Taking The Supply Chain Pulse
St. Onge’s Healthcare Hall of Famer and industry icon, Fred Crans, chats with leaders from all areas of healthcare to discuss the issues of today's- threats, challenges and emerging trends and technologies in a lighthearted and engaging manner.
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Taking The Supply Chain Pulse
Supply Chain Turbulence: Navigating Healthcare's New Reality
"The most stirred up soup I've ever seen in healthcare." That's how host Fred Crans describes the current state of healthcare supply chains in this eye-opening conversation with industry veteran John Strong. As healthcare systems face unprecedented challenges from multiple directions, Strong offers practical wisdom on navigating the turbulence ahead.
Strong warns of three critical concerns reshaping healthcare's landscape. First, government reorganization threatens significant revenue disruption through potential Medicaid cuts, which could cost hospitals billions. With Medicare and Medicaid representing roughly 60% of hospital revenue and many facilities already operating at capacity, these cuts raise serious questions about care access for vulnerable populations. Strong advises caution rather than panic, especially regarding threatened tariffs that have prompted preemptive price increases from suppliers.
Supply shortages represent another mounting challenge. While new drug shortages have modestly decreased, basic medical-surgical supplies are increasingly harder to find, costing hospitals an average of $3.5 million annually in canceled procedures and delays. Strong highlights emerging domestic manufacturing initiatives like Ochsner's in New Orleans, suggesting that paying slightly more for reliable supply may ultimately prove less expensive than managing disruptions.
Most provocatively, Strong challenges healthcare's procurement status quo, arguing that hospitals continue paying 30-50% more than necessary for common goods by failing to create genuine competition. He shares how at Premier, implementing a sole-source contrast media contract delivered 40-48% savings despite internal skepticism. "Nothing gets a supplier's attention like making a product change," Strong observes, lamenting that too few organizations are willing to undertake the disruption required for meaningful evaluation.
Whether you're managing a hospital supply chain, developing healthcare policy, or supplying medical products, this conversation provides essential perspective on creating sustainable value amid healthcare's perfect storm. Subscribe now and join the conversation about transforming healthcare supply chains for resilience and value.
Hello and welcome to another episode of Taking the Supply Chain Pulse. I'm Megan with St Onge Company and I'm thrilled to have you with us today. We're excited to welcome back a familiar voice, John Strong, who's joining us once again for another insightful conversation. You may remember John from Season 1, Episode 27, and if you do, you know you're in for a treat. Let's jump right in Over to you, Fred.
Speaker 3:John Strong, former leader in group purchasing organizations and private businesses and many different places within the healthcare system, including actually working at running supply chains at hospitals, is with us again and we want to get John's sort of 30,000, 15,000, 10,000-foot perspective on what's going on in health care today, what the concerns are, what he sees from where he sits and, john, thanks for coming back, it's good to have you here- oh, thanks for having me back, fredred, it's a pleasure to do this.
Speaker 3:Yeah, I only get to meet with you about four or five times a month now, it seems like I know, right, that's true that's okay.
Speaker 3:So, without you know, there's health care is normally in flux. Let's and, uh, you know, we've had this ongoing thing of becoming fewer and fewer and fewer systems, which means they're bigger and bigger and bigger and more complicated. That's been going on for a long time. We've had momentary outages of products from time to time, we've had natural disasters from time to time from time to time, and yet I'm probably leaving the biggest thing that's going on in America right now out of the conversation, but right now seems to me to be probably the most stirred up soup that I've ever seen in health care. So I'm going to ask you to talk about what you think are the three things that we need to be thinking about and addressing, and I know you've told me what they are. So let's start out with government reorganization and refocus.
Speaker 1:All right, well, thanks, fred. Using the word soup is probably a polite expression. Healthcare over the last 20 or 30 years has gone through a lot of remarkable changes and has been proved to be very resilient and very flexible in addressing many of the changes that have occurred in the marketplace. You mentioned one of them, and that's certainly consolidation of hospitals and system building and that sort of thing. What's going on now adds to this soup, as you call it, in terms of threatened tariffs and reimbursement changes. In particular, I just saw an article this morning that said, not surprisingly, that cuts to Medicaid could lead to billions of dollars in lost revenue for hospitals, and that's not a surprise, or it shouldn't be a surprise, but it's painful.
