Maximizing the Supply Chain During Acquisitions and Closures

This article was written by Bryan Covert.

VIE Healthcare Consulting has worked with health systems to maximize the supply chain during acquisitions and closures since 1999. During that time, we have seen firsthand the dramatic changes in the US healthcare provider landscape, which continue today at a rapid pace.

Mergers and acquisitions deals broke volume records in 2018, fueled by cross-industry alliances, regulatory uncertainty, reimbursement pressure, and increased consumer focus. VIE Healthcare anticipates this consolidation trend to continue.

Why do healthcare systems expand?

Healthcare systems expand for numerous reasons…to provide coverage in new areas, provide a higher level of patient care, or in a continued effort to increase purchasing and operating efficiencies.
The shift is clearly demonstrated in the following statistics:

• In 1995, only 51 percent of private acute hospitals were part of a health system.
• This figure rose to 57 percent by 2000.^[1]
• By 2016, almost 70 percent of non-federal general acute care hospitals belonged to a health system or network of at least one hospital connected via ownership to at least one physician group.^[2]

Whether your health system is acquiring a new location, or closing or selling a current facility, one trend is always prevalent; the expectations and visibility of the purchasing department increase tremendously.

Managing expectations

Prior to any decision to expand or close a healthcare facility, an exhaustive analysis must be performed on both operational and pricing efficiencies. Expectations arise on how the system can better use its market power to consolidate services and leverage better pricing. These roadmaps are usually created from a high level and become very directional.

When the deal is executed and implementation begins, these savings expectations are passed on to your supply chain. It is at that point that achieving projected savings becomes a challenge.

In most cases, medical surgical supply and Physician Preference Items (PPI) are typically mapped out to identify areas of potential consolidation. Vendor consolidation in PPI spend is a very effective way to drive savings but can be extremely difficult. Most likely, your supply chain team is already aware of and has analyzed several initiatives at your current locations that would provide tremendous savings but has not been able to execute them.

These types of savings opportunities are often front and center on any acquisition savings roadmap. Often, they make up a large percentage of the projected savings plan.

For example, if your organization purchases a specific surgical implant for $3,500 each and the facility you are acquiring purchases 300 annually of a competing vendor’s product for $4,300 each, the roadmap may show a savings of $240,000 annually. 

Projecting these savings is easy but achieving this result post-merger requires a sensitive PPI conversion, which a supply chain director cannot make alone. This is a time-consuming process that requires your supply chain to be aligned with senior leadership to garner the support of the physicians.

Common roadblocks to purchased services savings

These types of roadblocks will exist throughout the entire acquisition, especially surrounding purchased services. For this reason, it is important to identify, anticipate, and have the resources and a plan in place to work through them.

The common challenges we see in purchased services include:

The need for analysis: Purchased service transitions are very difficult to evaluate from a bird’s eye view. In some cases, the same vendor may be providing an array of services. When this occurs comparing costs from a high level will often exclude very important considerations.  For example, an outsourced rehab provider may also be moving patients. It is important to have the resources in place, and the time to properly evaluate and vet these opportunities.

Not all purchased services agreements are structured identically: An EVS (Environmental Services) cost metric may not take into account how supply purchasing responsibilities are divided, or consider that a hybrid approach was implemented regarding who employs the EVS productive staff. A high-level outsourced dialysis review may point to a 25% opportunity in your case rates, however, it may not have taken into account that your current service provider has a footprint in your new market and is willing and able to launch a program there.  Furthermore, the dialysis case volume in your new location may not afford the vendor the opportunity to use supporting techs. The situation becomes more complex if all cases are being performed solely by a registered nurse.

Collaborate with an experienced partner
Having a strong plan and an equally strong purchasing department is crucial to achieving the organizational cost efficiencies that drove your health system’s decision to expand into a new location. At VIE Healthcare, we recommend:

• Working with strong partners and ensure your supply chain team has the resources to succeed.
• Your team should set realistic goals and timelines for savings and allow them enough of an opportunity to evaluate vendors and test the market. Having an expedited timeline without the proper resources to accomplish savings means falling short of your targets is almost inevitable.

The dynamic of your cost initiative can quickly shift from savings to making sure you have contract coverage and signing deals that are not market competitive.

As the trend of healthcare consolidation continues, acute providers with significant uncompensated care costs and low volume are finding it increasingly difficult to operate in isolation. Increased purchasing power and market efficiencies are large contributing factors to these decisions to expand, but in many cases, savings fall short of initial projections, especially savings projections in relation to purchased services.

During these initiatives, it is important to work with experienced partners who can ensure that you project achievable numbers, create a realistic timeline, implement an effective strategy, and can execute.
Find out how VIE Healthcare can help your health system to execute and achieve your projected savings. For a complimentary consultation, call our office today at 1-888-484-3332, Ext 500 or email us at info@viehealthcare.com.

[1] https://www.healthaffairs.org/doi/full/10.1377/hlthaff.24.1.213
[2] https://revcycleintelligence.com/news/health-systems-responsible-for-70-of-acute-care-hospitals