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CMS continues to challenge margins that providers must make in order to remain profitable. More costly and technologically advanced medical products are being introduced at an increasing rate. Hospital providers across the nation are looking at the profitability of their service lines and asking themselves if they should continue to offer loss leading service lines. The reason some service lines are not profitable can be directly attributed to the cost of supplies. The chart below shows a few common service lines that are being impacted:
The traditional method of contracting has been to trade market share with a vendor in order to get lower prices on products. In order to achieve lower prices, most hospitals benchmark using external databases. This model has worked well on commodity type products. However, the model becomes increasingly difficult to implement on preference type products (Reference Girard Senn's Article). Very rarely do supply chain managers look at DRG payments or the impact on profitability in the contracting process. The exception recently has been in contracting for orthopedic implants (DRG 209). Hospitals have identified that the cost of an implant must be in the region of 35% of the DRG payment if the hospital is to make the desired margins in that line of business (Guthrie et al, 2005, 42).
The method of trading market share for price really doesn't look at the profitability of service lines. Many supply chain managers achieve savings (using historical data) by negotiating with suppliers, but we typically do not look at the impact the savings have on margins. Using Cardiac Rhythm Management products for example, supply chain managers typically want to reduce cost by a certain percentage, say 10%, Assume the total spent on CRM products for an organization is $20 million. Driving cost down by 10% will yield $2 million in savings. The savings may appear significant but unless it is linked to profitability of the service line, you really haven't seen the full impact of your efforts.
Tying supply cost to DRG payments
With regard to orthopedic service lines, we know that for most hospitals the cost of orthopedic implant supplies have to be in the region of 35% of the DRG payment in order for that service line to be a profitable...