Healthcare Market Transformation Must Continue in 2012 for Improved Long-term Viability

The healthcare market has dominated headlines for the past three years and with the Supreme Court scheduled to review the healthcare reform act, 2012 should be no different. Regardless of the outcome (of the Supreme Court review), there is general consensus that the healthcare marketplace must continue to transform in order to remain viable for the citizens it serves. GHX, a healthcare technology and services company that brings together the majority of supply chain trading partners to electronically conduct their business transactions, is predicting key inflections in the market that will move healthcare closer to long-term sustainable health.

GHX anticipates that the healthcare marketplace in 2012 will show increased provider consolidation; healthcare delivery organizations will experience a "repricing" as they move into requirements of healthcare reform; hospital supply chains will be centralized to maximize efficiency; hospitals will increase focus on quality in order to achieve cost reduction; and both providers and suppliers will be examining ways to increase trust, a current inhibitor of healthcare market transformation.

"Healthcare is a complex industry and changing the way business is done to ensure the viability and success of the hospitals and medical suppliers is a daunting challenge," says Bruce Johnson, president and CEO of GHX. "Never before has the industry been on the brink of such change, planning for the bold moves needed to achieve long-term fiscal health so it can continue delivering high-quality care and products to patients. In keeping with this environment, I see GHX on the threshold of change, as we prepare to deliver new solutions that will meet the evolving needs of the industry."

1.     Provider Consolidation
In the coming year, hospitals and care providers will need to coordinate patient care to promote long-term wellness, while delivering quality care in a cost-effective manner. This requires much more focus on the patient over time and across delivery organizations, as opposed to the more common historic view that has looked primarily at specific episodes of care delivered by a specific provider.

Consolidation will enable single, albeit larger, organizations to deliver a broader range of care at many levels of acuity and in more locations, from the doctor's office, to the operating room, to the retail clinic and even to the patient's home or place of work. This move to create more integrated delivery networks (IDNs) will accelerate in 2012, perhaps to a level not seen since the introduction of diagnosis-related groups (DRGs) in the early 1980s. Some industry analysts have predicted the number of independent organizations could decrease by two-thirds over the next 10 years. Merger and acquisition statistics shortly after passage of the healthcare reform bill support this prediction, with M&A activity among healthcare providers up 20 percent in the third quarter of 2010, compared to the same time period the year before. 

2.     Industry Repricing

Under healthcare reform, hospitals must survive on what Medicare pays them, which currently only covers about 87 percent of the actual cost of care and is declining. Many experts and industry analysts predict the overall impact of healthcare reform will result in a 20 to 30 percent reduction in the average hospital's cost structure.

Significant expense is also being incurred to install and demonstrate meaningful use of electronic health records (EHRs). Although the federal government has promised to reimburse those who achieve meaningful use within specific timeframes, many estimate those reimbursements will fall short of the real cost of implementation. Further, those who cannot achieve meaningful use will be penalized. Of greater concern to many is whether or not EHRs will truly deliver on the promise. 

These pressures will result in repricing services and products as providers and suppliers work to adjust to the changing reimbursement schedules to remain sustainable.

3.     Supply Chain Centralization
The supply chain represents the second largest and fastest growing operating expense for most hospitals. The challenge in reining in supply chain costs is that most hospitals have historically focused their efforts on lowering the price they pay for products, which is only part of the cost. They've not yet fully explored ways to reduce direct and indirect coststhings like error-ridden manual processes, discrepant data, logistics and inventory carrying costs, to name just a few. Gartner Research says supply chain represents 40 to 45 percent of hospital or healthcare system operating expense and these organizations can reduce those costs by 5 percent to 15 percent if they better analyze, plan and control the purchase and use of goods and services.

Hospitals are increasingly relying on supply chain leaders to work cross-functionally with teams around their organizations to reduce costs. This in turn is resulting in consolidation of what have historically been multiple, separate supply chains within a single organization. This consolidation can result in business process automation for lower costs, more extensive contract management and product standardization and the return of clinical time to patient care instead of supply ordering and management.

4.     Quality Focus for Cost Reduction
Healthcare suppliers and their vendors will need to focus more on bottom-line growth in 2012, which can be achieved through better operational performance. It also requires a focus on quality patient care as a means to reduce costs. According to Dale Locklair, vice president of supply chain and construction for McLeod Health, "When I focus on quality, I can reduce costs. The reverse is not necessarily true."

Research conducted by the Dartmouth Medical School reported that the quality of care delivered in regions of the U.S. where healthcare spending is higher per capita is not necessarily better. Healthcare providers who deliver quality care also deliver that care at a lower cost. In healthcare, quality care is less about the type of care provided and more about whether it delivered better health to the patient. These providers need access to data on the treatments (and in some cases supplies) that improve outcomes and at what cost. In order to improve quality while lowering costs, the industry must move toward standardization of business processes. 

5.     Improving Trust
Lack of trust between hospitals and suppliers has historically hampered the industry's ability to lower the cost of doing business and, in turn, the cost of healthcare. Both hospitals and suppliers are having more difficulty growing revenue. With lower reimbursements a certainty, hospitals are hard-pressed to pay more for products, unless they can be proven to lower hospital-acquired infections, readmissions and other factors influencing reimbursement levels. The bridge to this relationship is the supply chain.

This conversation between providers and suppliers will become one that is focused less on where they disagree and more on how to navigate an uncertain, but certainly challenging, future course together. This trust equation has the potential to make a measureable difference in performance and quality.

Gartner Research has noted that SG&A costs for healthcare suppliers are nearly twice those of companies in other industries recognized as having highly efficient supply chains.