The Association for Healthcare Resource & Materials Management (AHRMM) recently projected that the cost of medical supplies will surpass labor as the biggest expense for hospitals and health systems by 2020. This news likely felt like a low blow for CFOs and supply chain leaders as it essentially said that while you are likely winning battles around the price of individual supply items, you will lose the war on supply spend. And it will happen in roughly three and a half years.
For Vizient’s David Gillan, senior vice president, member business ventures, the projection is a catalyst to rapidly expand the conversation around what he calls “lightning in a bottle.”
“What I love about member aggregation groups is that they understand their challenges and they have a commitment to work together,” Gillan said. “These members are looking far beyond item price to capture incremental value in new, differentiated ways. They are also connecting to solve problems faster and better than they can individually. These value drivers and connections are like lightning in a bottle and have enough power to change results for all involved hospitals and health systems.”
On the surface, driving price value through aggregated purchases is not a new concept. For some time, hospital systems have been forming collaborative purchasing groups that exchange volume or commitment for incremental value in commodity and lower-complexity clinical items.
“This basic price leveling is what the majority of aggregation groups have been doing for years. But that's just one type of value among a number of key drivers we have identified. To have a material effect on supply costs, aggregation groups must move beyond price leveling to other layers of value, including contract management, product standardization, utilization management, value analysis, at-risk contracting and new ventures,” said Gillan.
Success factors for participation in an aggregation group
Gillan noted that there are more than 100 existing aggregation groups using various strategies to help lower participants’ supply costs. Vizient is actively involved with 14 member aggregation groups providing management rigor, data and analytics, contracting services, and compliance. Gillan expects that number to increase as groups look to move into new levels of sophistication. Within the Vizient membership, approximately 67 percent are currently participating in an aggregation group and the expectation is that number will only continue to grow.
Vizient encourages aggregation when it aligns with members’ strategic business objectives. Hospitals interested in joining an aggregation group should consider the following before making a commitment:
- Strategy: Aggregation should be viewed as an enabling organizational strategy, not just a supply chain tactic. To recognize all available value, your organization must be willing and able to think beyond item price. Is your organization willing to develop and execute a plan with innovative strategies?
- Participation: Each group approaches aggregation in a unique way based on its common purpose. Members must be willing to embrace a group mentality in order to maintain a brand reputation for compliance. This is particularly critical when group commitments are made around utilization or operational improvement. Is your organization able to follow through on contract execution and be a compliant participant?
- Leadership: The most effective groups have strong executive involvement. As the era of clinically integrated contracting emerges, it is critical to have champions within the C-suite, physician leadership, service line leadership and supply chain leadership. Are your leaders able to implement evidence-based decision criteria? Can your leaders move market share if necessary to provide suppliers with reason to offer additional value?
Getting involved in an aggregation group
Moving forward with an aggregation group requires substantial planning. Vizient recommends taking the following steps to determine the best fit for a prospective member and an existing aggregation group:
- Alignment evaluation: Survey to collect further insights into supply chain management, culture and commitment, physician alignment, executive engagement, and desired aspirational state
- Savings analysis: Savings calculations based on submitted spend, contract coverage, total savings, direct match and conversion opportunities
- Aggregation comparison: Recommendation of potential aggregation groups detailing background information, portfolio and support resources, membership classes, levels of compliance and committee structure
Understanding the opportunities available through aggregation groups
Gillan dispelled a commonly held notion that aggregation groups undermine national GPO contracts. “That is simply not true. Last year we created more than 1,500 addendums on behalf of the aggregation groups we support and nearly every one of them leveraged an existing tier or rebate structure included in the original Vizient contract negotiation."
He also noted that Vizient doesn’t own any aggregation groups. “We don’t own these groups, they own themselves. At best, we have one vote among many. Our job is to listen to problems and offer solutions that fit. We strive to be a channel partner working in their best interest according to their common purpose and strategic plans.”
“I think the net/net is that hospitals and health systems have to be increasingly creative to address the challenges they face,” said Gillan. “Underutilization of data standards, lack of representation at the C-suite level, silos that exist in the supply chain environment and clinicians’ resistance to change are four of the primary factors aggregation groups help to address.”
For more information about Vizient’s aggregation services, contact Kevin Galyean, director, supply chain aggregation.