Reinforcing healthcare delivery with a supply-chain management perspective

It’s popular to repeat the Drucker mantra of “Do what you do best, and outsource the rest.” However, not all nonprofit hospitals have this option or can afford to pursue it. The result is they are stuck fixing the problems.

Let’s assume EPIC is not practical, and the Cerner end-to-end solution is out of the budget. A recent study identified that only 45 percent of hospitals were profitable. U.S. healthcare spending increased 5.3 percent in 2014, reaching $3 trillion, from which $971.8 billion was through hospital care and services, with primary sources of health spending originating from Medicare, Medicaid, private health insurance and out-of-pocket payments by individuals. Most hospitals don’t have extra money to “just outsource it.” Even planning to outsource takes time and money, both of which are rare commodities within a hospital system.

There are 12 areas where the synergies of supply chain management and healthcare management align. Today we’ll be covering the last six synergistic areas of alignment. My previous post covered the first six.

Here are the 12 areas of synergy:

1. Microsegmentation: Consumerization
2. Point-of-sale: Point-of-care
3. Servitization: Person-centered primary care
4. Value-based supply chains: Value-based reimbursements
5. Reverse logistics: Patient readmissions
6. Manufacturer list price: “Chargemaster” or provider list price
7. Product volume discounts: Patient volume discounts
8. Design of products: Design of care
9. Cost-to-build: Cost-to-serve
10. Product commoditization: Population health
11. Removing intermediaries: Cost-out initiatives
12. Direct-to-consumer: Direct-to-patient

7. Product volume discounts: Patient discounts

Tiered or volume-based pricing offers various price points depending on the volume. The incentive for buyers is to tie up with larger contracts under the anticipation that volume will help drive a lower price per unit. From books to lodging, volume discounts introduce new pricing options for volume buyers. If purchases are not made in bulk, the cost is higher and no discounts are provided.

Health insurance helps to protect members from the high costs of healthcare services. Discounts are applied when members use preventive services. This utilization helps transfer cost from the insurer, helping to underwrite a lower-risk policy. Do a health assessment, save $100 annually. Complete your annual physical, save $75. Track your steps daily, save another $250 a year. Stop smoking, save $200 a year. The savings provided appear to be a discount. However, it’s actually a fee. Members who don’t do a health assessment or the other “voluntary” services will pay more each year. A total of $625 to be exact. This of course is a hypothetical example, but probably not far off the mark. If health insurance is not purchased in bulk (with similar population characteristics) the cost to purchase is higher, and discounts will be not provided to the member.

8. Design for products: Design for care

Product design identifies the problem and creates, designs and validates the solution. Good manufacturing product design involves interaction designers, graphic designers, user researchers, data analytics specialists, prototypers and business strategists. Product design is not a single activity, it’s a process that evolves over time.

“Design for care” is a new system for well-being to reduce unnecessary provider admissions. It’s a reinvention of care for the 21st century that is more personalized, more connected, and more focused on prevention. We’re addressing the costs in healthcare, and we’re addressing the healthcare environment. Design for care addresses the one thing we do not address in healthcare — a mindset of designing care for people, practitioners and societies. Technology won’t save healthcare. People will. People like you. People like me.

9. Cost-to-build: Cost-to-serve

Manufacturing cost estimates and product development strategies factor into the cost-to-build. Cost-to-build answers the question “How much will it cost to build a product, service or interaction?” There could be some product positioning and strategy cost. Add in the corporate branding and packaging design costs, and it’s assumed the other four parts of the supply chain have already been taken into account. Cost-to-build gives insight on price-per-unit and gives visibility into the profitability of individual customers and products. In a healthcare environment, we’re concerned about the cost-to-serve, or the total cost incurred to fulfill patient requirements for treatment through the healthcare supply chain.

The total cost of ownership and the total cost of service hint at this. But insurers refer to cost-to-serve as per-member-per-month (PMPM) cost. Often this infers capitated payments as in the case of a health maintenance organization (HMO) where an insurer pays a fixed fee per member each month regardless of the complexity or volume of health encounters (visits). Provider reimbursement has become more complicated with the introduction of relative value unit (RVU). In general, hospital cost accounting tools give providers the ability to calculate the cost per unit of service.

10. Product commoditization: Population health

Product commoditization can be roughly defined as a process to associate goods with an economic value to distinguish regarding attributes (uniqueness). The result? These goods become a commonplace in the minds of consumers. In essence, the differentiation between the manufactured goods is virtually nonexistent. This changes the selling process to focus on price, not the brand. The negligible distinction between products creates a price obsession: Cheaper is better.

Population health is healthcare’s fanciful obsession with price. The concept is that the outcome of a group of patients is more important than the health of a single patient. This works swimmingly efficiently most of the time. Well, unless you’re that unique patient for whom the aim of improving the health of an entire population doesn’t apply. Your uniqueness varies cost and disrupts the model — healthcare delivered as a commodity.

11. Removing intermediaries: Cost-out initiatives

Disintermediation eliminates the middleman from business transactions and by doing so improves the value of existing products, services or interactions. In the case of manufacturing, disintermediation removes distributors, brokers or agents from the supply chain. The result is the supply chain contracts and a piece of the cost is removed. (That’s the way it’s supposed to work.)

However, intermediaries can add value. For example, the cashier at the grocery store saves you from having to make a trip to the farm to get milk. We accept some additional costs in exchange for added convenience.

With healthcare, it gets complicated. What do we remove? The call center that we call when there is a problem? We could go directly to the provider, but the call center offers us convenience and the ability to call from home. How about we eliminate the third-party billing process? Here we have economies of scale, and costs might be lower by leveraging their services. What about the payers or insurers? Earlier we discussed servitization, and offering services to extend product functionality. Dental offices, small practices and even large providers are offering health insurance directly to patients. This model has fewer systems to maintain, fewer touches with patient data, and at least one process step is removed. This approach cuts costs by reducing shared functions — e.g. information technology, human resources and financial functions.

12. Direct-to-consumer: Direct-to-patient, e.g. generic drugs

Direct-to-consumer (DTC) is an approach to promote a product from the seller to the buyer. Many retail organizations with substantial production and manufacturing supply chains are investing in this strategy. Consumers receive a better experience, and the organization can build a brand relationship with the consumer. The seller also has immediate access to customer data. Gaining consumer intelligence, building authentic engagement and establishing a new relationship with customers makes this approach appealing to manufacturers.

Direct-to-patient is frequently used within pharmaceutical segments that distribute branded and generic drugs and over-the-counter healthcare straight to consumers. A shift in direct-to-patient specialty distribution is driving more demand for consumer healthcare products for retail pharmacies.

Innovation requires long-term collaboration to lower costs and increase value. We, the patients, thank you in advance.