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TRENDS IN HEALTH CARE PURCHASING

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It is change, continuing change, inevitable change that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be. This, in turn, means that our states men, our businessmen, our everyman must take on a science fictional way of thinking.

Isaac Asimov,

It may not be science fiction but purchasing trends in health care have been in a state of rapid change since the early 1980s with the passage of the federal government's Tax Equity and Fiscal Responsibility Act. During the years since the passage of that law, health care facilities have gone through incredible evolution in the way products are bought and managed. These changes have been precipitated largely by the different ways in which patients access and pay for health care.



Three changes in health care delivery are responsible for variation in purchasing habits. The first noteworthy change is that health care providers (HCP) are no longer reimbursed on a fee-for-service system. HCPs have historically totaled up the bill for treating a patient and then passed those charges along to the payer such as an insurance company. The bill was simply a result of every charge in the treatment process being forwarded for payment. If the HCP used a product costing $10 for patient treatment, the HCP was reimbursed. If another HCP used a more expensive product ($20) for the same treatment, they, too, were reimbursed. Under this system, there was no incentive for the HCP to aggressively control costs, and there was more emphasis on product quality than on product price.
  • CAPITATION
Instead of the fee-for-service system, most health care is now prepaid. This means that a health care plan may be negotiated between provider and payer for a flat fee that is paid before any service is actually rendered. The provider is usually a type of health maintenance organization (HMO) that includes both general practice and specialty physicians. The HMO will provide a complete and comprehensive range of health services to the payer for a fixed amount of money over a specified period of time. The result is that HCPs are actually rewarded for keeping the cost of delivering health care down. This new approach is known as capitation.

Capitation can be defined as the relationship between a provider and insurer whereby the provider is paid a fixed amount for each plan member per time period for a defined set of services. The goal of capitation is to decrease cost and maintain lower levels of cost over longer periods of time. This system motivates providers to hold down costs because they can directly profit from their success. Providers have little to no incentive to request more diagnostic tests, hospitalize patients, or refer them to extensively trained specialists. Basically, under this system, providers can achieve better financial results by limiting the utilization of their health care services.

Managed care as described above, has immediate impact on medical supply companies and their sales employees. HCPs are becoming much more aggressive in their negotiations with suppliers because every product price reduction means positive movement in the provider's profits. Although product quality is still important to HCPs they are expecting price concessions from manufacturers in return for long-term business commitments. Long-term contracts do help manufacturers become more effective in production forecasting, and in turn this helps in managing the costs of making and selling products. The ultimate goal of capitation is to drive cost out of every part of the health care system.

On an individual level, the medical sales representative will have to change to more of a partner rather than a traditional product seller. Once reps develop business with a HCP, their performance will be measured by how well they partner with the customer in areas such as appropriate product utilization. Service from reps becomes more important than sales because without service there is no sale. Managed care will demand that salespeople spend more time making sure that customers are using the right product for the right application in order that the customer can meet their financial objectives. Reps who can demonstrate the ability to further drive costs out of their customer's health care delivery system will succeed.
  • GROUP PURCHASING ORGANIZATIONS
A second change seen in health care today is the change in venue. In the past, most care was provided in a hospital setting. This has dramatically changed due primarily to new medical technologies. Approximately 60 percent of health care is now provided in an outpatient setting, and that shift also means that many health care products that previously had been used in hospitals are now being used in an outpatient or home health environment. To equal the purchasing power formerly found in hospitals, many outpatient centers and clinics are joining forces with each other and with hospitals as part of group purchasing organizations (GPOs). GPOs have been around for nearly two decades, but they were previously made up of hospitals alone. Now they consist of many types of providers and are also changing their business methods.

There are several group purchasing organizations in the United States with names such as MedEcon, VHA, Ameri-Net, Premier, and SCA. These companies solicit members from hospitals, outpatient clinics, and physician groups and charge their members annual membership fees. Their basic purpose is to use membership power to negotiate better contracts with suppliers than the members could manage on their own. GPOs focus their attention on two main issues: contracts and compliance. Each is dependent on the other. Product suppliers want to negotiate contracts and will provide their best pricing to those groups that can bring the highest level of compliance to the contract. GPOs in turn will guarantee their highest levels of commitment to contracts that represent the highest savings to their members.

