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How hospital purchasing works in 2015

Flurry of M&A activity prompts formation of centralized purchasing networks.

A flurry of mergers and acquisitions among U.S. hospitals and health systems last year is prompting the formation of more centralized purchasing networks.A flurry of mergers and acquisitions among U.S. hospitals and health systems last year is prompting the formation of more centralized purchasing networks.

Who said change is a bad thing? When it comes to supply chain purchasing, healthcare has become the picture of efficiency.

A flurry of mergers and acquisitions among U.S. hospitals and health systems last year is prompting the formation of more centralized purchasing networks, ranging from national or regional procurement centers to those located near the medical facilities themselves, said Mike Costante, vice president supply chain services at MedAssets.

Those sites, in turn, are helping institutions maximize efficiencies and resources and minimize redundancies in areas like job roles, he said.

Furthermore, supply chains are operating more strategically and focusing greater energy saving money and tightening daily procedures, as CFOs increasingly leverage the contracting and negotiating expertise of those within the chains, he said.

[Also: Tracking 2015 mergers and acquisitions]

Many suppliers have also recognized – or are beginning to – that the "old" supplier-provider transactional model will become obsolete and are putting together new offerings, said Chris Provines, CEO of ValueVantage. Among them are risk-based contracting for more innovative technologies, more affordable sales models that eschew sales representatives, as well as business models to better meet provider needs as they shift to value-based purchasing and population health, he said. This is all unfolding in light of supply chain realities showing that to cut costs, chains need to move beyond the usual competitive bidding practices and GPO agreements, said Provines, who is also an adjunct professor at Rutgers Business School Department of Supply Chain Management and Marketing Sciences.

“CFOs have a real opportunity to press their organizations to try to find new ways to work with suppliers to drive costs out and improve quality beyond the traditional sourcing tactics,” said Provines. With hundreds of billions of dollars in purchases each year, it’s no surprise that a number of businesses are trying to get in and help providers better manage the supplier network and supply decisions, he added.

Part of this also stems from a growing recognition that reducing prices is simply one of many different levers providers can use to generate more value from suppliers, Provines said.

Meanwhile, unlike the bustle of mergers and acquisitions, there are supply shortages to deal with, which might be blamed on lack of competition, said Jay Mitzel, recently appointed director of purchasing and logistics at Tri Health in Cincinnati.

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As consolidation continues, hospitals and healthcare systems will have to look across their portfolios to determine whether opportunities exist to do business with one or more of their various product companies. While he believes that will take place, how quickly remains up in the air, said Mitzel. "But it's coming; maybe sooner than people think."

On another front, Costante said that for the past 10 to 15 years hospital supply chains largely have focused on automation and procurement, connecting vendors and the electronic placement and confirmation of orders. That value from automation has caused hospitals to continue to automate on the accounts payable side of the workflow. They are even looking into automation for invoice management and payment services where, traditionally, the supply chain had been leading the automation charge, he said.

"It's becoming a collaboration with various departments. We saw some efficiencies with buyers when we were automating the way purchase orders were placed through technology over the past 10 years," said Costante. "Now we're seeing some opportunity to gain efficiencies in accounts payable and finance departments by maximizing automation and the way hospitals are performing functions like managing invoices and payments."

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