A number of groups in the health care industry, including Group Purchasing Organizations, believe that supplier contract pricing information should become part of a knowledge base shared by hospitals subscribing to certain information services. This issue has been simmering for years having heated up several years ago with a lawsuit between Aspen Healthcare Metrics and Guidant Corporation (now part of Boston Scientific). Among other products, Guidant makes cardiac stents -- small expensive devices inserted in blood vessels to prop them open. Guidant believed that their pricing to individual customers was confidential information and contractually required hospitals to maintain their contract pricing as confidential.

But organizations such as Aspen and ECRI that, among other services, make money selling contract pricing information to hospitals, believe that hospitals have the right to share that information so that other hospitals can use it to improve their own pricing position. Their position is that sharing such pricing creates a level playing field for hospitals wanting to compete with other hospitals. Ironically, GPOs that claim to negotiate pricing on behalf of members but often have trouble getting good pricing on a class of products known as physician preference items -- of which stents are a part -- are also in favor of what they call price transparency. Note: Stents are an integral component of the product (clinical outcomes) sold by hospitals. They are not paper clips.

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Forward buying can be a smart procurement strategy in the right market conditions. But those who participate in forward buying are able to specify exactly what they are buying. They know what they want and know what they will get. The Congress of the United States, however, wants many of us to pay for three or four years for undefined health care services that we won't be able to access until 2013.

So why is this being done? The healthcare bills before the Congress are all very expensive but the President has set a goal of having whatever bill is passed come in at a price tag of under one trillion dollars over ten years. As written each of these bills would come in well over that so the only way to make the numbers work is to initiate the proposed cuts in year one and have them be in place for the full ten years while new coverage and access would not be made available until year three or four. If you add ten years of cuts to six or seven years of new costs you get to the number you want.

So the question for the reader is: Would you pay a supplier today for an unspecified product that would not be delivered for three of four years?

Does your company have a procurement challenge that might benefit from a fresh set of eyes? If so, drop me a line (leverard (at) bellsouth.net).

- Lynn James Everard

Has this ever happened to you? You have just put out RFPs for a new component and before they even appear in your suppliers' email inboxes the specifications have already changed. This seems to be what is happening in Washington these days. In the House there are currently three separate health care bills in process. In the Senate they are trying to merge two bills. The goal appears to be to pass differing bills in the House and in the Senate and then use the committee process to create one final bill that both the House and Senate could pass. The bills themselves have each changed many times so far and more changes are assured. Some of the changes result in a new scoring by the Congressional Budget Office but some don't. If they scored each one they would not be able to keep up anyway. But the negotiations have continued even though there is no agreement on specifications.

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It has become clear that the Obama administration and the congressional majority have decided that insurance companies are dragons they must slay in order to rescue the citizenry from a serious threat. That threat is now being defined as monopolistic behavior that results in a number of troublesome outcomes. The logic seems to be that because every insurance company is bad in some way they can be grouped together and be viewed as a monolithic threat. It is an easy jump from monolithic threat to monopoly and the administration really seems to believe that the insurance companies have a monopoly. In some cases the administration may have good cause to believe that. But the legal system has remedies for monopoly and the Federal Government itself has remedies it can bring to bear without a total remake of the health care system.

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While buying direct from the source is the preferred approach to the procurement of direct materials, the procurement of indirect materials (aka MRO) presents both opportunities and challenges in the use of distribution channels. For example, there are many suppliers of IT equipment who prefer to use distribution channels to get their products to market. Synnex, TechData and Ingram Micro are the three main master distributors with networks of warehouses both in the U.S. and internationally. They sell only to resellers including companies like CDW and Insight. Companies like Cisco sell networking gear and other products through distribution.

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There continues to be a wide divide between Democrats and Republicans on the nature of health care reform. One of the most significant areas of disagreement is what a bill will actually cost and how it would be paid for given a general commitment to revenue neutrality. The only real hope for a bipartisan bill has been based on the work of a group of six senators headed up by Senators Baucus(D) and Grassley(R). In the last few days Senator Baucus has released a document referred to as the Baucus Framework. It outlines key provisions that Senator Baucus would like to see in a bill. Baucus has introduced several new taxes on pharmaceutical companies, medical device manufacturers, clinical laboratories and insurance companies. The new fees on pharma would be a collective $2.3 billion per year allocated according to market share. Medical device companies would pay $4.0 billion a year also allocated according to market share. Over the ten year horizon period these fees would total $63 billion dollars just for pharma and the medical device industry.

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In an earlier post I touched on the confusion in the health care supply chain related to suppliers trying to figure out who the real customer is. But suppliers also face other financial complications related to the nature of the hospital world.

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Not so long ago, there was a number of thriving independent hospital supply chain consultancies. Then something interesting started to happen. The largest of those consultancies were acquired -- one by one -- by some of the industry's largest manufacturers. Not to be left out, the industry's group purchasing organizations and distributors got into the action by either buying other consultancies or starting their own. But how would hospital C-suite dwellers respond to what seemed like an obvious conflict of interest? They welcomed these new arrangements with open arms especially when they realized that these new supplier consultancies could offer them services at little or no apparent cost.

At virtually every turn they were able to undercut the pricing of the few remaining independent consultants who did not have supply contract profits from their clients to use to offset the financial impact of lower consulting fees. Years later, some of those consultancies were sold back to private owners but they were no match for the remaining supplier in-house supply chain consultancies. Today it is getting harder for hospitals to get unbiased supply chain advice and harder to find hospitals that are willing to pay for it anyway.

So what do you think? How comfortable would you be buying supply chain consulting services from your largest product suppliers? Do you think they would give you advice that reduced their sales to your organization even if that would be best for your company?

Is your organization or someone you know looking for a procurement leader or consultant with a deep understanding of the health care industry? If so, please send an email to: leverard@bellsouth. net.

- Lynn James Everard

There is no doubt that supply chain management has been one of the single most significant drivers of strategic competitive advantage across many industries in the past twenty years. The stellar results have elevated Supply Chain to a C Level function at many companies. But that rise to greatness would have likely never happened if there was no compelling case for strategic competitive advantage in your company or in your industry. What if, in your industry, doing no worse than the competition was the standard of excellence by which your efforts were judged?

If you can even envision such a scenario you have begun to understand the typical hospital's role in its own supply chain. Strategic competitive advantage in the supply chain does not appear to be something hospitals seek. Instead they appear to be focused on being at or becoming the center of the bell curve with all of the other hospitals. Like many companies, they purchase through consortiums -- a well accepted practice. But hospitals don't just purchase their indirect materials this way, they purchase their direct materials that way too -- seemingly content to have the same costs as hundreds or thousands of other hospitals (competitors). A friend of mine once said that hospitals willingly trade the chance to do better for the security of being no worse than everyone else. Sadly, hospitals seem to trust their futures to lobbyists and legislators, rather than to strategic competitive advantage -- such as could be found in the unique and untapped power in their own supply chains.

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Every supply chain is actually several concurrent chains. The physical supply chain is the path that materials take on their journey from raw materials to finished goods to consumption. The financial supply chain is the path that money created or required for each physical move traverses. Other paths may include value, a transfer of equivalent financial value from one physical materials owner to another. Fortunately in most supply chains the materials, money and value travel in parallel with the identities and roles of the participants clearly defined. And in most supply chains it is not difficult to identify the customer. This is not the case with health care.

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