Implications of Healthcare Reform for Suppliers: Part 2

As healthcare reform descends upon all of us it’s important to look at the implications for suppliers so that a strategy can be developed to cope with these sweeping changes. In Part 1 of this blog we looked at changing physician relationships, fewer buyers, payments and payers and price transparency. In this week’s blog we will look at buying power, cost containment, new disruptive care models and evidence.

Buying Power

Hospital buying power is affected in several ways. As hospitals continue to consolidate their use of GPO agreements has increased significantly. Purchasing decisions are being made at higher levels in the organization and by different people. This trend is occurring with all purchases since substantial savings can occur with consumables, commodities, services and capital equipment.

The short and long term debt of a hospital also affects new capital purchases. Hospitals with higher debt are more likely to play it safe and delay new capital purchases. This is especially true if the hospital is a Not-For-Profit institution.

Hospitals are also consolidating to have access to capital for new purchases in equipment, renovations or new construction.

Lastly the GPOs, (and we would also include: Alliances, Consortiums and RPCs) can have enormous influence over which products are purchased at the member hospitals. Approximately 96 to 98 percent of hospitals rely on one or more GPOs to leverage their purchasing decisions. It is also estimated that 72 percent of all hospital purchases are made within GPO contracts1

Cost Containment

Hospital supply chain departments are controlling and reducing costs through a variety of mechanisms. The most common method is the continued downward pressure on pricing for the majority of goods and services that are purchased. They have also increased the focus toward product standardization, efficient utilization of all products and the reduction of many physician preference items. In addition, hospitals are issuing more RFPs on purchases and seek new solutions for products that increase productivity. In other areas of the hospital, staff reductions, the implementation of lean processes and six-sigma are types of operations improvements that drive out waste and inefficiency while increasing productivity.

New Disruptive Care Models

As the focus now turns to keeping patients healthy and out of the hospital, Accountable Care Organizations (ACOs) are forming at a rapid rate. ACOs are similar to the managed care programs of the 90s where minimum quality of care standards must be met. In general, it is a management structure either sponsored by physicians, hospitals or payers that will coordinate, manage and provide care for patients. ACO’s accept collective accountability for the quality and cost of care delivered to a population of patients. While ACOs started for Medicare patients under the Affordable Care Act all major payers are now offering some flavor of an ACO.

ACOs are being formed largely as a result of a key provision in the Affordable Care Act that allows Medicare to reward healthcare organizations with a share of the savings resulting from improving the quality of patient care while reducing the cost for their eligible populations.

Increasingly payers are also bundling payments to hospitals and other providers that target a specific patient population. Suppliers must be able to deliver the right product at the right price to the right location at the right time. If they can accomplish this objective in a manner that helps the hospital reduce their overall costs they will become an indispensable partner.

Suppliers must be cognizant of new emerging disruptive purchase models that allow for direct purchase without a middleman such as OrthoDirect or Curvo Labs.


Every hospital employs a decision making process for the purchase of equipment, products and services. Increasingly hospitals and payers require evidence or proof that a technology supports the price. Are you able to document and support your claim with unbiased evidence that is based on real data to validate your proposition with both therapeutic and financial justification? This analysis is critical when customers decide to switch or stay with their existing platform. Also, how do you maintain transparency in the buying so that all stakeholders buy-in based on the validity of the data/evidence presented and therefore are confident and supportive with the final decision?

Hospitals are also using value analysis committees and other technology evaluation committees to help them navigate the complex decision making process and subsequent negotiation with vendors. This also allows them to identify more options and to control deadlines and timelines; it puts them in front of the buying process.


1. Healthcare Group Purchasing Industry Initiative: Eight Annual Report to the Public. September 2013.