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Follow the money: transforming healthcare procurement 

Traditionally, the U.S. healthcare payer industry has lagged other industries in transformation and innovation. According to the findings of PA Consulting Group’s global innovation report, the Healthcare industry issues with innovation comes down to internal, structural resistance to change. The survey states the main barrier to innovation is embedding change and improvement in a sustained way (29%), followed closely by too many rules and restrictions (28%) within the organization. 

Competing priorities and risk aversion have driven the industry to adopt a “just in time” approach to transformation. Payers that have high administrative costs are under pressure to radically cut overall operating costs. To achieve this, a new wave of “next generation” outsourcing and vendor contracting is needed, requiring a change in strategic procurement capabilities.

With the start of what many expect to be a fairly substantial round of consolidations, mergers and acquisitions in the sector, the need for a detailed and strategic understanding of how you procure, manage, measure and drive increased value from vendors and business partners has never been more pressing. 

So what are the key factors that drive strategic procurement organization success? 

Understand the value of your money

No organization can drive efficiency without knowing where their money is going and what value they are realizing from investments.  Understanding the total cost of operations for organizational functions and key processes is fundamental to managing and reducing operating costs. We hear of payers trying to ‘drive greater efficiency’ and ‘realize gains for their customers’ but, they don’t know what it costs to operate key functions of their business. There is little insight into their supplier portfolio and their strategic vendor relationships. 

Leverage and Compare 

It is estimated that over 80% of Request for Proposals (RFP) are already awarded before they go out for a bid. Usually, there is an incumbent that will be awarded the contract or a vendor that already has the inside track to win the award. Strategic procurement functions should establish and leverage a preferred vendor program and strategic service vendor to speed up the time to value.

Payer core capability has traditionally been to process claims, manage provider networks, and manage care, not run procure to pay or RFP processes. Leading companies have realized that they can’t build and manage all capabilities in-house and are leveraging managed services and service vendors to deliver non-core services. For example, there is a significant amount of administration and management required to select, manage and administer external labor. Use of outsourcing suppliers with specialist skills can help drive more competitive and value-based service agreements in key categories, such as external labor providers, marketing or telecommunications.

Measure and Monitor

To manage administrative costs in the new world of healthcare payers it is critical that your procurement organization is equipped with the tools and processes needed to manage your vendors. When it comes to vendors you should ask yourself a couple of questions. 

When was the last time I penalized a vendor for not meeting a Service Level Agreement?  

When did I last review a vendor’s performance dashboard?  

Which vendors did we award for outstanding value last year?  

Who is the key point of contact that owns the relationship for my top 5 vendors?

If you cannot answer most of these questions, then it is within your right to challenge whether your procurement organization is truly a strategic asset or a simple transactional function. 

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System Implementation and Data – if you don’t measure it you can’t manage and improve it

Key data points suggest that your procurement systems should be able to draw upon and include the ‘usual suspects’ of expenditure data, contract management data and supplier performance data – but what about relationship to cost data? The need for data to show which products and business lines are profitable, how their cost breaks down in each payer function and where the money is going is a fundamental tool essential to improving performance.

Beware of the false promises of a system implementation. Transformation of your procurement capability does not start by selecting a new system to install. You must first address the organization, process flows, governance and put a plan in place to enable the new organization. Once this is accomplished you can look at the efficiencies of a system install, but the system must not drive the change.

Organization Design and Transformational Change Management

Expecting organization structures that have bred and sustained the current transaction system for years to suddenly become masters of continuous improvement is both naïve and expensive. When analyzing the expenditure, systems and data requirements that allow healthcare companies to drive efficiencies, there must also be an understanding of what organization is needed to support the changes. This means turning procurement organizations that have been built around a ‘place and chase’ mentality, into true strategic procurement and supply chain functions that manage relationships, provide market insight and analysis, deeply understand their business and can contract and negotiate with the best of them.

Leading from the Top

The last critical area to drive out healthcare procurement transformation is in leadership. Healthcare is waking up to the need for a Chief Procurement Officer (CPO) and the value of executive-level control over costs. The challenge is that procurement is run as a finance, legal or business function and each of these results in a procurement organization that is dominated by either bean-counting, compliance processes or a ‘whatever the cost’ mentality. When considering where the efficiencies and transformational initiatives come from in an organization, the idea that a function that is directly responsible and accountable for how money is spent but does not have a seat at the table remains ludicrous. The right leadership, sponsorship and empowerment to be able to ‘get things done’ is perhaps the most critical part of any program.

The Road Ahead

The next few years in the healthcare market are going to define who thrives, survives and dives. Organizations that don’t rapidly get a handle on how their procurement department functions and where efficiencies can be used to transform performance will rapidly dive, disappear or get swallowed up.  Organizations that start to understand some of the challenges and implement one-off programs without the structural changes needed to support these may survive and if they’re very lucky, they may retain their independence. However, the true leaders of the healthcare market in the next decade will be those that understand their own business, and implement the procurement and efficiency programs needed to restructure their cost base.

Jeff Cameron and Justin Hughes are healthcare experts at PA Consulting Group

To find out more about the future of healthcare, please contact us now.

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