Healthcare News & Insights

Lowering direct costs with smarter PPI sourcing strategies

Healthcare spending is out of control, and no one knows that better than hospital executives. But there are areas where hospitals can save without sacrificing care or reinventing the wheel. In this guest post, Alex Saric, CMO of a provider of cloud-based spend management solutions, shares how hospitals can rein in spending.


Amidst all the heated debate about the U.S. health insurance system, it seems just about everyone agrees that healthcare costs are far too high. Despite the scale and maturity of the U.S. market, healthcare consumes 20% of gross domestic product and costs twice as much as it does in peer countries. The ramifications of wide-ranging, systemic inefficiencies impact us collectively and individually on a continuous basis – and they certainly don’t make a hospital executive’s job any easier. The complexities of our healthcare and insurance systems are a big part of the problem, but there are opportunities to cut costs without reforming the whole industry.

Better sourcing strategies for PPI and beyond

Hospital administrators should address smarter sourcing and procurement of direct materials as a major strategic factor in reducing healthcare costs. Direct spend includes physician preference items (PPIs), which are often procured through group purchasing organizations (GPOs). Increasingly, administrators recognize they can’t afford to ignore the potential increase in control and decrease in costs that can be gained through direct local contracting. Many have begun negotiating directly with their most critical and strategic suppliers.

Sourcing and supply chain management (SCM) for hospitals, surgery centers, and clinics are especially nuanced and complicated. As the healthcare industry continues to reorganize around value-based care standards, healthcare administrators are under mounting pressure to show that medical device and supply costs are aligned with patient outcomes. These complex challenges call for robust, integrated intelligence and automation capabilities.

As every hospital executive is acutely aware, sourcing decisions can have serious consequences and must be backed by well-governed, integrated data. Physicians are the experts when it comes to their patients’ health and treatment outcomes. But medical devices and treatment protocols advance quickly – the sourcing process must be agile enough to help doctors stay current.

Getting the most out of PPI sourcing requires building better and smarter connections between administrators, procurement and SCM teams, subject matter experts, physicians and vendors.

What challenges lie ahead for administrators and supply chain executives?

As hospitals and healthcare groups form larger networks, manual or one-off sourcing and procurement processes quickly become insufficient. Although a growing market of indirect spend management platforms has been established, the same hasn’t happened for direct spend.

Health care isn’t the only industry struggling to optimize direct spend, but as a whole, the sector has been particularly slow to find solutions via supply chain collaboration. As an aging population drives up demand for joint replacement surgeries and other services, PPI procurement will become a more central – and expensive – problem. Hospital administrators must find new ways to work with suppliers and vendors to keep device and pharmaceutical costs from skyrocketing.

Over the last several years efforts have been focused on reworking infrastructure, employee training, and compliance activities to integrate electronic health records and other patient-centric digital systems. But for digital transformation initiatives aimed at efficiency and cost-cutting to reach their full potential, hospitals and the software vendors supporting them need to develop stronger capabilities and controls vis-à-vis the sourcing and procurement process.

Transparency is another growing challenge. Health care and health insurance headlines, not to mention social media posts, reflect widespread frustration among healthcare consumers. A recent Medicare/Medicaid rule update (CMS-1694-F)  requires hospitals to post a list of their standard charges online. While intended to protect patients from unexpected charges, it reflects the public’s active scrutiny of healthcare costs.

How can you help your organization win at the negotiating table?

Suppliers aren’t always willing to give and take in negotiations; they’ll come prepared to create pressure, incentives or obstacles, so procurement and SCM pros must be ready to walk away and switch vendors. Hospital executives can give supply chain teams greater leverage with vendors by integrating proven solutions and processes that accelerate efficiency. Restoring balance to these supply chain relationships, and moving on from untenable contracts with agility, is key to turning the tide of mounting costs in health care.

It’s high time, as healthcare supply chain expert Tom Finn points out, to develop sourcing and procurement processes that align with the value-based cost of care delivery instead of being geared solely to the performance and profit objectives of the supply side.

Comprehensive solutions designed to help hospital leaders gain more control over direct spend are emerging – and producing measurable benefits. Platforms that target and optimize both indirect and direct spend are powerful support for organization-wide SCM efforts. Actionable data is the key to making sustainable improvements to PPI and other healthcare sourcing. Look for solutions that enable deeper visibility into spend details, including what PPI products are used and how, and what their cumulative financial impact is.

Healthcare administrators have a vital mission to advance: driving innovation by sourcing from best-in-class vendors and raising the overall standard and accessibility of care by optimizing resource utilization.

Managing costs and supplier relationships isn’t just about protecting the bottom line, it’s about doing what’s best for patients.

Alex Saric is the CMO of Ivalua, a provider of Cloud-based Spend Management solutions.

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