Right Procurement Savings

Right Procurement SavingsThings are tight in healthcare. Declining reimbursement means health systems are considering all options for margin management – from testing new revenue streams to reducing non-labor expenses 20% to 30%.[i] Optimizing quality and improving financial performance are perpetual objectives for any health system, but at McKesson, it’s become a cornerstone of our Better Health 2020™ strategy to adapt to healthcare reform. And in fact, the healthcare supply chain is one of the top sources for new savings. Success depends not necessarily on LEAN revisited, but heavily on smart system optimization.

What I mean by smart system optimization is the ability of a procurement system to help reduce non-catalog purchases, include physician preference items (PPI), and ensure purchasers have the information they need to make the most cost-effective buying decisions.

Procurement systems fall into two categories: procure to pay (P2P) and formulary guided procurement. Most systems are contract P2Ps; they help justify invoices to contracts and identify which items were bought off-contract. Some use powerful analytics to compare contracts to output. It’s good information, but you’re identifying and analyzing off-contract spend after the purchase is made rather than before.

Requisitioning P2Ps create a familiar buying experience, similar to the way we buy personal goods online. Unfortunately, these systems don’t do much to help purchasers find the item they want or make the best choice — users don’t know if it’s the right price or even if a contract or formulary exists.

Contract and requisitioning P2Ps pull information from only one source: the item master. Item master data is notoriously outdated (30% to 40% inaccurate, according to HFMA’s 2007 “Data Quality: The Foundation for Significant Supply Chain Enhancements”), and the cryptic product descriptions don’t match how users order. When users can’t find a product, they order offline.

Most importantly, P2Ps miss your non-item master spend: the 40% to 50% that falls outside of your current materials management information system (according to McKesson/Meperia research). That means you aren’t capturing your total spend data because you’re missing high-cost PPIs.

In other words, with a P2P system you’re spending lots of money to analyze incomplete data without preventing users from making wrong decisions up front.

On the other hand, formulary procurement systems give you the advantages of P2Ps without the pitfalls:

  • They use your organization’s product formulary to guide users to make the best purchasing decision to support your organization’s business goals.
  • They offer the “consumer-simulated” buying experience users are familiar with and like. Users can find the product they need thanks to longer descriptions and recognizable photos. A nurse and a purchasing agent can both find the same item, even if the nurse calls it a “Christmas tree” and the agent calls it an “airway adapter.”
  • They capture that elusive spend outside your item master (including PPI, self-contracted items and GPO contracts) to provide a single, perpetually cleansed source for your total med-surg spend.

Preemptive formulary guided procurement systems give you a real difference by preventing any non-formulary, non-contract spend:

  • They direct users to your preferred product choice at the point of requisition — before they buy.
  • Through artificial intelligence, the systems “learn” your products and preferences. Similar to the way the data engines at Amazon suggest new books you might like to read based on your buying history, the systems suggest the best choice item based on your formulary and contracts. Currently, McKesson is the only vendor that can provide artificial intelligence systems for procurement.
  • They can even identify functional equivalency to aid your value analysis team in standardization efforts.

With preemptive formulary guided procurement systems formulary and contracts are enforced before the purchase is made and off-contract spend is virtually eliminated. Contract compliance jumps, admin hours drop and your savings head in the right direction.

Learn more about the benefits of formulary procurement by downloading our new white paper.


[i] Supply-side Economics; Jaimy Lee; August 18th, 2012; Modern Healthcare; http://www.modernhealthcare.com/article/20120818/MAGAZINE/308189932