Supply Chain Archives • Pathstone Partners Healthcare Consulting Chicago

Navigating Tariff-Induced Supply Chain Challenges in Healthcare

Key Takeaways

Tariffs on imported healthcare products are introducing significant financial strain and operational uncertainty for hospitals, affecting everything from medical supplies and pharmaceuticals to IT infrastructure and construction materials.
With limited ability to absorb or offset rising costs, hospitals must take proactive steps to maintain financial stability.
Pathstone Partners supports health systems by challenging unjustified supplier price increases, analyzing vendor responses to tariff pressures, and guiding strategic contract negotiations.
Pathstone also helps identify and vet alternative suppliers, execute sourcing events, and implement contingency plans to preserve continuity of care and long-term supply chain resilience.

I. Introduction

The U.S. healthcare system depends on a globally integrated supply chain not just for medical equipment and supplies, but for virtually every facet of operations, including pharmaceuticals, IT systems, laboratory instruments, construction materials, purchased services, and more. Historically, healthcare products received strategic exemptions from tariffs — but new policies highlight the potential for tariffs to negatively impact these products. The current administration has implemented, or plans to implement, tariffs on key trading partners. Further, executive orders indicate pharmaceutical tariffs may be implemented within the coming weeks or months. For hospitals and healthcare systems, this policy shift introduces real risks: increased costs, supply delays, and reduced access to lifesaving and life-sustaining products.

II. The Global Supply Chain of Healthcare Products

The U.S. imported $36.7 billion in medical equipment in 2024¹, with much of its healthcare infrastructure relying on global partnerships. Several countries play critical roles in the healthcare supply chain, and as of June 2025, varying levels of tariffs apply to their exports, according to the Reed Smith Tariff Tracker:

China: Supplied nearly $2.31 billion, primarily for face masks, gloves, and syringes in 2023¹, and remains the dominant source for active pharmaceutical ingredients (APIs) used in both U.S. and global drug production². The U.S. currently has a 20% tariff with China, with a 34% tariff set to start 8/12/25¹⁰.
India: Provides around 40% of the U.S. generic drug supply, which accounts for 90% of prescriptions filled, while relying heavily on Chinese API imports³. A 27% tariff on Indian goods is expected to start 7/9/25¹⁰.
Mexico: Exported $12 billion in medical equipment, including syringes, diagnostics, and surgical tools¹.
Canada: A key supplier of prescription medications and raw materials, often offering lower-cost alternatives to U.S.-produced drugs. Canadian and Mexican goods that fall under USMCA rules (fully sourced from USMCA countries) are exempt from tariffs; otherwise, a 25% tariff applies to products from Canada and Mexico¹⁰.
Other Key Suppliers: Germany, Ireland, and Japan also play important roles — exporting advanced surgical instruments, hosting major medical technology manufacturing hubs, and supplying high-tech diagnostic equipment, respectively¹.

This global network ensures innovation, availability, and affordability across the U.S. healthcare landscape — but also introduces potential vulnerabilities in times of geopolitical or logistical disruption.

III. Understanding the Complexity of the U.S. Healthcare Supply Chain & the Influence of Tariffs

Hospitals operate within one of the most intricate supply chains in any industry. Medical products often require highly specialized manufacturing processes and must meet strict FDA and international regulatory standards, which significantly limit sourcing flexibility.

Mark Pascaris, Senior Director and Analytic Lead for Nonprofit Healthcare at Fitch Ratings, cautioned that new tariffs could undermine the modest financial recovery many nonprofit hospitals have achieved in recent years. “This adds yet another headwind for not-for-profit hospitals, which are already navigating post-pandemic pressures, workforce shortages, and persistent inflation,” Pascaris said⁸.

Given that medical supplies and pharmaceuticals make up 20% or more of hospital operating expenses⁹, tariffs could affect a broad range of items. Tariffs on critical inputs like diagnostic reagents, telecom hardware, or steel and HVAC components could drive up costs, delay major projects, and disrupt operations. These impacts are far-reaching: a price hike in imported IT equipment may impact cybersecurity readiness, while construction material tariffs could stall facility upgrades or expansions. Even software platforms used in electronic health records may be built on globally sourced technologies, leaving hospitals exposed to cost increases and longer implementation timelines.

However, unlike many other sectors, shifting suppliers or relocating production is neither quick nor simple. It involves considerable time, cost, and logistical coordination — especially in a market where pharmaceuticals remain among the top U.S. import categories⁴. Even if some manufacturing is reshored to the U.S., Pascaris warned that hospitals may still face “permanently elevated costs and potentially fewer choices.”⁸

The COVID-19 pandemic underscored these healthcare supply chain challenges, exposing deep vulnerabilities in the global healthcare supply chain and leading to widespread shortages. More recently, the disruption of a single manufacturing plant in North Carolina — which impacted roughly 60% of the nation’s IV solution supply — demonstrated how localized events can have nationwide consequences.

For hospitals, these realities make clear the need for resilient, diversified, and well-managed supply chains to ensure continuity of care and protect against future shocks.

IV. Impact of Tariffs on Healthcare Contracts

Rising tariffs on imported medical goods are adding new financial strain for U.S. hospitals. Increased costs on essential supplies like gloves and syringes — many of which are sourced from China — are difficult to absorb, especially given long-term reimbursement contracts that prevent providers from adjusting prices. The costs of both pharmaceuticals and medical devices are also expected to be impacted by impending tariffs. In particular, complex and varied items such as surgical kits may be affected by the inability for providers to easily switch out kit items.

To manage these pressures, some manufacturers are shifting production to lower-tariff countries such as Malaysia. However, these changes take time and can introduce new sourcing complexities and delays⁵. Hospitals may experience a 6–12 month delay in feeling the effects of new tariffs due to fixed-price contracts with suppliers, which may shield them from immediate cost increases. However, as these contracts come up for renewal, hospitals are likely to face significant pricing hikes. In some cases, the magnitude of the increase may trigger force majeure clauses, allowing suppliers to renegotiate or exit contracts due to unforeseen economic hardship.

V. Sampling of Supplier Projected Tariff Financial Impacts & Strategic Responses

To better understand how suppliers in the market are adjusting to policy changes, the projected revenue between Q4 2024 and Q1 2025 as well as announced tariff mitigation strategies were compared for key healthcare suppliers.

The chart below illustrates how leading healthcare suppliers have revised their 2025 revenue projections in response to recent U.S. tariff changes. Each bar represents the estimated impact on a specific company, comparing revenue forecasts from Q4 2024 (prior to tariff implementation) with updated estimates from Q1 2025, after companies began adjusting to the new cost landscape.

Companies are also categorized by their tariff response strategy outlined in their Q1 2025 earnings calls: absorbing the added costs, passing them along to hospitals, adopting a mixed strategy, or having low exposure. The strategic decisions made by the suppliers are already influencing hospital budgets, contract terms, and supply chain planning—and will continue to do so heading into the second half of the year. Hospitals are particularly vulnerable based on their utilization of those suppliers who have announced they will pass increased costs onto the health systems.

