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Spend Management Solutions for the Healthcare Industry: An Industry Assessment

Spend Management in Healthcare The SCRC recently conducted an industry study, led by Dr. Handfield, and four MBA students (Ragesh Rajan, Rahul Sharma, Sangrum Chavan, and Swetha Menta) on the current state of spend management solutions in healthcare.

A spend analysis was often viewed as a one-time annual event to derive budgeting estimates, and develop insights into annual contract negotiations.  Today, spend analysis is evolving into spend management, which is a much more dynamic and on-going assessment and tracking of spending patterns, matched to other cost drivers and activities.  Spend analysis does not need to occur only on an annual basis, but can be applied also to reviews of a category or subcategory of spend that occurs when a contract is being negotiated, or when a strategic sourcing project is initiated for a particular category group.  Spend analysis is also a critical component of effective budget planning, and setting key performance indicators for sourcing teams to consider in their assigned duties.  An on-going spend management capability provides answers to the following questions:

  • What did the provider spend its money on over the past year? This value is an important component in calculating the cost of goods sold in the financial statement. Purchased goods and materials are often more than 40% of the total cost of goods sold in healthcare.  Many systems fail to include indirect and nonclinical spending in their analysis, which is missing an important piece of the pie.
  • Did the healthcare system receive the contracted level of products and services based on payments made to third parties?  Although many providers outsource their purchasing to GPO’s, there is nevertheless a need to audit and verify that services and products delivered met not only contracted pricing, but also service level agreements, statements of work, and appropriate levels of support services.  A thorough spend analysis will often reveal areas where products and services are being paid for, but the goods or services are not even being received or being used by the system.
  • What suppliers received the majority of the business, and did they charge an accurate price across all the units in comparison to the requirements in the POs, contracts, and statements of work? (This is an important component to ensure contract compliance.)
  • Which divisions of the business spent their money on products and services that were correctly budgeted for? (This is an important component for planning annual budgets for spending in the coming year.)
  • Are there opportunities to combine volumes of spending from different parts of the healthcare system, and standardize product requirements, reduce the number of suppliers providing these products, or exploit market conditions to receive better pricing? (This is an important input into strategic sourcing).

The concept of strategic sourcing as a core tool for healthcare integrated distribution networks (IDN’s) to achieve its clinical mission while managing risk and reducing cost has been well touted in the industry.  One of the most fundamental components of a strategic sourcing program is the ability to carry out a category analysis for their consolidated spend data at the hospital, as well as at the buyer level.  This requires aggregating 100 percent of the data into a single consolidated view of the spend to enable a precise analysis of spending with each supplier for each category of spend in the system.  In this study, we surveyed the landscape of different providers of spend management in the healthcare landscape.  This included Group Purchasing Organizations (GPO’s), ERP system providers, specialized software providers, and distributors.  The five major categories of spend management assessed at each of these organizations includes data cleansing, spend analytics, contract management, technology enablement, and customer service/responsiveness.  Of these, data cleansing was identified as the most challenging component that is fundamental to creating true visibility of spend.  Unfortunately, data cleansing is also the component that was typically overlooked by the majority of the organizations reviewed in this analysis.  While each of these organizations provides a different and unique set of capabilities in the area of contract management, technology, analytics, and support, only two of the providers truly have a demonstrated capability in capturing, cleansing, coding, and uploading 100% of the spend data for hospitals and IDN’s (Datapros and GHX).  Further, many of the organizations perform data cleansing only as a requirement for entering the data into their proprietary databases, without providing the cleansed dataset to the client.  Without capturing and providing visibility to 100% of the spend (including not just EDI data, but non-EDI spending, paper contracts, off-system spending, etc.), the true benefits of a strategic sourcing exercise cannot be achieved, and the result is a self-defeating exercise in futility.  Only two providers of specific software targeted at data cleansing were identified in the study.  This was made more complicated by the fact that up to 20% of manufacturer data that is used as input into healthcare data analysis is “dirty” or incorrect.

In today’s environment, hospitals continue to outsource their sourcing capabilities to a national or regional group of GPO’s, who nevertheless are able to obtain leveraged savings for groups of large commodities.  To truly become more strategic, however, healthcare providers need to adopt a strategic intent to insist on visibility and cleanliness of all data, not just what is easily accessible.  Further, the data needs to be captured into an analytical environment that allows the flexibility to drill deeply into different types of data sets to unearth opportunities through benchmarking, analysis of non-traditional spending areas, and engagement of key stakeholders to review the results of these analyses.  Data is the only true enabler for change in the healthcare supply chain.  Our research points to the need for strategic sourcing groups across the country to begin to take the issue of spend management into their own hands, control the data, and use it as a leveraged tool for driving change and improving performance.  Healthcare supply chain executives need to select providers who are aligned with a spend management strategy that relies on centralization of spending, but also engagement of stakeholders for decision-making.  It’s time to regain internal control of spend data, and begin to truly manage third party spending as a strategic capability.  While strategic sourcing has grown in leaps and bounds in most industries, healthcare has a long way to go.  The time for change has never been better.