What Is Healthcare Procurement Strategy and Why Is It Important?
When buying medical supplies and equipment, many healthcare providers rely on standard means of consolidated buying. Methods like group purchasing organizations (GPOs) and volume buying agreements may save a little money, but they often leave total value considerations and sourcing flexibility on the table. Software solutions in healthcare procurement make it easier for buyers to get high-quality, compliant consumable items and medical equipment at competitive prices, distribute it more effectively, and track spending to uncover more opportunities.
This article covers the information you’ll need to understand traditional versus modern forms of healthcare procurement:
- What is a healthcare procurement strategy?
- Why is healthcare procurement important?
- How does the healthcare procurement process work?
- The top five healthcare procurement challenges
- Best practices for healthcare procurement
- How Order.co helps healthcare buyers succeed
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What is a healthcare procurement strategy?
Healthcare providers such as hospitals, doctor’s offices, dentists, and other health-focused businesses use large volumes of consumables and single-use medical equipment. Keeping supplies in stock and getting the best prices presents a considerable challenge. These healthcare businesses use procurement strategies to secure the medical goods and services they need for patient care.
Healthcare procurement activities include tasks like:
- Selecting suppliers
- Ensuring product quality
- Managing supplier relationships
- Negotiating prices
With an effective healthcare procurement strategy, organizations maximize spend efficiency while maintaining a high standard of care.
Healthcare procurement strategy refers to the practices and tactics healthcare providers use to achieve the most cost-effective purchases of medical supplies and services. It includes practices such as:
- Researching and analyzing the marketplace
- Developing relationships with vendors
- Establishing negotiation strategies
- Using technology to automate purchasing
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Why is healthcare procurement important?
Cost reduction is a major driver of procurement strategy. But beyond the dollar cost, practicing strategic procurement in the healthcare industry provides a wide range of benefits, from quality to organizational improvements.
Healthcare buyers focus on these seven benefits to ensure the best outcomes:
Better quality control: High-quality products are essential for the integrity of patient care. In strategic buying, buyers research the marketplace, identify potential opportunities, review delivered goods’ quality and damage rates, and create vendor scoring. Technology is sometimes used to automate and track supplier performance management. These strategies ensure strong pricing while maintaining quality standards.
Lower operational costs: Healthcare procurement lowers operational costs by reducing waste and inefficiencies. This includes streamlining processes, controlling inventory levels, negotiating better prices and terms with suppliers, and utilizing technology for automation. By taking steps to reduce costs while maintaining quality standards, healthcare providers can achieve greater savings over time. Additionally, healthcare providers can use data analytics to gain insights into their spending patterns and streamline spending further.
Improved patient outcomes: Cost is irrelevant if patient care lags. Strategic procurement improves access to quality, cost-effective consumables and equipment. Using buying groups or procurement platforms, healthcare providers take advantage of economies of scale to negotiate better terms and pricing. This gives practitioners and healthcare providers more time to focus on their most important mandate: patient care.
Stronger vendor relationships: Healthcare procurement strategies set buyers up to collaborate closely with vendor partners and identify opportunities for cost savings. In this way, proactive procurement is mutually beneficial, with buyers and vendors developing stronger relationships through better communication and planning. Buyers who use vendor data and industry benchmarking can also improve decision-making regarding pricing and terms.
Streamlined logistics: Using procurement tools for healthcare buying enhances operational efficiency and delivery tracking. These software solutions also help buyers and administrators improve demand forecasting for consumable purchases to create consistent availability of critical items without oversupply, storage issues, or expiry concerns.
Better resource allocation: The pricing and control aspects of procurement strategy improve budget management. By leveraging data-driven insights, buyers pinpoint the type and volume of goods needed to run departments effectively. This reduces unnecessary spend without compromising patient care. Analytics tools help assess total healthcare supply chain costs and free up resources for other areas.
Reduced risk: Healthcare organizations practice risk management through selective, well-vetted procurement relationships. Buyers who conduct due diligence when seeking suppliers (by verifying reliable quality, fair pricing, and regulatory compliance) see their risk profile decrease. Vetting vendors helps buyers avoid unexpected costs due to poor customer service, quality issues, or fraud. Setting clear expectations and performing background research on vendors minimizes the likelihood of litigation and disputes.
How does the healthcare procurement process work?
Unlike standalone businesses, many healthcare organizations procure goods through a traditional GPO — a 100-year-old model for consolidating buying activities among member organizations. Depending on the parameters of the GPO, buyers may have access to certain in-contract goods to save money and keep quality consistent.
These are the general steps for a healthcare organization purchasing goods through a GPO:
Needs identification
The business or organization conducts a needs assessment to determine which supplies and equipment they need. The assessment looks at the types of products or services, quantities, quality requirements, and delivery deadlines necessary.
Contract review
Based on the needs assessment, the business reaches out to its GPO for help securing goods. Often, a GPO’s administrator or procurement rep will research options through multiple negotiated contracts to find what they need.
Purchase order
The healthcare organization then puts in an order for the requested goods. The vendor processes the purchase at the negotiated rate and fulfills the order. Quality review checks ensure that the correct items arrived per the purchase order. The GPO deals with any issues or concerns regarding the order.
Payment
Finally, the buyer pays for purchased goods. Depending on the specifics of the GPO agreement, the buyer might pay the vendor directly. The GPO often receives compensation through either a flat fee paid by the buyer or a percentage of the contract value ordered through the vendor.
