Cost pressures fueling change

Hospitals remain under pressure to reduce supply costs, which will lead to lower margins for device manufacturers and an increased need for providers to not only reduce costs but also establish new forms of revenue within the supply chain.

Hospitals across the U.S. have undertaken initiatives to reduce the costs of both medical and surgical supplies and pricey physician preference items over the past several years. Supply costs usually make up a hospital's second-largest expense after labor.

In recent years, supply-chain executives have pushed for more product standardization and, in some cases, less reliance on their traditional group purchasing partners.

Ascension Health, Highmark and Dignity Health are three organizations that have moved forward with initiatives to launch their own GPOs. Dignity is also involved in a new venture with UnitedHealthcare to address the costs of physician preference items.

However, internal cost-cutting programs at hospitals remain a top priority.

Steve Kehrberg, senior vice president of supply chain for Catholic Health Initiatives, says a systemwide initiative to address costs and improve operations has led to cost reductions across a number of supply sectors, including food service and pharmacy.

Like other large health systems that have identified for-profit business ventures that will allow them to sell their supply-chain expertise and develop a new revenue stream, the Englewood, Colo.-based system plans to start marketing its clinical-engineering support services to other organizations.

Kehrberg projects $82.4 million in supply-chain savings for the three years beginning in 2013. The target takes into account both reduced costs and increased revenue.

“We think this is the key to our success going forward under healthcare reform,” he says.

Pressure on supply costs will continue to extend to medical-device companies, especially those that manufacture the commodity medical products and supplies that are under the most financial scrutiny, says Megan Neuburger, a senior director with Fitch Ratings.

Added to that pressure is the medical-device excise tax under the Patient Protection and Affordable Care Act; the 2.3% tax on the sales of certain devices is expected to go into effect in January. Providers also face increased payer scrutiny on procedures. The one bright spot for manufacturers is new technology, which has been less affected by new pricing dynamics.

“Providers are still willing to pay for new products,” Neuburger says.

As cost pressures continue, supply-chain executives at hospitals are likely to push back on the traditional purchasing system and seek alternative products that can reduce costs, improve clinical operations and, in some cases, bring in new revenue.