Healthcare Contracting Goes Online, Signaling a Brand New World for the Supply Chain

Updated on June 21, 2014

By Justin Hibbs

The healthcare industry has always been proud of its advancements in technology. Pharmaceutical companies spend billions to research new drug treatments. Hospitals and healthcare providers strive to offer the latest medical devices that help diagnose and treat their patients. In healthcare, the bar is always being raised to be considered “the state of the art.”

But one area in healthcare that is just now starting to move away from the “business as usual” model is the supply chain industry. The most popular approach to managing the supply chain was the advent of the Group Purchasing Organization (GPO), an institution that first showed up in healthcare in the 1970’s. Basically, GPOs help hospitals leverage their purchasing strength through bulk rate discounts. But these deals are one-size-fits-all.

Since no single GPO addresses all the varied needs of its members or its suppliers, hospitals still try to arrange their own contracts with suppliers. This trend, which is gaining in popularity, happens about 40 percent of the time, equating to a $50 billion spend annually. Historically, this contracting approach – known as “self contracting” or “local contracting” – has been far from perfect. Hospitals and suppliers tend to lack adequate access to data or to the tools necessary to make the right decisions. Without this insight, it has been very difficult for hospitals to gauge the competitiveness of offers from supply companies, resulting in rebids and a lack of commitment to signing the negotiated deal.

The combination of a lack of commitment and inadequate insight into pricing turned self contracting into a time-consuming, tedious ordeal. Hospitals had to draft voluminous RFPs but often asked to rebid deals due to the uncertainty of competitive market pricing. Sellers were also wary of the process since they had difficulty understanding actual and potential market share. Such were the limitations of self contracting. No wonder these deals took about six to nine months to close.

Times have changed.

A year ago, with the launch of aptitude, healthcare’s first direct contracting market, the entire process is now online. Data, once elusive during the contracting process, is now readily accessible to both sides while they are exploring potential business partnerships. Hospitals are now assured of competitive pricing, supply companies understand customers’ potential and performance, and both sides are assured of an approach that delivers results faster and more efficiently. The result is that direct, customized deals are now closed routinely in about 38 days.

The aptitude philosophy is not a one-sided approach, nor is it an RFP generator or a reverse auction tool. It was created as a market in which healthcare costs will be reduced by leveraging fundamentals from other successful market examples while bringing value to both parties involved.

aptitude is a one-stop destination designed to complement a hospital’s existing contracting model or provide an alternative for those looking to modernize the business of healthcare. Hospitals and suppliers are using it for greater:

• Freedom for hospitals to choose their supply partners and select appropriate performance targets for their health care organizations;
• Flexibility to define the length of the agreement, mutually agreed upon by both the hospital and the supplier;
• Commitment by allowing hospitals to understand the buying habits and behaviors that will lead to best pricing, and allowing suppliers to accurately measure, monitor, and manage compliance;
• Access to data on achievable pricing options and how those options relate to the overall market; and
• Efficiency in managing the contract’s entire lifecycle, including a streamlined pricing request process and ongoing implementation and performance measurement.

There are now nearly 600 hospitals around the country signed up for direct, online contracting with supply companies who offer more than a million different products in over 150 different categories. As both buyers and sellers start to enjoy the benefits of speedy, customized agreements, it’s probably just a matter of time before online contracting becomes the industry standard.

Justin Hibbs is the Senior Director of Marketing and Research for aptitude LLC.

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