The Crazy Dynamics Behind a Surgical Supply Chain…

For any business owner or corporation, I would imagine the pursuit of happiness and success to be the basis behind each one’s journey. Happiness could be fueled by one’s passion and success more often than not comes from a profitable business model.

Can you imagine a chef opening a hot new restaurant in downtown Chicago knowing the wholesale cost for a steak on the menu actually costs more than the price customers are willing to pay for their dinner? It’s easy to see that this business model is not sustainable and the restaurant is destined to fail. Unfortunately this is a pretty accurate depiction of healthcare’s surigcal supply chain. In many instances, the surgical implant devices used during surgical procedures actually cost more than the reimbursement amount insurance providers are willing pay. Suppliers and independent device represetatives have basically taken advantage of the market they helped build.

Just look at what happened when a certain pharmaceutical manufacture increased the cost of the EpiPen overnight from $100 up to $600. The higher cost literally forced families to take healthcare risk by considering to do without their medication.

A Sustainable Surgical Supply Chain

Now take a moment to measure the cost of orthopedic and spinal implant devices that are priced anywhere between $800 to $20,0000. The rationale here is that implant devices are just a component of the expenses needed during surgical procedures, but they account for more than 70% of the average cost. The total cost for these procedures range from $12,000 to $45,000 and unfortunately healthcare reimbursements are based on DRG-(Diagnosis-Related Group) payment methodology which could be less than 10 to 20% of the total cost of the procedure creating negative financial impacts per case.

Imagine what happens when a hospital recuits a top surgeon projected to increase the number of surgical procedures by 12%? The number of surgical procedures and expenses go up; however contribution margins quickly go down… Where’s the upside here?

Hospitals are banking on “Trickle-Down” effects. They’re recruiting top surgeons to generate more procedures for new patients in hopes of them enjoying their experience, to then recommend family & friends resulting in more onsite lab tests, pharmaceutical prescriptions filled, and increased utilization of other network services. What a risky business?

It’s hard to believe that in 2017 many hospitals still don’t have sufficient technology to better manage these dynamics? Often times it takes several different departments collectively pulling from seperate data sources; just to indentify the total cost of a procedure and contribution margins by surgeon.

Balancing patient care and financial discipline can be challenging. This explains the supply chain shift from being dedicated to improving workflow efficiencies, to spending most of their time negotiating with dozens of vendors constently introducting new products & devices. The supply chain now needs to use technology & spreadsheets to tell compelling stories to C-Suites & physicians with the intent of driving better business decisions. Who cares if a physician has a favorite sales rep?
Partnering with physicians

The time has come for supply chain leaders to start leveraging these relationships instead of exhausting resources trying to dissolve them. Creating an even playing field for vendors and physicians often times means keeping all players on the field until you’re able to collectively develop a process of elimination. This is what’s needed to help the supply chain gain momentum and raise its social equity amongst their leadership teams.

The dynamics behind a surgical supply chain and DRG’s can indeed be tough to manage, but when your organization is driven by its ability to provide the best quality of care for its patients; the importance of financial discipline becomes a part of your culture. If a healthcare system is unsustainable it’s actually becoming disservice to the community it serves and will likely be acquired by another IDN (Integrated Delivery Network) more interested in the exact same patient lives that you serve.