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Third-party Spend: A Key to Unlocking Healthcare Efficiencies

Article-Third-party Spend: A Key to Unlocking Healthcare Efficiencies

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As the Gulf Cooperation Council’s population puts ever more demands on the region’s hospitals, a coordinated campaign can reveal hidden opportunities to create value with no detrimental impact on patient outcomes.

In the wake of rapid population growth, the Middle East’s hospital systems have been under mounting pressure to serve more people. With an aging population bringing an array of health problems, healthcare providers are also facing a deluge of issues from new consumer trends, including urbanisation and more sedentary lifestyles along with dietary shifts from locally-grown, unprocessed food to more fast foods and sugary drinks. As a result, hospitals are seeing more chronic health issues from obesity and diabetes to hypertension and cardiovascular disease.

Under pressure to meet these intensifying needs, governments and private companies have spent billions of dollars to expand the region’s healthcare facilities, increasing capacity and improving outcomes. However, healthcare systems in the Gulf Cooperation Council (GCC) have yet to tap into a powerful way to make hospitals more efficient: optimising the way goods and services are selected and sourced.

An advanced approach can reduce a hospital’s external costs by 20 per cent and cut waste in half, whilst improving the quality of care. In this article, we discuss how GCC healthcare providers can use these techniques to unlock a wealth of value. A typical 1,000 bed hospital with an operating budget of $1bn, can save $100m a year in sustainable cost reduction. Reinvesting these sums into healthcare priorities creates huge possibility.

Obstacles to Reaching the Full Potential 
The GCC healthcare market is expected to grow from $40 billion in 2015 to $71 billion by 2020, with the market expanding by 11 to 13 per cent in every country. Demand for services has been growing for the past several years driven by, amongst other factors, a larger and—thanks to a longer life expectancy—aging population. Consequently, healthcare providers have a much larger base of consumers to serve. Adding to the demand for services is the higher incidence of chronic and non-communicable disease compared with more advanced economies. To address these demands, most GCC healthcare systems have focused on infrastructure: building hospitals and adding beds. This has caused spending to escalate. 

Advanced methods can reduce costs and improve efficiency while still providing high-quality patient care. This effect is even more pronounced in GCC hospitals, where up to half of annual operating costs go on third parties (Figure 1). 

Across the region, private and public organisations have made efforts to drive down external costs with different degrees of success. In healthcare, four regional challenges tend to thwart attempts to reduce costs:

Doctors’ diverse backgrounds: GCC healthcare systems are staffed with doctors from around the world. This unique diversity of backgrounds brings with it an endless array of preferences for medical equipment, consumables and pharmaceuticals, making it difficult to standardise using basic methods.

A skills shortage: There is a lack of procurement professionals who specialise in healthcare, and local schools do not offer courses to train the workforce in healthcare supply chain management. Therefore, recruiting category managers who are key to driving the advanced techniques is exceedingly difficult.
Procurement’s low status: Even when limited procurement skills do exist, supplies functions are often seen and operate as a transactional entity that simply purchase goods and services under instruction from doctors and others. Few hospitals give procurement a genuine voice in which products are purchased. 

Competitiveness of the local supply market: Local companies often have exclusive rights to international products and brands and distributor mark-ups can double costs. A nascent manufacturing sector means a limited local market for even basic products.

A Much-needed Transformation
Most GCC healthcare systems have put third-party spend into too small of a box tagged with a narrow definition of procurement: basic tendering and material handling. Much bigger benefits can be achieved if board’s give procurement a more advanced role. Four sourcing strategies can deliver substantial—and sustainable—cost reductions. (Figure 2)

Change specifications: Optimise what you buy. Hospitals have an excessive number of products, primarily because of a lack of governance and control mechanisms. For example, in the GCC, doctors and nurses often have a choice in which gloves they buy. Because of variations in personal preferences, hospitals end up purchasing a wide variety of gloves. In more advanced hospital settings, purchasing departments have a strong influence over the final decision. One hospital system we worked with was buying three brands of infant formula with identical specifications but vastly different prices. By standardising to the most affordable option, the company reduced its costs for formula by 70 per cent with no negative impact on the standard of care.

