Dear CEOs:
It’s only fitting that our attention turns to evolution during this month when Charles Darwin would celebrate his 200th birthday. But I’m not writing about finches on the Galapagos Islands. Instead I want to focus on the evolution of the hospital business model and the reasons we need to make the supply chain a key piece of our overall strategy.
This is an open letter to hospital CEOs. I’ve worked with hospitals for more than 25 years, and so – like you – I’ve experienced the days when clinical decisions ruled and payments covered expenses and provided us modest margins. Throughout the 90’s I watched the advent of managed care and capitation, the alarming decline of our bottom lines, and the resulting mergers and acquisitions to align with physicians and capture market share. Reimbursement descended into a complex maze of payer contract negotiation, coding optimization, even congressional lobbying.
It was an era of consolidation, fueled by the realization that only the biggest among us could negotiate sustainable payer contracts and achieve economies of scale in overhead and supply expense. The age of the integrated delivery network (IDN) emerged.
The IDN concept was indeed well adapted to its new environment, but we all see that conditions have begun changing again. We now find ourselves caught in a vise between declining reimbursement and increasing supply costs. The squeeze is on, and our industry is being forced to reevaluate our current business models to determine a strategy to evolve and survive.
Over the past two years, I’ve watched as many IDNs have gone into survival mode. They have begun spinning off unprofitable facilities, recognizing the need to insulate themselves from losses, even if it means giving up hard won market share. This may be necessary, but it certainly doesn’t constitute a long-term strategy.
Today’s healthcare environment requires hospital CEOs to balance expansion with smart cost containment. To accomplish this, we must make the supply chain strategic. It’s no secret that supply costs represent the largest operating expense after personnel, and in some IDN’s the two have reached parity. When supply costs are combined with “services contracts” (by this I mean everything from lawn maintenance to physician contracts), the total expense typically doubles.
It’s no longer acceptable to limit the materials managers’ role to ordering and delivering product. Their position must evolve along with our pressing need to control expenses. Supply chain executives belong at the table when the hospital makes its most important strategy decisions.
Over the next few weeks I'll explore with you what our hospitals can do to evolve and adapt to this new world by focusing on cost controls. We will discuss what it means to elevate supply chain executives to key roles. We will explore why you should invest in your supply chain to gain long-lasting benefits. We will look at the value analysis process and what senior executives can do to support materials management as they work to rein in the ever-inflating costs of clinical preference items.
I’m eager to host this learning series, and I hope you’ll participate in it with me. I look forward to sharing my thoughts with you and hearing about yours in return. At any point, please give me your ideas on making the supply chain and cost reduction a strategic priority in healthcare. Also, if you have any stories about ways you’ve accomplished this in your organization, I would love to hear them.
Sincerely,
Mike Merwarth