The most significant projected revenue declines are seen among distributors and medical device manufacturers, reflecting increased import costs on surgical supplies, equipment components, and consumables. Pharmaceutical manufacturers tend to show smaller shifts, often due to more diversified sourcing or the fact that pharmaceutical tariffs have not been formally announced.

Suppliers expected to either fully or partially pass tariff-related costs to hospitals are among those with the steepest projected revenue declines. This suggests that companies pursuing downstream cost-shifting are still facing significant short-term financial pressure and indicates that price increases alone may not be enough to offset the broader impact of tariffs. In contrast, companies absorbing costs or reporting low exposure tend to show smaller revenue shifts, reflecting stronger internal cost controls or more resilient sourcing models that allow them to protect their customers.

*Source: Data compiled from Q4 2024 and Q1 2025 earnings reports and press releases from leading healthcare companies operating in the U.S. market. Each bar reflects a single company’s reported revenue projection change.

Hospitals are facing a difficult financial reality: higher supply costs without the ability to raise prices lead directly to shrinking margins and increased pressure on operating income⁶. Lawmakers have also expressed concern, warning that tariffs on critical medical products could lead to care rationing or treatment delays — outcomes that risk directly impacting patient safety⁷. Understanding how each supplier is responding to tariffs can help hospitals anticipate upcoming changes in spending, adjust contract strategies, and proactively manage supply chain risk heading into the second half of the year.

VI. Navigating the Path Forward

As tariffs and global supply chain disruptions continue to raise the cost of medical goods, hospitals and health systems face a growing need to balance financial sustainability with uninterrupted, high-quality care delivery. Addressing these pressures requires coordinated, data-driven action — and that’s where Pathstone Partners can help.

Push Back on Proposed Price Increases with Existing Suppliers: In the coming months, suppliers under current agreements may propose price increases on existing products or services, using tariffs as justification. Many suppliers already have cushions built into operating margins to better absorb the tariffs, while health system operating margins may be so slim as to not be able to absorb any price increases. Pathstone can push suppliers to act as true partners for health system clients in absorbing some of the tariff pressure.
Proactively Manage Supplier Relationships: Based on market review, Pathstone can tell which publicly traded suppliers project significantly decreased revenues or plan to pass the cost of the tariffs onto the hospitals. In conjunction with the hospital team members, Pathstone can provide insight into how a given supplier is managing the situation, informing supplier conversations, business reviews, and contract negotiations.
Identify and Vet New Suppliers in Response to Market Shifts: In response to shifting international trade dynamics, new domestic suppliers may enter the market, and existing suppliers may acquire each other or consolidate. New suppliers providing the same product or purchased service may present an opportunity to test the shifting market. Pathstone can conduct RFPs to test the market and understand the value offered by new suppliers.
Force Majure: If raw material prices increase considerably, suppliers may be unable to meet contractual pricing requirements, leading to an inability for the supplier to turn a profit. Hospitals may face backorders in these cases. In response, Pathstone can work with clients to quickly implement agreements with new suppliers to minimize patient care disruptions.
Evaluate Secondary & Tertiary Suppliers: In response to fluctuations in availability across the market, there may be an opportunity to negotiate and eliminate volume requirements or exclusivity clauses in supplier agreements. If suppliers are unable to meet contractual requirements, hospitals may need to implement agreements with additional suppliers. Pathstone can help health systems balance low prices offered by an exclusive supplier with the need for multiple suppliers to meet demand.

VII. Conclusion

Tariffs are reshaping the economics of healthcare supply chains, especially for hospitals. As costs rise and supply disruptions increase, healthcare systems must act decisively to protect financial health and patient access.

Pathstone Partners helps hospitals move from reactive responses to proactive strategies — building more resilient, cost-effective supply chains without compromising care quality.

Footnotes:

An Adaptable Approach Through the Covid-19 Pandemic

Pathstone Partners Chicago Health Care Consulting (11)

The supply chain leadership of a large $2B integrated health system identified the need to elevate its procurement function by establishing a strategic sourcing function that is critical in driving long-term value to the organization, then Covid-19 hit.

The supply chain leadership of a large $2B integrated health system identified the need to elevate its procurement function by establishing a strategic sourcing function that is critical in driving long-term value to the organization.

The client had limited strategic sourcing resources to serve its internal customers, partner with its supplier base, and address total non-labor expenditures of $1B.

Furthermore, the client was facing budget constraints that created challenges to secure resources to recruit, train and grow a team that is critical to its ability to achieve its goals.

As a result, the client engaged Pathstone to partner with the organization to embark on a journey to transform its procurement function to deliver and sustain value over the long-term.

Pathstone introduced its Balanced Partnership® approach, which offers a flexible support model that scales with each of the three phases of the client’s transformation journey.

Phase 1: Start-Up (Year 0-2)

Pathstone led support to identify and implement non-labor and strategic sourcing savings across all categories.
“Quick win” categories were identified and implemented such as translation services, records management, managed print, telecom.
After securing several wins, Pathstone worked with supply chain leadership to develop a business case to recruit and hire additional strategic sourcing FTEs to accelerate efforts.
The client was able to mitigate financial headwinds by achieving $2.5M+ in annual savings through Pathstone-led initiatives.

Phase 2a: Momentum (Years 2-3)

Pathstone worked with the newly formed sourcing function to plan for the next wave non-labor expense reduction initiatives.
Pathstone and the client allocated initiative responsibilities between both teams to maximize overall return on investment (ROI).
Complex categories such as Rx, lab and revenue cycle, purchased services were assigned to Pathstone.
Less complex categories such as clinical and non-clinical supplies were assigned to the client team.
Achievement of $7.5M in benefit through ongoing Increased non-labor spend addressed by the client supply chain team to impact cost.

Phase 2b Resilience (Year 4-5)

Emergence of the COVID-19 pandemic, leading to supply chain disruption, and significant financial challenges.
Pathstone worked with the client sourcing team to proactive source and secure PPE (gloves, gowns, sanitizers) needed by front-line staff.
Pathstone partnered with executive leadership to engage top spend and strategic suppliers to secure short-term concessions to mitigate financial impact.
Pathstone worked with IT leadership to evaluate and rationalize IT investments.
Quick implementation of $15M in non-labor expense savings within 9 months by engaging strategic suppliers.

Phase 3 Sustainability (Years 6+)

Pathstone provided ad-hoc implementation support on targeted complex categories in Rx, Lab and Biomed.
Pathstone also provided market intelligence, training and post-implementation reviews to augment the client’s ability to drive and sustain long-term value.
Achievement of $10M of benefit (combined team effort).

