Beyond the Price

6 Aug 2015

John Enright and Colin Hui

At Health Purchasing Victoria (HPV) we help public health care services deliver high quality

patient care by ensuring they have a reliable and agile supply chain.

We do this by:

Partnering with them to organise collective contracts for the things they buy.

Providing advice and education on how to get their supply chain working at its best.

Ensuring Victorian Government health purchasing policies are complied with.

Who is Health Purchasing Victoria?

Looking beyond the price

Category Management

Price

Utilization Cost

Standardisation

Demand Management

Labour Productivity

Maintenance

Shrinkage

Damages

Waste

Disposal

Recall Mgmt

Revision Procedures

Infection Rates etc.

Beyond Price – not a new idea…

• Fuel efficiency

• Maintenance

costs

• Safety features

• Warranty

What car

should I buy? What will I

have for

dinner

Who should I

fly with? I’ve run out

of milk

• Convenience

• Past experience

• How long will it

take to cook?

I need a new

shirt

• Reputation

• Baggage

• Food

• Leg room

• Expiry date

• Packaging

• Taste

• Convenience

• Quality

• Material

• Colour

• Brand

TOTAL COST to PATIENT

Hospital Cost Supply Chain

Cost (Hospital)

Order Processing

Inventory

Transport

Supplier Cost

Supply Chain Cost (Supplier)

Order Processing

Inventory

Transport

Profit Sales

Selling Cost

Product Cost Research,

Manufacturing, Packaging, etc.

What is beyond price in health?

5 Health Purchasing Victoria | Working with Victoria’s health sector to achieve best-value supply chain outcomes

Contract

Price

Data quality

Common

standards

Predictability

Trust

Product quality

Quality of

relationships

Service

Patient

Outcomes

Four key levers to drive value

• Get the best price you can by aggregating demand

• Managing consumption to reduce demand

• Buy the best value product that will do the job

• Improve the efficiency of buying, handling, using and

maintaining the product

Source: http://www.grosvenor.com.au/the-next-wave-of-procurement-savings/

Pay Less

Buy Less

Buy Cheaper

Buy Smarter

Examples….

Reducing use of consumables –

e.g. training/education

Reusable vs single use

Lease payments for disposed

equipment

Not taking advantage of

warranties

Lost/damaged product

Buying a better value item that

still does the same job

Standard equipment rather than

a modified spec

Right specification vs over spec

Volume commitments to drive

optimal pricing

Reducing the cost of purchasing

through e-commerce

Buying in bulk where possible

More reliable product

Forecasting demand

Considering total cost, not just

price

Coin locks on trolleys Implementing returnable handling equipment

Buy Less Buy Cheaper Buy Smarter

House brand products Long sole-supplier contracts for capital

Compulsory EDI Integrated forecasting & planning

Examples from retail…

Driving value needs solid foundations…

Information

Collaboration Incentives

Information

Standardised, trusted and accurate information to drive decision making

and processes, and which enables opportunities to be discovered

Qualities of good information:

• Easy to access and keep up to date

• Transparent

• Spans the entire supply chain

• Should enable relationships between data

sets to be created – enabling analytics

• Common standards

• Enables decision making

• Crosses organisations

• Measure’s what’s important

• Helps provide focus - “fish where the big

fish swim”

• It’s trusted as being right

• But – you can drown information

Some Opportunities:

• Understanding cost drivers

• Understand the points of waste and how

they can be influenced or eliminated

• Understanding the true value of a

product/service – not just price

• Using common categorisations/accounting

to enable consistent spend analysis

• Contract visibility

• Common master data – e.g. VPC as the

foundation for product data, Bravo for

suppliers

Collaboration

Internal and external collaboration focussed on common goals, clear

accountabilities, and using objective, trusted data

Qualities of good collaboration:

• Both internal and external

• Requires trust and transparency

• Clearly defined joint goals and objectives

• Both parties have the opportunity to benefit

• Sharing of information

• Involve the real decision makers/experts

• A commitment to continuous improvement

• Two-way accountability to perform, and

measurement of performance

• Fact-based decision making

• But – can’t be superficial or one-way

Some Opportunities:

• Shared visibility of costs – enabling honest

discussions around improving efficiency

• Longer contracts – enables improved

investment in innovation and efficiency

• Technology collaborations

• Understanding demand, and using it to

drive certainty where possible

• Total cost of ownership

• Regional supply chain collaborations

• EDI implementations

Incentives

Put in place strategies to incentivise the type of behaviour you want to see,

and discourage those you don’t

Qualities of good incentives:

• They drive accountability

• Right type for the job e.g. contractual,

commercial, efficiency based

• Target at the right level(s) – organisational,

functional, individual

• Ensure a sharing of risk and reward

• But - need to be aware of where incentives

are misaligned across the supply chain

• No one size fits all

• Can’t set and forget

Some Opportunities:

• End to end category management

• Open book pricing models

• Establishing contracts which enable

efficiency to be realised

• Pricing strategies to enable efficiency

• Transparent benchmarking of performance

against peers

Key Points

Impacting the price

Case study: Orthopaedic Prostheses category

Beyond Price – Orthopaedic Prostheses

• Background

• Market Research on cost breakdown

• What can we do to impact the price?

