For more than 50 years, hospitals, healthcare systems and integrated delivery networks have depended on price concessions, standardization and their group purchasing organizations to provide the fire power necessary to keep reducing their healthcare organization’s supply chain expenses.
This strategy has worked superbly up to a point, but now all healthcare organizations have reached what is called “The Law of Diminishing Returns” where even more effort to save money translates into less savings being generated from these three savings sources that I just mentioned. We consider this scenario the narrow path to supply chain expense savings, while the “long tail” should be regarded as supply utilization.
Narrow path
Unfortunately, these tried-and-true savings tactics (price, standardization and group purchasing) are clustered close to the Y-axis (or narrow path) of the “long tail” shown in Exhibit A resulting in only a trickle of savings because these sources of savings have greatly matured.
Yes, I know that all healthcare organizations have worked even harder over the last few years on group buys, reverse auctions and committed volume programs, etc., to improve their price position, but these tactics haven’t moved the needle on savings at these healthcare organizations. As proof, just look at your healthcare organization’s profit and loss statement.
The “long tail, a concept developed by Wired magazine editor Chris Anderson, and explained by Margaret Rouse of Whatis.com, “is a frequent distribution pattern in which occurrences are most densely clustered close to the Y-axis and the distribution curve tapers along the X-axis. The long tail refers to the low-frequency population displayed in the right-hand portion of the graph (Exhibit A) represented by a gradual sloping distribution curve that becomes asymptotic to the X-axis. In most applications (of the concept), the number of events in the tail is greater than the number of events in the high frequency area, simply because the tail is long.” Now that we have examined the theoretical long tail, let’s see how this concept can be applied to the supply chain expense continuum.
Long tail
Moreover the “long tail” or X-axis in Exhibit A provides a greater number of new utilization savings opportunities in the range of seven to 15 percent, than the number of new savings opportunities in the high frequency area or the Y-axis, which calculates to be 1 percent to 3 percent annually.
For example, I’m sure you receive 500 or more new or renewal GPO contracts annually from your GPOs that may save you 1 percent to 3 percent of your total supply chain expense budget. Similarly, 100 utilization misalignments (i.e., wasteful and inefficient consumption, misuse, misapplication or value mismatches) could be identified over a longer period that will save you 7 percent to 15 percent of your total supply chain expense budget. Get the idea? The “long tail” provides a greater number of big savings opportunities in the long-term for your healthcare organization, than the higher frequency area.
This begs the question, where should Supply Chain/Value Analysis leaders be spending their limited time? It is obvious that you should be focusing on the “long tail” of supply utilization. This doesn’t mean that you ignore the high frequency areas price and standardization, but you also focus you value analysis teams’ efforts on utilization management.
Supply utilization/value analysis connection
After 17 years of specializing in supply utilization management, we have discovered that value analysis teams have the best opportunity to investigate and then eliminate their healthcare organization’s utilization misalignments, looking at the lifecycle cost (birth to death) of the product, services and technologies they are evaluating or studying. We need to more than investigate whether products, services and technologies are safe and appropriate for their intended use.
Meaning, value analysis teams need to look deeper and broader into how the thousands of products, services or technologies their healthcare organization is buying annually are being utilized as opposed to how much they cost initially. Remember, the unit cost of a product, service or technology is only one-tenth of its in-use cost when you add up all the costs associated to its use. For example, if an I.V. set costs $1, then its in-use cost could be $10 once you add in all storage, delivery, stocking, tagging, inventorying, charging and removal cost of getting it to the end-user.
Pathway to greater savings
The healthcare marketplace is rapidly changing to value-based contracts from fee-based, and that’s why supply chain/value analysis strategies, tactics and techniques need to be continually evolving to meet these new challenges. How you look at your products, services and technologies’ “long tail” or utilization could be the difference between your hospital, system or IDN continuing to be profitable in the new healthcare economy we all live and work in.
Robert T. Yokl
Robert T. Yokl is President and Chief Value Strategist at SVAH Solutions. He has four decades of experience as a healthcare supply chain manager and consultant, and also is the co-creator of the Clinitrack Value Analysis Software and Utilizer Clinical Utilization Management Dashboard that moves beyond price for even deeper and broader clinical supply utilization savings. Yokl is a member of Bellwether League’s Bellwether Class of 2018. For more information, visit www.svahsolutions.com. Email Yokl at [email protected].