As a result of Pathstone’s Balanced Partnership® approach, the client was able to achieve the following results:

Achievement of $35M+ annual non-labor expense reduction: The client achieved over $35M+ in annual savings in all major non-labor spend categories, including clinical supplies, information technology, telecom, pharmacy, lab, support services and purchased services.
Enhanced credibility and relationships with internal stakeholders: Previously, the supply chain & sourcing team had limited resources to truly serve the needs of its customers and the organization. Over time, internal customers viewed supply chain as a strategic advisor that can make a meaningful contribution to their departments. The paradigm shift led to earlier integration of supply chain
Increased internal knowledge & expertise: Pathstone served as an extension of the client sourcing team, which enables the client to “learn by osmosis” by jointly participating in a full strategic sourcing lifecycle from start to finish. Furthermore, through Pathstone’s ad-hoc support model, the internal team gained access to formal training and knowledge sharing sessions that facilitated their growth over time.
Enhanced ROI over time: Through Pathstone’s flexible model and investment in the client team, overall return on investment on supply chain & Pathstone resources increased from 4x to 10x. This was largely driven by the supply chain team’s growing capabilities, which led to a higher number of spend addressed and impacted internally as opposed to relying on Pathstone’s resources over time.
Sustainability: With access to Pathstone’s ad-hoc support including market insights/leading practices, negotiation support and post-implementation support, the client significantly increased its ability to sustain benefit achieved over time. For instance, Pathstone conducted a post-implementation review of a translation services sourcing event, which revealed over $1M+ in value leakage over-time due to lack of contract pricing compliance. The client utilized Pathstone’s findings to address both pricing and utilization opportunities to drive costs down with its key suppliers.

Cost Reduction Initiatives For Healthcare Organizations

Cost Reduction Initiatives

Cutting costs can be tricky, especially when patient health is on the line. Targeting spending less in larger areas like staff, supplies and equipment seems simple. However, these are essential to keeping the hospital running efficiently and delivering a positive patient experience.

Instead, consider the following initiatives as alternative ways to create a successful cost-reduction strategy.

Optimize Revenue Cycle

A healthcare revenue cycle helps organizations stay financially healthy as they provide services for treating patients. Some factors can enhance the revenue cycle and help avoid debt collection. These include:

Patient education: Patients should continually be educated on the costs of care, especially early in the treatment. Financially clearing patients early and consistently can help them be prepared and not confused when bills arrive in the mail.
Electronic medical billing: Provide online payment opportunities for patients to conveniently and quickly pay their bills.
Data analytics: As we mentioned before, data analytics are important in maintaining costs. With this concept, you can get a clearer picture by analyzing your revenue cycle trends.
Process updates: Continue to revisit your daily operations to ensure all pieces work smoothly. You can address any issues at the root and adjust strategies where needed to avoid large costs or debt for later maintenance.

Improve Supply Chain

The post-COVID supply chain has greatly improved through enhanced communication opportunities between the medical staff and management. Doctors relaying helpful information on certain products and treatments to management can improve the inventory of adequate medical supplies.

Additionally, regularly evaluate your suppliers. Are they providing quality products at a reasonable price? From here, identify what goods are being transported along the supply chain, including how much of the product is being delivered vs. how much you use between shipments. Knowing what and how much you use can help avoid wasting equipment.

Optimize Information and Digital Technology

Technology continues to advance, and healthcare organizations are beginning to use that to their advantage. Hospitals can utilize technology to create efficiency and cut costs by doing the following:

Automate administrative tasks: Doctors spending hours on monotonous administrative tasks can take up more than just time. Technology can make these tasks more cost-effective by automatically importing test results into a patient file, scheduling appointments and providing prescription information to patients.
Improve workflow and operations: Technology automation can reduce the risk of human error, saving the hospital from negligence claims. Implementing telehealth can also improve a clinician’s productivity through e-prescription refills and e-visits, allowing the clinician to see more patients.
Rethink human resource expenses: Digital applications can analyze labor demands, identify open beds and check equipment status to allow clinicians to focus on patient outcomes.
Process digital claims: An automated digital claim processor can assist patients with billing, improving turnaround time and reducing fraudulent claims.

Optimize Labor and Streamline Management Structures

Labor expenses are expensive for hospitals, so discovering where to cut costs in this realm could be very beneficial. You can start by looking over your current medical staffing schedule and administrative positions.

In short, it is about optimizing the right labor in the right departments. Every unit should have a list of necessary tasks and noticeable credentials that need to be fulfilled in each. For example, if nurses are responsible for food delivery in a particular unit, consider hiring a less expensive food tech to pass out trays. Doing so can reduce five nurses to four by eliminating a task from their list that can be handled by another employee.

You can also recognize trends in your organization and adjust the staff. Are there seasons or certain circumstances where patient counts are likely to increase? This process may take some time in the beginning, but it could save you quite a bit of money in the end.

Additionally, for every doctor, there are 16 healthcare workers — and only six are involved in patient care. The other 10 are administrative roles.

Now, these labor and management structures can be simplified. Technology can help streamline a patient’s care and reduce administrative costs but sometimes only leads to workload reduction. Technology in healthcare should streamline these processes instead of creating additional work.

Each administrative position should have a specific role that works for the good of the whole. Let the mundane tasks be taken over by technology, such as scheduling appointments, billing patients, managing patient communications and collecting payments.

Improve Patient Throughput

Now, take a look at your patient flow. Are things moving efficiently? Identifying ways your patient flow can improve is another area of strategic cost reduction.

Consider the following to improve your patient throughput:

Enhance collaboration between caregivers across units.
Improve communication between a caregiver and patient.
Continuously monitor the patient and make good notes.
Allow caregivers to spend more time with patients.

Every patient should be seen with the same careful attention in a timely manner. Doing so will improve the patient experience and decrease bottlenecks, reducing delays and ensuring the maximum occupancy for each hospital bed.

Optimize Utilization

Utilization in healthcare defines the usage of products or services within a certain hospital. This is another area where data analytics can be beneficial, as they can accurately assess current operations. Understanding what your hospital uses can help you avoid overtreatment and lower costs while increasing trust.

You can also optimize utilization by encouraging employee feedback. For example, when looking at the data, get a second opinion from employees before deciding what areas are unnecessary. A well-planned feedback system maintains consistent data to take action with, even when you aren’t in a crunch. This system can help your organization stay on top of cutting overall costs.

Introduce a Hospital Asset Management Plan

Hospitals spend a lot on fixed assets, including physical infrastructures like heating, air conditioning, ventilation, plumbing and generators. These assets also include healthcare-specific items like wheelchairs and beds. Instead of reducing the use of these needed items, aim to protect them through a hospital asset management plan.

A hospital asset management plan can help maintain a safe and clean environment in the most cost-effective way possible. Some ways to do this are by tracking your hospital’s most critical equipment, ensuring safety requirements are met and supporting a preventive maintenance approach.

Get the Results You Deserve With Pathstone Partners

At Pathstone Partners, we are committed to providing your company with the right plan to reduce costs. Our healthcare consultants can help you identify, implement and sustain a cost-reduction plan that fits your organization’s exact needs. Contact us today to get started.