GPOs affect salespeople in much the same way as man-aged care in that the service aspect becomes more important than the sales function. Large medical manufacturers usually have a national accounts team that negotiates group contracts, and the individual reps have little influence on that process. The national accounts team is responsible for selling a company's products and services to the GPO. When a company signs a national GPO contract, the sales personnel are responsible for the implementation of the contract, and while there is some selling involved, most rep activities are geared toward proper product selection and use. GPOs want to enhance partnering with suppliers in order to improve contract compliance because this can further reduce product prices on future group agreements.

As you seek a career with a medical company, make sure you know what relationship exists with national and regional GPOs. More specifically, ask what GPOs are represented in the territory you are interviewing for, and determine if the company has a contract with those organizations. If you take a job with a company that has no GPO agreements and your major competitors do have them, you may have a very difficult time making a living. Companies do want GPO agreements, but when they do not get them, they do their best to ruin compliance of contracts awarded to competing companies. GPOs are aware of this, and they are doing a complete job of making sure that there are penalties for noncompliance and financial rewards for compliance. The success of manufacturers in the last half of the decade will be directly determined by their ability to forge new and maintain existing GPO contracts.

Hospitals are branching out on the GPO concept a bit further in that many are aligning into regional health care networks. Regional networks are almost always smaller than competing GPOs, but their size is actually the foundation of their strength. Because they are smaller, regional networks are often much better at getting agreement from their members to standardize on a method or product for exclusive system wide use. Standardization enhances efficiency, and the compliance to specific product use allows the network to leverage pricing with the manufacturer. Regional health care networks will continue to develop and grow, meaning that sales professionals must become adept at managing a customer system.
  • VALUE ANALYSIS TEAMS
The last trend impacting purchasing practices is that health care now is more oriented toward promoting wellness than treating illness. The longer a person remains sick today, the more money an HMO must spend. By keeping members well, HMOs have a greater opportunity to positively impact their bottom line. This trend has led to the development of value analysis team (VATs), which jointly review products and practices for the purpose of selecting those that can reduce patient recovery times or promote overall wellness. VATs are here to stay.

Value analysis teams make decisions as a committee comprised of clinicians and financial experts from many different parts of a health care organization. This introduces complexity into the decision-making process that salespeople are trying to understand. No longer is a rep calling on one doctor or one nurse when trying to sell a product. The rep must now manage the politics surrounding "decision by committee." VATs are basically looking at three areas or categories of questions in their review of products. Sales reps need to have the answer to these questions when presenting products to the VAT.
  1. All else being equal, is the new product less expensive for our facility to use?

  2. If there is no price savings, can we make the jobs of our workers easier with this new product thereby improving our labor efficiency?

  3. Will this product, at no additional cost, make the work environment safer for either staff or patients?
These questions regarding cost, ease of use and safety form the basis for product decisions made by value analysis teams.

When interviewing for a sales position, you should ask these same questions about the company's products relative to the competition in the marketplace. If the company's products are all more expensive, then they better have a functional or safety advantage. If not, you need to question whether the market will seek out and purchase the products you would be selling. "Me-too" products that mirror every aspect of the product that has been copied are very difficult to sell even if you are known for your sales savvy.

Customers in the health care marketplace will not make a change unless there is a strong reason to do so because change is very expensive. Hospital purchasing personnel have long suggested that changing from one supplier to another, costs about 5 percent of the annual expense for the product line being changed. Value analysis teams need strong reasons to make a product switch, and reps must recognize the cost of change. Salespeople must be ready to demonstrate how their product's design, technology, and/or quality can improve staff efficiency, enhance the quality of care delivered, or lower supply costs.

As health care delivery continues to evolve, purchasing practices will also continue to change. Change truly is the only thing constant in health care.
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