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Top 5 healthcare procurement challenges
While the benefits of healthcare procurement strategy are many, the practice isn’t without challenges. In many cases, leaders should carefully consider whether procurement strategies like a GPO membership will alleviate procurement obstacles while remaining competitive.
Inconsistent quality: Healthcare organizations often face variability in product quality when sourcing supplies from a GPO contract or a new, unvetted vendor. These fluctuations may seriously impact patient safety and quality of care. Quality issues also increase costs by replacing medical supplies that don't meet expectations, rushing replacement items to maintain supply, and resolving contract issues over defective items.
Unknown vendors may not always provide accurate product information, which increases the risk of receiving low-quality items. GPOs aren’t immune to these fluctuations, as they may lack visibility into the quality of their vendor's goods. This makes it difficult for buyers to ensure they’re purchasing the appropriate high-quality supplies.
Unclear contract terms: GPOs and vendors sometimes have vague contract parameters that make it difficult for buyers to find in-contract goods. The buying contracts that govern most GPO purchasing are meant to serve a majority of its members. While this may work for general consumable goods (such as bandages, linens, or other common items), specialty items may be out of the scope of buying contracts. This lack of clarity and availability causes friction in the order and fulfillment process, such as pricing issues, miscommunications about in-contract goods, or lack of supply.
Without accurate information on supply availability or pricing, hospitals may not be able to secure their desired products in time. It can lead to poor pricing outcomes (spending more for specialty items) and spur out-of-contract buying that reduces the effectiveness of GPO membership.
Out-of-contract buying: Though participating in a GPO can save money, those procurement savings only materialize if the vendor supplies needed goods within the contract and if those goods are easily available. Frustration, friction, or lack of availability greatly increase the chance that internal stakeholders will circumvent the process and buy goods outside the expected procurement channels.
Vague fee structures: The fee structures supporting a GPO can be vague or, in the worst case, misleading. Before signing with a GPO, be sure you understand the intended fee structure and expected order cadence for participation. Ask if the fees come in the form of buyers’ membership fees or if the GPO earns money through a percentage of vendor sales. There are multiple ways for a GPO to monetize their business, so ask up front what business model they use.
No in-contract options: Sometimes, there are no good options for purchasing what you need within a GPO contract. If the GPO doesn’t secure contracts for high-quality goods from reputable vendors, a GPO membership may not be worth it. Before entering into an agreement, be sure you know the vendors within the GPO will be able to serve your needs. Estimate the amount of in-contract versus tactical procurement your business will need to do, and evaluate whether the relationship will be beneficial enough for partnership.
Best practices for the healthcare procurement process
Healthcare procurement is rife with potential pitfalls. One of the most important keys to success is employing established best practices. By staying up-to-date on industry developments, you ensure your procurement efforts yield the best results.
- Estimate expected in-contract versus tactical procurement. Looking at expected in-contract versus tactical procurement with a GPO requires careful analysis of the contract terms and conditions. This includes evaluating the quality and reputation of vendors already contracted with the GPO and researching whether or not the vendors involved can supply the goods essential to your business. Potential members should also evaluate volume expectations to determine whether or not the savings from making purchases within a contracted price outweigh membership costs.
- Research the savings of a GPO membership before signing up. Although some GPOs may offer ten to 25 percent savings, those estimates are often inconsistent with real-life results. Take time to understand the percentage of savings the GPO reports, the conditions members must meet to realize that level of savings, and whether your organization meets those minimums at the time of evaluation. Spending more to secure savings is rarely a winning formula for cost control.
- Educate team members on the purchasing policies. Team members must understand the method and importance of in-contract buying when joining a GPO. This education should help them understand expected savings from using the membership, the restrictions or limitations on usage, and the consequences of off-contract buying. It’s important to set expectations for contract compliance within the organization.
Educating stakeholders on these policies helps create an internal culture that values cost control and understands its importance. A well-used GPO can create a more efficient organization where everyone understands their role in realizing targeted savings goals and quality requirements.
- Take a look at the numbers to keep costs down. Data analytics provide a more accurate picture of where an organization spends money and whether it’s saving on purchases with its GPO membership. Organizations should be able to effectively measure their savings from the GPO by comparing cost data before and after joining the group purchasing organization. This enables organizations to identify missed savings opportunities, costly procedures, and areas for improvement to justify membership use.
- Consider alternatives to traditional healthcare procurement models. GPOs aren’t the only viable option for healthcare buying. Other solutions, such as procurement management software, allow organizations to automate processes to purchase the products and services they need while helping them save time and money. Software often provides powerful analytics and reporting capabilities that make it easier to understand purchasing habits and trends and can give insight into which channels offer the best savings opportunities.
How Order.co improves healthcare procurement
GPOs have always been the most recognizable solution to the challenges of healthcare buying, but in many ways, technology has surpassed the GPO model. Order.co’s spend efficiency platform offers better options for healthcare procurement.
Using the platform, healthcare buyers realize the benefits of healthcare procurement strategy with better pricing, service, and flexibility through features such as:
- A curated catalog that simplifies and streamlines the purchasing process through buyer guidelines, spend limits, and automated purchase order processing
- The ability to use any vendor within Order.co, which gives buyers more opportunities to secure competitive pricing with no minimums, hidden fees, or restrictive contracts
- Invoice consolidation and payment features to reduce volume and simplify multiple vendor payments into a single action
To learn more about using the power of spend efficiency to improve healthcare procurement outcomes, schedule a demo of Order.co.
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