Cost Reduction Strategies for Healthcare Providers

Health Care Financial Consultant Cost Reduction

Cost Challenges Facing Healthcare Organizations

Hospitals used to be reimbursed at a line-item level, where a charge was only issued with each item used or service provided. That bill was then sent to the patient or insurer, incentivizing procedures and tests.

Now, hospitals are given a certain amount for each diagnosis-related group (DRG). The hospital must then figure out how to best spend that fee while keeping the patient’s overall health status as the priority. Below are three of the most significant risks involved with delaying these strategies.

Lack of Resources or Bandwidth for Strategy Management

When we think of healthcare resources, we paint a picture of physical supplies like gloves, medications or medical kits. As you can imagine, a lack of these resources for healthcare settings can affect the quality of patient care and the work environment for providers. For these reasons, increasing the supply of resources is one of the first places organizations invest extra funds, delaying any plan or initiative.

However, consider extending the needed resources for hospitals to include general knowledge about strategic management — or bandwidth. For the success of cost-reducing plans, teams must have the capacity, energy and motivation to deal with the situation. Understanding your goals and knowing how to implement a strategy can help your organization manage cost reduction.

Decision-Making Process Complexity and Length

Making the final decisions for these strategies can be lengthy and full of multiple levels. Because of this complex process, implementing strategies can be seen as more of a hassle than a help. People and organizations have often pushed a cost-reduction strategy to the wayside because of the many factors involved, including maintaining employee and patient safety.

However, don’t let the lengthy process scare you away from making necessary changes for the betterment of your healthcare organization. Taking the required steps can change this daunting task into a helpful resource to utilize for years to come.

Poor or Inadequate Data for Initiative Support

Data analytics in healthcare are important for categorizing data to use it toward the organization’s operations and services. Poor data organization can add to your costs.

Insufficient data can interfere with patient medical records, increasing potential errors and hindering the patient experience. It may even impact your organization’s security, and data breaches are exceptionally costly.

Take control of your data to best help with the decision-making process. This way, you can pinpoint precisely where cost reductions are needed based on recent data, making initiative support much more efficient.

Take Action

Any organization has several challenges that threaten the success of reducing costs. Overcoming these challenges is vital to ensure we create an environment for patients to heal and thrive. What healthcare organizations decide to implement now can create a sustainable model for the future.

Contact Pathstone Partners today and discover how we can help your margins!

The Value of Supply Chain Management in Healthcare

Pathstone Partners Chicago Health Care Consulting (4)

What is Healthcare Supply Chain Management?

Healthcare supply chain management involves the procurement of resources, the management of supplies, and an interlinked group of processes that are required for healthcare professionals to carry out their operations and increase productivity. Each link in the medical supply chain influences overall cost, patient outcomes, and service efficiency.

The Importance of Supply Chain Management in the Healthcare Industry

COVID-19 related supply chain disruptions across the United States have expedited the need to optimize hospital supply chain management. This is especially true for health systems that aim to provide high-quality care, ensure service availability, reduce cost and boost profitability. Over the course of the past few years, supply chain management in healthcare has become a central focus due to increasing pressures to reduce cost from the pandemic, while improving patient outcomes and reimbursement. Healthcare supply management and optimization within health systems achieve these goals through improved data collection and employment, attentive vendor management, and incentive alignment.

How Does the Healthcare Supply Chain Work?

The healthcare supply chain for healthcare consists of numerous stakeholders. Each one plays a significant role in how the supply chain operates. These stakeholders include:

Manufacturers: The manufacturers are the labs, biologists and vaccinologists. They perform the research, development, manufacturing and monitoring. These groups make medical, surgical and pharmaceutical supplies and watch for shortages.
Distributors: The logistic partners and wholesale distributors sell, deliver and monitor products while following proper procedures.
Providers: Providers include pharmacies, urgent care centers, hospitals, assisted living facilities, dialysis centers and long-term care facilities. These places receive products from the distributors so they can prescribe them to patients. They submit orders to distributors, look for inventory shortages and call in prescription refills.
Patients: The patients are the people in the community who use these products or services. They influence the demand for medicines and other products with their unique needs.

Contact Pathstone to discover the critical role of healthcare supply chain management in ensuring the seamless flow of resources and services within the healthcare industry.

Standardization in the Hospital Supply Chain

Health Care Financial Consultant Standardization

What is Standardization in Healthcare?

Standardization can be defined as the extent to which hospitals are making use of the same products, services and processes. Due to the sheer number of suppliers and products available in the market combined with a diverse array of end-user preferences, hospital leaders often find they have a variety of similar products and services being used across the organization.

Standardization delivers the following benefits to an organization:

Financial benefits ranging 15 – 30% depending on the category
Leveraging system purchasing power
Improved consistency of service levels across the organization
Improved patient care and access

Key Opportunity Indicators

Supplier Fragmentation

The use of multiple suppliers providing similar products and services may be a strong indicator for standardization opportunities. A closer review may reveal differences in both pricing and quality amongst the suppliers.

Client Example: Pathstone worked with a large health system that used multiple suppliers for over the phone interpretive services. By consolidating its supplier base through a competitive bid process, the client was able to leverage the health system buying power to negotiate market competitive prices and save over 25% in annual costs.

Product Fragmentation

The use of multiple products or services that fulfill a similar need can be another indicator of potential standardization opportunities. Different end-user preferences are a key contributing factor to product fragmentation, which can lead to varying price points for similar products and services. A thorough review of purchase orders or supplier invoice data can be a good starting point to understand the degree of product fragmentation.

Client Example: Pathstone recently reviewed print services for a client and discovered over 40 different copier models being used across the organization, resulting in variable device leases and cost per page rates. A deeper analysis showed over half of the devices had similar functionality but were billed at different rates. By standardizing devices, the client was able to achieve significant savings.

Incomplete Category Definition

An incomplete understanding of a total product or service category due to extensive fragmentation can lead to missed opportunities to take advantage of key supplier relationships. If there is a narrow view of a category and its scope, it can significantly restrict the hospital’s leverage in negotiating key supplier contracts.

Client Example: Revisiting our previous example, the key driver behind the client’s fragmented supplier base was its decision to allocate business based on the type of interpretive services, such as in-person, over the phone and video interpretation services. Pathstone worked collaboratively with the client to identify suppliers with capabilities for all types of services, thereby generating more leverage for negotiations with existing and new suppliers.

Varying Service Levels

Disparate service level expectations across departments or facilities may also suggest opportunities to achieve cost or service efficiencies. This is often an overlooked identifier but can drive more consistent service delivery at a lower cost overall.

Client Example: In the same example as mentioned above, Pathstone discovered varying break/fix Service Level Agreements (SLAs) for the copiers across departments, resulting in inconsistent service and higher staffing costs due to the vendor’s inability to implement standardized practices. By standardizing and aligning break/fix SLAs with actual needs, the client was able to not only reduce costs but also improve service levels by optimizing staff deployment based on the “density” of areas (the volume and devices at a certain location).

