiate contracts for spinal implants and then tells doctors, ‘You will now use Medtronic products.’ We do this because we save millions of dollars. While savings quickly show up on the bottom line, over time it weakens physician engagement and more importantly, their buy-in.”
“This model cannot be sustained. No doctor wants to lose their autonomy. They don’t want a businessman telling them how to practice clinical medicine.”
Mr. Wengert explained that another model is the influence model. In this model, you present all options to surgeons. “One option is doing nothing and maintaining the status quo. It looks like this.”
“The second option is always standardization. If we reduce suppliers from six to three, it impacts pricing and ultimately helps build deeper relationships with vendors.”
Why should doctors care about deeper supplier relationships? During COVID, many shortages made good medical practice difficult. Better vendor relationships help ensure full and timely deliveries of goods. Doctors may not be concerned about costs, but they do care about supply certainty.
This model empowers decision-making committees focused on specific spending categories like spinal implants or knee replacements. “We strategically form these groups. So if we ask them to standardize a brand, we try to identify surgeons using two brands and seek their clinical feedback. ‘What do you think of this?'”
“But there will always be some surgeons who say, ‘This is what I want to use.’ We have very strong physician champions within the organization. Sometimes they intervene in discussions, and usually, issues get resolved.”
St. Luke’s also has six nurses on its supply chain team. “They speak clinical language. This helps us achieve greater success.”
“Finally, we hired a Medical Director of Supply Chain. She is really excellent.” She explains to the physician community “the overall benefits for patients that we are trying to achieve.”
St. Luke’s is not content with the status quo. They are transitioning to a self-distribution model, further reducing reliance on expensive distributors. They have built a warehouse equipped with material handling systems and a Warehouse Management System from Tecsys. Inbound items will flow into this warehouse before being distributed to healthcare facilities across the state. The warehouse is scheduled to be operational by year-end.
Source: Forbes