• Formulary control and Representatives

• Key learnings

Background

• Estimated global market value, estimated sales in 20111

• Hips replacement: $5.84b

• Knees replacement: $6.94b

• Extremities replacement: $1.09b

• Prices vary between countries, states, regions, private and public sectors

and health services.

• In June 2015, Lord Carter of Coles released an interim report on the

review of Operational productivity in NHS providers.2

• Report is based on 22 NHS Trusts

• Primary cemented hip has a variance of 44% between the lowest and

highest price paid.

• Primary uncemented hip has a variance of 56%

Market research and cost break down

• Hip and knee implant review report released in 2008, estimated the

breakdown of cost structure for orthopaedic implants in United States.3

• Note that the cost of manufacturing is not the largest cost components

• The highest cost component is Selling, General and Admin = value added

services such as representative, supply chain, training, clinical support,

marketing etc.

How can we impact the price?

Value added service

Rationalisation at Health service

Level

Formulary Control

Reduce cancellation and

last minute orders

Management of consignment

stock

Return loan kits in time

Need for Representatives for every case

•Standardisation creates efficiencies

for both parties

•Reduce cancellations benefits both

parties.

•Reduce ad hoc/urgent orders will

reduce supply chain cost

•Reduce delays in loan kit returns will

minimise the opportunity cost for

suppliers

Formulary Control

• Formulary Concept

• A list of approved products for use in a particular health services.

• Pre-approval must be sorted before ordering non-formulary products

• For example: The use of uncemented hips vs cemented hips

• BMJ published a research paper about the cost effectiveness between

cemented and uncemented prostheses:

‘In men and women aged 70 and 80 revision rates at five and 10 year were

lowest with cemented prostheses and highest with cementless prostheses.

Only in 60 year old men were cementless prostheses competitive in terms

of 10 year revision rates.’4

Cemented Hip Uncemented Hip %Variance

£854 £1977 131%

Clinical support and Representatives

• Suppliers a team of representatives supporting the orthopaedic market.

The number will depended on the size of the company, on average it will

be more than 10 EFT.

• the key question is not about removing representative, whether there is

an alternative model that is more cost effective.

Transition Product

Training and specialisation

Consolidate suppliers

Quantify current

services provided by

supplier representatives

Determine Return on Investment

Key learnings

The key learnings from orthopaedic prostheses:

• Prices varies based on different setting, especially in a non-mandatory

procurement environment in NHS

• The importance of benchmarking to understand your position

• Understand total cost of ownership allows health services to work out new

ways to reduce cost in partnership with suppliers.

• Supplier consolidation is the first step to drive new efficiencies

• Formulary control based on evidence based practice is absolutely essential

for prostheses, medical consumables and pharmaceuticals

• Clinical representative support is a significant part of the expenditure, is

there a better alternative option.

Where to from here?

• Health services must work on multiple levels in order to influence price

• Collective Procurement and Market consolidation

• Local rationalisation and supply chain

• Clinicians prescribing and formulary control

Reference

1. Orthoknow, Strategic insights into the orthopaedic industry, published June 2012, ORTHOWORLD Inc

2. Lord Carter of Coles, Review of Operational Productivity in NHS providers Interim Report, June 2015,

published by Department of Health

3. Orthopedic Network News, 2008 Hip and Knee Implant Review, Volume 19 Number 3 July 2008. posted to

www.orthopedicNetworkNews. Com on August 10, 2008 at 9:00pm est

4. M Pennington, R Grieve, J S Sekhon, P Gregg, N Black, J h van der Meulen, iCemented, cementless, and

hybrid prostheses for total hip replacement: cost effectiveness analysis, BMJ 2013:346:f1026 doi:

10.1136/bmj.f1026 (Published 27 February 2013)

Health Purchasing Victoria | Working with Victoria’s health sector to achieve best-value supply chain outcomes 23

Questions

Level 34

Casselden Place

2 Lonsdale Street

Melbourne 3000

T: 03 9947 3700

F: 03 9947 3701

hpv@hpv.org.au

www.hpv.org.au