Key Success Factors

Utilize a Data-Driven Process

High-performing organizations remain disciplined in utilizing data as a foundation to identify opportunities for change. Since standardization requires a change in end-user preferences for suppliers, products and services, data is crucial for an objective approach to arrive at the best solution. Without the use of data, organizations may resort to anecdotal information that will not drive optimal results.

Increase Knowledge of Complex Categories

Understanding the strengths and weaknesses of suppliers, products and services enables organizations to select the best solution that meets internal objectives. By conducting market due diligence, organizations can evaluate a wide range of options considered by their peers. Partnering with third party consultants such as Pathstone may be beneficial to access market intelligence and provide assistance in determining what change is truly best-in-class and beneficial to the organization.

Engage Key Stakeholders Early

Any standardization initiative that does not have support and buy-in from key stakeholders is bound to fail over the long-term. A strong leadership team that participates in initial decision making and ongoing management is essential to reduce costs and improve service levels. When working with clients on standardization initiatives, Pathstone proactively identifies champions that can engage end-users and hold them accountable. By doing so, initiative benefits can be sustained over the long term.

Insourcing vs. Outsourcing in the Hospital Supply Chain

What is Make vs. Buy in Healthcare?

Make vs. buy in healthcare can be defined as the extent to which hospitals choose to use in-sourced or out-sourced resources. Many clients often do not pursue this lever because each evaluation is unique; it requires robust data analysis, deep operational knowledge, change management and a longer timeline to successfully implement. However, the benefits that come with the make vs. buy lever can be enormous to any healthcare organization.

Key Opportunity Indicators:

Significant Change in Volumes

A significant change in volumes, regardless if products or services are outsourced or provided in-house, can be a good signal it is time to evaluate the make vs. buy value lever. As demand changes, hospitals need to determine if either a make or buy model is best suited to maintain costs and quality levels over the long-term. Often, an increase in volume can serve as a strong leverage point for negotiations with suppliers. Conversely, with a significant decrease in volumes, organizations need to evaluate if its service delivery model has a flexible cost structure that can match current demand or if it is heavily burdened by fixed costs.

Client Example: Pathstone recently worked with a large health system that was experiencing continuous growth in annual bed rental spend. Although renting beds provided benefits such as procurement flexibility and third-party maintenances services, our analysis showed the increase in volumes was large enough that an investment in purchasing hospital beds was more favorable to the organization. As a result of our recommendations, the health system was able to reduce rental costs by 20%.

Increasing Program Costs & Decreasing Quality

If annual costs related to a service are increasing while quality is decreasing, it may be worth evaluating make vs. buy opportunities. From a cost perspective, organizations need to understand the key drivers of increased costs. Is it price, volume or productivity? Furthermore, hospitals can partner with third parties (GPO, consultants, benchmarking service, etc.) to determine how costs compare to the market and begin to measure key performance indicators for their health system. From a quality perspective, performance on key service level agreements (SLA) and end-user feedback can be gathered to understand key drivers of decreasing quality levels. Is it bandwidth, staff capabilities or limited resources? By understanding the current state, hospitals can then effectively evaluate the benefits of transitioning to a make or buy model.

Fragmented Service Delivery Models

If your organization has a different mix of service delivery models, it may indicate opportunities to generate value. Fragmented service delivery models lead to differing levels of productivity, cost and quality, potentially impacting patient care and operations. By selecting a standard make or buy model for a given product or service, an organization is essentially applying another form of the third value lever we’ve covered, standardization.

Client Example: Pathstone has encountered several clients that have fragmented models for courier services which led to differing levels of staffing, service quality and cost, all of which can also make daily operations challenging to manage. In several of those situations, a decision was made to outsource courier services by working closely with key stakeholders across the health system, leading to more consistent service delivery and lower costs.

Key Success Factors

Develop Business Cases

Organizations that utilize a comprehensive business case to evaluate the pros and cons of an in-sourced or outsourced model will increase their chance of success. The business case is a fact-based tool that allows teams to have an open and objective dialogue when selecting the best strategy. For complex categories, engaging third parties to develop business cases can provide market information and objective analysis necessary to make the best decision.

Evaluate Program on an Ongoing Basis

Since costs, quality and performance of programs can change over time, organizations that continuously evaluate make vs. buy opportunities position themselves to generate more value over the long-term. Continuous self-assessment can uncover opportunities resulting from minor improvements in supplier relationships to complete transformations for an organization’s service delivery model. For example, one important question for an organization to ask about an insourced operation is: “What else can we do with these resources?” The opportunity cost of those resources can help identify alternatives that drive more value for the organization. Furthermore, alignment of the service with the organization’s overall mission should be evaluated.

Access to Market Intelligence and Best Practices

Hospitals that have conducted extensive market research are well positioned to evaluate existing outsourced or internal programs. Market intelligence on leading practice cost metrics and performance indicators can be an effective barometer to measure financial, quality and operational performance. Partnering with third party providers that can provide insight on market benchmarks can help an organization set the right targets to measure the competitiveness of existing programs.

Strategic Supplier Campaign

Pathstone Partners Chicago Health Care Consulting (19)

The client achieved over $3.5M+ in annual benefit in several key strategic categories.

Pathstone partnered with a large academic medical center, which included six additional hospitals throughout the system. After a three-year effort dedicated towards driving benefit across large, complex categories, leadership charged supply chain and Pathstone to drive remaining benefit opportunity quickly and ensure no stone was left unturned. “Speed-to-Value” became a frequent talking point in all client conversations and out of these conversations a Strategic Supplier Campaign was strategized, mobilized, and executed.

Throughout the first three years of the client engagement, Pathstone had successfully interacted with many suppliers through competitive bid processes and stakeholders through utilization and standardization initiatives. Though significant benefit was achieved through these efforts, it was clear that there were many additional suppliers that had opportunity to achieve price improvements.

Pathstone reviewed accounts payable data, contract expiration reports, pipeline activities, group purchasing organization (GPO) involvement and benchmark data to identify key suppliers to include in the Strategic Supplier Letter Campaign. Out of this review process, 105 suppliers representing $100M in total spend were selected for the campaign.

Having created a strategically focused list, Pathstone created a timeline to reach out to all 105 suppliers within one month of go-live. Prior to go live, a workplan with roles and responsibilities was developed with and agreed upon by client stakeholders.

The Strategic Supplier Letter Campaign had three primary goals that were communicated with the selected suppliers:

Review of Current Supplier Relationships: We provided a data request template within each communication to the suppliers. These templates allowed Pathstone and the client to evaluate the current utilization and spend, including comparing expected rates and spend against actual rates and spend.
Reduce Overall Costs: Included in the data request template was a suggested reduction in current rates. Pathstone utilized available internal and client-based benchmarking to determine this request. Suppliers had the opportunity to provide enhanced pricing within the data request template, which allowed for a real-time view of expected spend and benefit delivered to the client.
Solidify and Enhance Long-Term Partnership: Knowing that the list of 105 selected suppliers were strategic suppliers, many of which had been key partners of the client for multiple years, Pathstone’s client was offering to extend any active agreement for a select number of years if the supplier could meet the request.

