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Pricing opportunity can be defined as optimizing the price paid for a good or service, which can be achieved through incumbent supplier negotiations or competitive sourcing activities. Accurately identifying pricing opportunities can be challenging due to several variables such as unique product/service specifications, quality, volume, technology advancements, and local market factors. As a result, most benchmarking exercises can leave hospital leaders with misleading perceptions of price competitiveness. Although pricing may be viewed as a straightforward value lever that is routinely reviewed by hospital supply chain, Pathstone finds many hospitals have yet to maximize pricing opportunities in more complex categories such as various clinical and non-clinical purchased services.
Successful implementation of pricing opportunities delivers the following benefits to health systems:
1) Supplier Relationship Not Reviewed: If your supplier contract has not been evaluated for price competitiveness in the last 3-5 years, this can indicate there may be opportunity. Supplier relationships with hospitals can change over time. Expansions of supplier scope in an organization can be an advantageous leverage point to bring into the pricing negotiations. Furthermore, supplier markets evolve and change the dynamics of how they do business with their hospital clients. Many clinical areas, for example, are impacted by demographic changes (e.g. aging baby boomers), population health challenges (e.g. new diseases) or development of new technology (e.g. telehealth), all of which may affect the demand for certain supplies or services. As a result, continuous vigilance is important.
Client Example: In our experience, perfusion services is an example of a complex area that is challenging to identify pricing opportunity for many of our clients. The demand for perfusion services has been growing driven by the increase of open-heart surgeries for an aging population. As a result, many hospitals have seen their perfusion service volumes jump by 30-50% over the last several years. In such situations, Pathstone can help clients evaluate pricing opportunities with current market intelligence across our widespread client base.
2) Not in-line with Price Benchmarks: One common indicator of opportunity is identifying higher pricing when benchmarked against peers. Utilizing available resources such as group purchasing organizations (GPOs) or databases to perform the benchmarking can provide a good directional perspective on potential pricing value. However, hospitals should proceed with price benchmarking cautiously. Our experience has shown that when hospitals have the ability (often through third-party partnerships) to contextualize and customize benchmarks – this creates the best data and ultimately drives the most value.
Client Example: Benchmarking services are anything but straightforward. Pathstone often helps our clients benchmark their services both internally and externally. Pathstone provides external price benchmarks that are contextualized based on the health system’s volume, geography, specific service requirements, and unique operational considerations to determine an accurate and tailored cost savings opportunity.
3) Hospital Growth and Expansion: Within the healthcare industry, hospital consolidation and integration activity has been increasing. If integration has already occurred or may be imminent for your organization, then it presents a ripe opportunity to re-evaluate pricing for goods and services. Through integration, your volume may change (likely increase) which creates leverage to help drive more competitive pricing.
Client Example: Pathstone has worked with hospital systems that have merged, acquired new sites, or expanded service lines. A benefit of any consolidation activity is the ability to combine purchasing activities of two different organizations to create leverage with suppliers. For example, a newly merged health system was using two different dialysis service providers, and in turn, had varying pricing for the same dialysis services. In some cases, hospital sites were even using the same service provider through separate contracts but with very different pricing. Consolidated purchased volumes in the newly merged health system created leverage to negotiate better pricing with the chosen provider.
4) Prices are Higher than Reimbursement Rates: For certain goods or services where the hospital is receiving reimbursement, it can be a beneficial exercise to compare pricing against reimbursement. If the pricing is significantly higher, this data point can potentially be leveraged in supplier pricing negotiations.
This article was authored by Joseph Jang. Joseph is a management consultant with expertise in healthcare supply chain, non-labor cost reduction and performance improvement at Pathstone Partners.