Reduce demand: Decrease waste and underuse. GCC health organisations have expanded quickly to meet the population’s needs, often without setting up clear rules for spending. Because of this, many warehouses are full of an assortment of items, often in quantities, which invariably leads to a lot of it becoming obsolete and being thrown away. Policies contribute to stockpiling because many hospitals have a use-it-or-lose-it budgeting practice that results in unnecessary purchases. What’s lacking is rigorous planning with stock thresholds and governance mechanisms that define what is desirable and what is excessive. 

Leverage competition: Do things better. Despite the region’s healthcare market being relatively small, two factors give it a big bargaining power: the growing and aging population and the fact that GCC countries tend to be cash rich and have demonstrated a willingness to invest in healthcare. This makes the region attractive for companies with an eye on growth. For example, the UAE is among the world’s top improvers in terms of its business environment, and the government is committed to foreign direct investment. Too often, however, negotiating power is lost because of poor planning. For example, one company we worked with was buying blood-collection tubes from the same supplier every few months but at hugely variant price points, primarily because orders were being placed by different hospitals. Combining demand and establishing long-term contracts lowered the cost of the tubes by 74 per cent.

Partner with the right vendors: Choose your suppliers wisely. Identifying strategic vendors and forming meaningful partnerships can create the right conditions to benefit both the hospital and the supplier. For example, a hospital in the United Kingdom has a long-term partnership with a provider of cardiac devices. The partnership extends beyond product supply into patient lifestyle sessions and follow-up clinics. This encourages both the hospital and the vendor to take a long-term view of patient satisfaction and clinical outcomes as well as the commercial opportunity.

Locking in Sustainable Results 
Four practices are proven to help keep costs down: 
Change the setup of your procurement team: A world-class procurement organisation is created by investing in talent and, infrastructure to build serious capability, and consulting support to mobilise that capability quickly and with immediate results. The return on this investment is measured by the benefits that procurement delivers, including lower costs and better results. A.T. Kearney’s unique Return on Supply Management Assets study found that for every dollar invested in developing and running a health organisation’s procurement function, the company gets $4.30 in return.

Bring stakeholders together in a cross-functional clinical value team. Advanced healthcare organisations have clinical value teams that act as decision-making groups. Comprised of doctors and nurses along with people from supply management and finance, these teams pinpoint the right specifications for the whole organisation, for example the ideal type of gloves. In addition, this level of transparency and information-sharing enhances compliance to the jointly agreed product selections

Overhaul the engine with fit-for-purpose processes. Many GCC health organisations struggle with the timely management of procurement requests. Bottlenecks and delays tend to be the norm. Strategic sourcing requires a flexible approach to adapt to both the organisation’s needs and the market’s changing conditions. Category managers need the freedom to choose the most appropriate strategy, from making purchases on demand to setting up multi-year agreements. Leading organisations standardise and automate the process, often by using dedicated software. 

Use enhanced analytical capabilities to uncover hidden opportunities. With the large variety of products that a healthcare system buys, and the countless unique item numbers, enhanced analytical capabilities are essential to uncovering the opportunities buried under all the data. Analytics can also prevent overstocking and reduce working capital by optimising inventory and defining reordering policies. In more advanced applications, statistical analysis of historical patient data from electronic medical records can be used to develop predictive models for low-cost interventions, reduce the number of readmissions, identify chronic illnesses, and evaluate the effectiveness of treatment.

The Way Forward
A forward-thinking approach to third- party spend can create significant economic gains, including reducing third-party spend by 20 per cent, which can in turn be used to support investments to sustain the region’s escalating demands for healthcare. Unlocking the full range of opportunities will require a proficiency in generating competition among suppliers to get the best prices, systematically managing demand to avoid unwarranted range complexity, creating clinical value teams to facilitate a healthier cost-benefit dialogue with clinicians, and, most challenging of all, developing differentiated supplier interaction models, including strategic partnerships, to get the most from your suppliers. 

A complete improvement transformation can take 12 to 18 months, but we have found that by working collaboratively most of the savings can be delivered in the first six to eight months.

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