As a result of Pathstone’s Strategic Supplier Campaign, the client was able to achieve the following results:

Achieved $3.5M+ in recurring non-labor expense reduction: The client achieved over $3.5M+ in annual benefit in several key strategic categories including Surgery, Cardiovascular, IV, Neurology, Spine, Respiratory, Patient Supplies, Wound Care, Laboratory, and Dietary.
Received accepted proposals from over 50% of suppliers within 4 months: Speed-to-value was a prominent theme for this strategy. Pathstone made concerted efforts to keep communication channels open with suppliers and review proposals as promptly as possible. Each week a list of proposals was brought to the client’s supply chain team for acceptance and then moved through the contracting process.
Identified $51K in overpayments: Pathstone carefully reviewed current contract rates versus rates provided in the data request template and identified over $51K in overpayments. Through conversations with 5 different vendors, the client received refunds for these overpayments.
Strengthen partnership with 63 suppliers: By the conclusion of the Strategic Supplier Campaign, Pathstone’s client received reduced rates and extended their relationship with 63 key suppliers across the system.
Confirmed Benefit: Pathstone worked directly with the supply chain, finance, and legal teams to confirm the benefit of each supplier’s proposal. A thorough review of these proposals was necessary to ensure the benefit being proposed fell within the client’s future operational plans. Pathstone actively communicated with impacted stakeholders to confirm the benefit before marking complete.

The Value of Strategic Alliances in the Hospital Supply Chain

Health Care Financial Consultant Alliance in Healthcare

What is a Strategic Alliance in Healthcare?

A strategic alliance can be defined as a form of mutually beneficial relationship or partnership between two parties focused on collaboration that achieves results for both organizations they wouldn’t be able to realize on their own. Strategic alliances are an increasing trend in the healthcare industry as a mechanism to achieve cost reduction and increase profitability. There is a broad spectrum of strategic alliances ranging from formal arrangements, such as joint ventures to more loosely affiliated collaborations.

Strategic alliances can offer the following benefits to an organization:

Incremental cost savings or revenue
Increased sustainability of long-term cost savings
Increased access to additional resources (knowledge, capital, etc.)
Expanded reach in the community through new partnerships

Key Opportunity Indicators

Minimal Investment in Outpatient Services

The healthcare industry is rapidly changing on a local level with competing hospitals establishing strategic relationships around the community, which can significantly increase competition for patients. With an on-going shift towards outpatient care in the market, hospitals continue to evaluate opportunities to increase outpatient offerings. Hospitals are often turning to suppliers for partnership opportunities to increase patient reach

Client Example: Dialysis services is an example where we see hospitals partner with the external service providers in joint venture arrangements with a goal of expanding offerings in the local market. Becker’s Hospital Review released an article, Joint ventures and collaborations across healthcare services (August 2017), which reported hospitals are increasingly turning to dialysis services as an area with clear benefits to hospital and supplier strategic partnerships. Since managing costs and the complexity of care for dialysis patients is difficult on both an inpatient and outpatient basis, it’s not a surprise that we see the industry leaders like DaVita and Fresenius partnering with hospitals across the country in joint ventures to deliver care. Negotiating such arrangements with competitive rates for dialysis inpatient services while also delivering competitive revenue share for the hospital through the joint venture is very challenging.

Strong Existing Supplier Relationship

Many hospitals have been successful capitalizing on a history of strong relationships with their suppliers by taking the relationship to the next level through creative new partnerships that deliver greater value for both organizations.

Client Example: Pathstone has encountered hospitals that have formed joint ventures with air ambulance providers that have been long-time service providers for those hospitals. In a service category such as this, hospitals have limited supplier choices in the market due to significant supplier consolidation over the years. When the two parties embark on a joint venture, one common goal may be the expansion of medical services to under-served areas that either the hospital or air ambulance company is challenged to serve on their own. By partnering, both organizations benefit from expanded market reach.

Merger and Acquisition (M&A) is Not an Option

Although M&A activity in the healthcare industry is occurring at an increasing rate, some hospitals are seeking alternatives that can still deliver the financial and operational efficiencies necessary to survive in the current market. M&A transactions are often very long, complex ordeals that come with heavy scrutiny of potential competitive implications, which we believe is one reason there is an increase in strategic alliances.

Client Example: Regional or local Purchasing alliances are becoming more popular across the country as an enhancement to hospital centric or national GPO purchasing. This is one example of hospital collaborations that can be achieved without formal mergers or acquisitions.

Key Success Factors

Align Goals

Ensuring a “win-win” mindset for all parties involved in an alliance is no easy feat. At the outset, the alliance must agree on their mutual purpose to keep everyone committed on a common goal and consistently seeking out the synergies for both parties, while still pursuing their individual organization’s goals. Many alliances will develop a charter and detailed workplans to keep on track. Sharing institutional knowledge and best practices can be invaluable to help each party achieve their mutual and individual goals.

Manage Conflict of Interest

Although collaboration in the healthcare industry is commonplace today, limitations do exist regarding those that can collaborate and the degree to which they collaborate. This is especially true for physician-hospital relationships because of Stark Law, where potential conflicts of interests can carry the threat of litigation and hefty fines. What makes matters more complicated is that Stark Law does lack clarity which is why you should pay careful attention to any relationships that may involve physicians. For example, we sometimes encounter hospital employed nephrologists that enter into partnerships to open dialysis outpatient clinics in the same town. On top of this, the hospital that employs the nephrologist sometimes engages in a joint venture with the nephrologist partnership for the dialysis outpatient clinic. This is especially complex and needs to be managed appropriately because the situation runs the risk of having business interests interfere with patient recommendations for outpatient dialysis services.

Maintain Effective Leadership

The right leadership is a key success factor for strategic alliances. Without this the best designed and well-intentioned alliance will often fail. Collaborative leadership teams that effectively utilize Steering Committees to manage key decisions should be required to help work out any issues and review progress towards the mutual goals.

The Value of Utilization in the Hospital Supply Chain

Health Care Financial Consultant Supply Chain 02

What is Utilization in Healthcare?

Utilization can be defined as the extent to which hospitals are making use of products or services. Many hospitals have historically focused on savings related to pricing and standardization. However, with seemingly relentless financial pressures and complexities of the healthcare supply chain, utilization opportunities are the next wave to spark interest of savvy hospital executives.

Opportunity for improvement in utilization can exist due to over, under, or improper use of a hospital’s goods, equipment or services. Being able to conduct an accurate assessment of current operations to determine if utilization opportunities exist is a challenge for most hospital leaders due to several factors such as unreliable documentation data and constantly evolving market options for products and services.

Successful implementation of utilization opportunities delivers the following benefits to an organization:

Financial benefits ranging 7-15% depending on the category
More efficient use of time and resources
Discovery of other deep issues within a category, often quality related

Key Opportunity Indicators

Poor Asset Management

In today’s environment, hospitals have a broad mix of assets across the organization. Understanding the true total cost of those assets is a challenge. Total cost of ownership for each asset includes not only the acquisition cost but also ongoing expenses related to maintenance, service and consumables. Furthermore, with hospital service lines experiencing continuous evolution, it’s difficult to maintain current lists of assets, let alone track service and maintenance records. As a result, an organization may find many inefficiencies or low returns on investments when true total cost of ownership is revealed.

