Why Hospital Procurement Matters!

Many domestic US sales professionals are surprised at the growing power and influence of hospital procurement in the purchasing process. They shouldn’t be. If they compared notes with their counterparts in Canada, Europe or other countries they would better understand the increasing importance and expanding relevance of hospital procurement.

In this blog we are going to use the term hospital procurement as a generic term. In some organizations the more appropriate term is materials management, supply chain, or strategic sourcing.

Many of the skeptics within the sales ranks are those who have had great success in selling to physicians/surgeons or department directors. In other words, they have succeeded in analyzing and breaching “silos” where one influential individual could authorize or demand that a product be purchased. These seasoned sales professionals, while competent and highly skilled, have often failed to step back and see the “sea of change” that has occurred within healthcare and, in particular, within hospital procurement.

Here is our list of why hospital procurement matters and why sales professionals should re-think their strategy for penetrating any healthcare organization!

  1. Hospital Procurement Controls the Purchase of the Bulk of Services, Equipment & Supplies. Hospitals exist to provide emergency care for patients with accidents or injuries, for unexpected medical care, for scheduled or unscheduled surgeries and to deliver babies. To perform these functions a hospital needs to provide patient care areas (ED, surgery, L & D, Birthing Rooms, Patient Rooms etc.), services (laboratory, pharmacy, radiology, surgery etc.), personnel (clinical, office and support), equipment and supplies. Purchased services, equipment and supplies is best sourced, negotiated and acquired by hospital procurement. It is hospital procurements job to get the right product, in the right place, in the right quantity, for the right patient, at the right time and at the right price. This requires a system, process and control.
  2. Hospital Procurement Controls Supply Cost as a Percentage of Spend. After salaries and wages, the next largest expense for most hospitals is supplies. Often supplies amount to 18-23 % of the total cost. It has to be managed successfully in a fee-for-service environment and it has to be managed expertly in a fixed payment system. Senior management depends on procurement’s system and processes to control spend.
  3. Hospital Procurement Oversees Total Lifecycle Management. Hospital procurement is in charge of managing the three phases of total lifecycle management. The beginning phase of the lifecycle is the value analysis process where hospitals determine the best value products to buy. The middle phase is utilization management where hospitals control their in-use cost. The last phase of the lifecycle is where they economically and ecologically dispose of the products.
  4. Hospital Procurement Processes Bring Measurable Results. As individual hospitals become a part of a system they centralize their procurement function to decrease acquisition costs, lower total cost of ownership (TCO) and improve clinical outcomes. A reduction in the number of suppliers lowers their transaction costs. Standardizing on one or two suppliers per product also lowers their training costs and reduces potential errors. Monitoring utilization allows them to ensure the right products are in the right place at the right time for the right patient while ensuring each product is being properly utilized. Misusing or misapplying a product can cost a hospital millions of dollars, euros, pounds per year.
  5. Hospital Procurement’s Data Analysis Drives Unemotional Decisions. Hospital procurement has access to the data and data can identify the areas where there may be an opportunity for cost savings. In some situations higher cost products will be required to provide a better clinical outcome at an overall lower cost; in other situations, they will be unwarranted. It is these areas of unjustified variation that will be the focus for improved utilization. Data also provides insight. As an example, tools like point of use inventory tracking allows nurses to issue items to patients, order item for replenishment and request new supplies. E-Commerce allows hospitals to communicate electronically with selected suppliers to track orders and confirm details. Spend analytics assist hospitals during the negotiation process with suppliers.
  6. Because of #1-5, Hospital Procurement has Organizational Hierarchy Status. Many have earned a spot in the C-Suite (Chief Procurement Officer) or as a Vice President of Supply Chain or Vice President of Strategic Sourcing and as a result report directly to the CFO or COO. In hospitals that are part of a system, procurement is managing a major amount of currency (dollars, euros, pounds etc.). For example: At Vanderbilt University Medical Center, Nashville, Tennessee the Chief Supply Chain Officer manages a $500 million annual supply chain spend for four hospitals, 151 employed physicians, multiple clinics and 1,065 beds. Imagine what the annual supply chain spend is at the Cleveland Clinic, UPMC and others.

Parting Thoughts

Done well hospital procurement can dramatically improve the bottom line every. Every dollar, euro, pound etc. saved during the negotiation with suppliers goes straight to profit in a For-Profit (FP) hospital or can be reinvested in a Not-For-Profit (NFP) hospital. Hospital procurement also improves working capital and therefore makes the balance sheet look better. As a result the Chief Procurement Officer is often the “best friend” of the hospital CEO, COO and CFO. They are now a major player in health care institutions and should be treated with reverence and respect.

Sellers would be wise to keep in mind that the Procurement professionals of today often possess strong clinical backgrounds as well as backgrounds from outside of health care (automotive, aerospace, manufacturing etc.) The combination of the two has brought new ideas and approaches.

The ascension of procurement from the “back room” to the C-Suite has come at a cost to many of our former contacts, especially physicians and department heads. They remain a part of the buying process but have less authority. They are a voice in purchasing, but they may be one among several. As a sales professional in the health care industry, it may be time to re-evaluate your network of relationships and ask yourself two critical questions. First, “How can I more fully understand the role of hospital procurement and the implications of their systems and processes for my pursuit of sales opportunities?” And second, “Who from procurement should I know better and what measures (financial and clinical) should I incorporate in documenting the value of my product or service.