Client Example: In our experience, clinical engineering often comes up in client discussions as an area to review due to its costly asset acquisitions, large asset inventory, and significant recurring spend on service and maintenance. Optimizing service levels on under-utilized or low-risk devices can drive utilization improvement. As an example, in outsourced maintenance agreements for ultrasounds, there may be significant savings to move from a platinum to silver or bronze support levels when in-house maintenance capabilities exist or sufficient inventory is available to swap out devices as equipment downtime occurs.

High Volume of Add-on Charges

For outsourced services, expenses can mount quickly due to “add on” charges for line items such as over-time, out of scope requests, volume commitment penalties, etc. These situations can result when service requirements were not anticipated when the agreement was created or if an organization experiences operational changes that impact how the services are now used. For these reasons continuous utilization reviews are important.

Client Example: Within our client’s clinical purchased services spend, such as dialysis, we discovered a high volume of “delay” charges that increased over several years. This led us to identify an operational bottleneck that was occurring with the patient transport process for treatments performed in the dialysis suite. Once the problem was understood, the transport process was redesigned, resulting in improved patient flow and a significant reduction in delay charges.

Misalignment with Key Performance Indicators (KPIs)

Although the process for determining utilization opportunities does not rely on data alone, using Key Performance Indicators (KPIs) to monitor high level utilization trends is helpful. KPIs are multi-dimensional, data-driven measurements of key operational data that highlight performance relative to targets and help measure productivity in healthcare organizations. KPIs are a good first place to look for unfavorable utilization trends that may be a symptom of a larger underlying operational issue. We find implementing a KPI reporting tool that ties operational performance to cost can bring more awareness to potential utilization improvement opportunities and ultimately help drive and sustain change.

Client Example: Appropriate linen utilization is a common issue for many hospitals, and an opportunity that our clients typically believe exists based on operational practices they witness. However, determining just how much utilization opportunity there is can be difficult to pinpoint. In our experience, a KPI that effectively measures linen utilization levels, including linen loss, reported in a metric of pounds per adjusted patient day helps our clients identify utilization improvement opportunities.

Key Success Factors

Establish Multi-Disciplinary Teams

Discovering utilization opportunity requires a long-term, multi-faceted approach more complicated than identifying opportunities in pricing or standardization, which are common focuses for traditional value analysis teams. Therefore, it helps to have a dedicated team that understands the nuances of the specific utilization elements. Multi-disciplinary teams including nursing, finance, support services and supply chain are most effective. For many organizations, engaging a third party to determine team composition, establish charters, facilitate initial meetings and help cultivate working relationships on the team, has been very beneficial to expediting efficient and effective utilization projects.

Leverage Multiple Tools and Processes

Identifying utilization opportunities is a comprehensive evaluation process. There is no one tool, process or metric that leads to successful utilization-based initiatives. It is often a combination of many tools that effects sustainable change over the long-term.

Find the Right Change Agent(s)

One of the most difficult aspects to pursuing utilization opportunities is effecting lasting operational changes. Once opportunities are identified and an implementation strategy is defined, an important next step is gaining support of those involved in the operation that change is necessary. An influential leader that can gain organizational support for change – whether it is a change in practices, processes or technologies – is crucial for transformation. Individuals need to feel well supported in the direction the organization is taking, especially when that direction requires change. Success will be elusive without stakeholder buy-in and support.

Improve Continuously

Continuously re-evaluating operations by looking to leading practices inside or outside your organization is important to maintain proper utilization. Take advantage of healthcare industry associations, roundtables and whitepapers that are regularly published to stay aware of key trends. Utilization opportunities, unlike pricing, are not proprietary and can typically be shared through collaborative discussions with peers.

Breaking Down the Common Types of Expenses in Hospitals

Importance of Cost Management in Hospitals

Technology, new discoveries, demographics, regulatory factors, and new models of care keep the healthcare industry in a constant state of fluidity. The United States spends $4.3 trillion a year on healthcare expenses and the U.S. hospital facilities market size is expected to reach $2,540.4 billion by 2030 and to expand at a compound annual growth rate (CAGR) of 7.62% over the forecast period.

Hospitals need to manage expenses and revenues to remain operationally efficient. The pandemic has put high pressure on costs whilst driving revenues down. With elective procedures cancelled or postponed and hospital visits restricted to only necessary ones, hospitals hemorrhaged revenue making cost control vital.

Breaking Down the Different Hospital Expenses & Costs

Hospital costs breakdown can be broadly categorized into labor, capital, administrative, operating costs, nursing services, and professional services.

Wages, Benefits, and Labor Costs

While percentages vary from hospital to hospital, across the board the biggest expense for hospitals are wages and benefits which on average account for 56% of the total expense of a hospital. It is nearly 5 times more than any other category, with the second largest expenditure being professional fees at 11.9%.

Wages and benefits costs are further expected to rise largely stemming from the effects of the COVID-19 pandemic. Doctors and nurses have left the healthcare system due burnout or illness and as a result, labor costs have risen and forced hospitals to sustain services through expensive contract labor. Compared to pre-pandemic levels, hospitals saw their expenses for travel nurses increase tenfold. An article by Healthcare Dive stated that one third of nurses are expected to quit their jobs by the end of 2022 due to burnout caused by the pandemic and the stress being put on them with increased demand for their services. In the next decade, the United States will be short of nearly 122,000 physicians by 2032 according to 2019 data published by the AAMC (Association of American Medical Colleges).

The next decade will bring additional challenges as demographics indicate that by 2029, more than 71 million Americans will be 65 or older while roughly one million registered nurses are already more than 50 years old. Thus, in the next 10 to 15 years, one-third of today’s nursing workforce will reach retirement age. Nearly 700,000 nurses are projected to retire or leave the labor force by 2024 at a time when the need will be higher.

By 2025, estimates indicate that more than three million nurses may be needed to care for the population, however, the national supply of nurses is projected to only reach 2.8 million by 2025 leaving a gap of 250,000 nurses. This shortfall between supply and demand is expected to drive additional wage increases in future years.

Overall, these factors will therefore continue to keep the wage and benefits category the highest cost and largest challenge for hospitals.

Areas such as information technology (IT), non-clinical and clinical purchased services and supplies, laboratory, and pharmacy costs represent up to 60% of hospital operation expenses.

Supply Costs

One major cost head is supply including medical devices. Supply costs include products such as medical equipment, laboratory supplies, machinery, operating tables, linens, food, wound dressings, and intravenous solutions. On average, these expenses make up 15% of total expenses but can go as high as 30-40% in surgery-intensive hospitals. While these products are necessary to hospitals, research has shown that hospitals spend on average an excess of $12.1M on supply-chain costs. The pandemic added additional items to the supply list. According to an article by Fierce Healthcare, hospitals have spent more than $3 billion on PPE kits from the beginning of the pandemic.

Hospitals in the US rely on global supply chains especially in the medical supplies category. Everything from masks to devices come from across the globe. Previously established relationships and contracts with distributors are disrupted with supply chain issues with factories and vendors shutting down operations. Consequently, hospitals have had to readjust systems leading to price escalations. Between fall 2020 and early 2022 costs for energy, resins, cotton, and most metals surged more than 30%; these all are critical elements in the manufacturing of medical supplies and devices used every day in hospitals. Global events such as the war in Ukraine, lockdowns in China and rising transportation costs continue to have fuel these cost increases and delays in deliveries. According to the Health Industry Distributors Association, transportation times for medical supplies are 440% longer than pre-pandemic times.

Specialist Fees

The next large cost center impacted is professional fees which are linked with specialists that usually run private practices but are attached to hospitals to provide expert opinions on specific medical cases, teach residents, and work at clinics. These fees are also often associated with doctors within the hospital that are specialized in fields such as anesthesiology, radiology, or pathology.

Technology Costs

An emerging cost area is technology with hospitals needing to constantly invest in newer digital health technology to ensure their patients get the most adequate care, especially with the new norm being virtual checkups and an increased demand for telehealth. Beyond that, while technology investments could be expensive, long-term efficiencies could help control costs. Emergent technologies such as robotic automation could help innovate and manage costs.

The Future of Hospital Costs

In conclusion, expenses will continue to exert pressure on hospital margins. Hospital administrations have a challenging decade ahead of them and they will need to consider strategies to optimize labor costs, reduce fixed costs and invest in new technologies to gain efficiencies.

Pricing in the Hospital Supply Chain

Health Care Financial Consultant Medical Billing 02

What is Pricing in Healthcare?

Pricing opportunity can be defined as optimizing the price paid for a good or service, which can be achieved through incumbent supplier negotiations or competitive sourcing activities. Accurately identifying pricing opportunities can be challenging due to several variables such as unique product/service specifications, quality, volume, technology advancements, and local market factors. As a result, most benchmarking exercises can leave hospital leaders with misleading perceptions of price competitiveness. Although pricing may be viewed as a straightforward value lever that is routinely reviewed by hospital supply chain, Pathstone finds many hospitals have yet to maximize pricing opportunities in more complex categories such as various clinical and non-clinical purchased services.

Successful implementation of pricing opportunities delivers the following benefits to health systems:

Financial benefits ranging 5-25% depending on the category
One of the quickest and least disruptive paths to financial improvement
More visibility into cost drivers of goods or services

Key Opportunity Indicators

Supplier Relationship Not Reviewed

If your supplier contract has not been evaluated for price competitiveness in the last 3-5 years, this can indicate there may be opportunity. Supplier relationships with hospitals can change over time. Expansions of supplier scope in an organization can be an advantageous leverage point to bring into the pricing negotiations. Furthermore, supplier markets evolve and change the dynamics of how they do business with their hospital clients. Many clinical areas, for example, are impacted by demographic changes (e.g. aging baby boomers), population health challenges (e.g. new diseases) or development of new technology (e.g. telehealth), all of which may affect the demand for certain supplies or services. As a result, continuous vigilance is important.

Client Example: In our experience, perfusion services is an example of a complex area that is challenging to identify pricing opportunity for many of our clients. The demand for perfusion services has been growing driven by the increase of open-heart surgeries for an aging population. As a result, many hospitals have seen their perfusion service volumes jump by 30-50% over the last several years. In such situations, Pathstone can help clients evaluate pricing opportunities with current market intelligence across our widespread client base.

Not in-line with Price Benchmarks

One common indicator of opportunity is identifying higher pricing when benchmarked against peers. Utilizing available resources such as group purchasing organizations (GPOs) or databases to perform the benchmarking can provide a good directional perspective on potential pricing value. However, hospitals should proceed with price benchmarking cautiously. Our experience has shown that when hospitals have the ability (often through third-party partnerships) to contextualize and customize benchmarks – this creates the best data and ultimately drives the most value.

Client Example: Benchmarking services are anything but straightforward. Pathstone often helps our clients benchmark their services both internally and externally. Pathstone provides external price benchmarks that are contextualized based on the health system’s volume, geography, specific service requirements, and unique operational considerations to determine an accurate and tailored cost savings opportunity.

Hospital Growth and Expansion

Within the healthcare industry, hospital consolidation and integration activity has been increasing. If integration has already occurred or may be imminent for your organization, then it presents a ripe opportunity to re-evaluate pricing for goods and services. Through integration, your volume may change (likely increase) which creates leverage to help drive more competitive pricing.

Client Example: Pathstone has worked with hospital systems that have merged, acquired new sites, or expanded service lines. A benefit of any consolidation activity is the ability to combine purchasing activities of two different organizations to create leverage with suppliers. For example, a newly merged health system was using two different dialysis service providers, and in turn, had varying pricing for the same dialysis services. In some cases, hospital sites were even using the same service provider through separate contracts but with very different pricing. Consolidated purchased volumes in the newly merged health system created leverage to negotiate better pricing with the chosen provider.

Prices are Higher than Reimbursement Rates

For certain goods or services where the hospital is receiving reimbursement, it can be a beneficial exercise to compare pricing against reimbursement. If the pricing is significantly higher, this data point can potentially be leveraged in supplier pricing negotiations.

Key Success Factors

Maximize Resources

Hospitals have a variety of resources at their fingertips but determining how best to maximize those resources is challenging. The use of Group Purchasing Organizations (GPOs), market databases, and/or consultants seem to be some of the best options for a hospital to obtain benchmarking information. Appropriate use of this information can create valuable metrics for internal KPI tools to identify opportunities.

“Test” the Market

There are various approaches your organization can take to “test” the market. A competitive process like a Request for Proposal (RFP) or Request for Information (RFI) are common approaches. At times, just the initiation of a competitive process can motivate your suppliers to provide a significant reduction in current pricing in hopes you avoid looking at competitors. However, when going to the market an organization needs to have conducted its initial due diligence on the market and have an appetite for potential supplier conversion

Find the Right Fit

Hospitals often struggle with finding a quality product/service at the right price but also one that fits that organization’s needs. When pursuing price opportunities, it is important to maintain focus on quality. Establishing cross-functional work teams that can evaluate both pricing and quality is key. Additionally, developing service level metrics can help reinforce quality expectations with suppliers. Lower prices don’t always mean it will yield lower quality. Quality can remain the same or improve while pricing decreases as long as the work team maintains focus on this balance.

Benefit your Supplier

Obtaining the most competitive price is usually the result of a mutually beneficial partnership with your supplier. It is important to understand your supplier’s goals and look for ways to benefit your supplier through your relationship while still achieving your financial objectives. Challenge yourself as the customer to provide feedback to your supplier not only on the areas that require improvement but also on the areas in which they have met or exceeded expectations.