Speaker 1:And I think, as we look across the supply chain for both drugs and pharmaceuticals, as well as medtech products and capital equipment, people are wondering what the impact of reimbursement changes are going to be. Number one, because it impacts the ability for health systems to purchase more capital equipment and do construction and that sort of thing. But beyond that, what's it going to do to the price of everyday supplies that every hospital in the country uses? The country uses right, and the thing that I find remarkable is that some companies not necessarily in healthcare, but some companies are already announcing price increases in front of tariffs, and the fact is that nobody's taken a hit on a tariff yet.
Speaker 1:And I do believe that tariffs can be a good thing, but we're going to go through a period of change and a period of I guess I would refer to it as hardship in terms of some price increases and disruption across the health care supply chain, and it's going to reorder health care supply chains around the world.
Speaker 1:Now, short term, that's not a great thing, but long term, it may actually save the United States and our consumers money, and so I guess my message on this is that, with regard to tariffs, you've got to wait and see what's going to happen, and this may be painful, but I've advised folks in the last few weeks let's not panic, let's see what the tariffs really are and, for heaven's sakes, let's not accept price increases because of tariffs before we actually know what they are, what they affect, and let's be fair to everybody across the supply chain. I think it's interesting that one big health care supplier the other day announced that they couldn't pass on the entire amount of tariffs, and that's understandable, I mean, but I guess, as a longtime hospital supply chain professional, I'd say well, if you can't pass it all on, where can we spread the pain points so that we can both continue to do business with one another and figure out how we're going to do this with the least impact and the least harm on both trading partners?
Speaker 3:Yeah, I got a couple of things about that. Number one, the fact that many suppliers are taking the threat of tariffs as an opportunity to raise prices. You know, ain't that the American way?
Speaker 3:Yeah, that's true, but number two, and as a longtime person with great experience in the GPO sector, health care is an industry and people outside don't understand this. Healthcare is an industry and people outside don't understand this where the pricing on different categories of products has totally different strategies behind it. For med-surg supplies, we would always go oh yes, if we work with Premier, we will get cost plus 3%, as opposed to if we bought it ourselves cost plus 8%, so it's cost plus three percent, as opposed to if we bought it ourselves cost plus eight percent, so it's cost plus. But if we're buying pharmaceuticals, for some reason they had this crazy cockamamie thing that says oh yes, we get our pharmaceuticals at cost minus five percent. The average person out there is going how the hell can you buy something for minus what it costs? So in my opinion and you can jump on this the way in which we try to understand costs in healthcare is so clouded that it would seem that many people could get away with just whatever they want and no one could figure it out.
Speaker 1:It's 100% true, fred. The call for transparency across the supply chain for the last 20 years has gone sort of unheeded in many respects. There's still large numbers of rebates out in the marketplace. There's price tiers for products out there in the marketplace that are dependent on either volume purchases or compliance. In pharmaceuticals, you bring up a great point with cost minus. It's a crazy world of pricing. And to your other point, most people in the United States don't understand the marketplace and they don't understand how it's priced.
Speaker 1:And until we, I think, really take some of this apart and start over, we're going to be confronted with this for the long term. And I'm not suggesting that the entire supply chain should be 100 percent transparent, although if we behave like other industries, like automotive, for example, where the manufacturers and the OEMs get together and decide how products are going to be used and how they're going to be shipped and how they're going to be manufactured, we're going to have this lack of transparency in the marketplace. But we're going to have this lack of transparency in the marketplace, and it's a shame because when you work with your suppliers, you can often do much better. You know, we've talked about trading partner relationships for 30 years and we've talked about corporate contracts and all of these types of things, but we never seem to get it right in health care and, as a result, it leads to exactly what you're talking about in terms of a very confusing system of prices for various products.
Speaker 3:Yeah, and the other thing you mentioned just a few seconds ago was that if Medicare and Medicaid get disrupted, it's going to impact the revenue flow for health care systems and they're going to be challenged with that. And I think I'm pretty sure I'm right about this that since 1965, medicare and Medicaid together comprise about 60% of the revenues that the average medical center or system takes in. Center or system takes in. The other 30% are from regular private insurances and the other 10% are too bad. They can't pay. We have to juice other people to get the money. So that's one thing.
Speaker 3:The other thing that I've heard and I've seen, with the threat to close down things like the Veterans Administration facilities and reduce things there is I think there could be a possibility that you try to send people who would be receiving care at the Veterans Administration, for example, into receiving care at the regular hospitals and healthcare systems. And those places are already. I talked with Matt Arsenault from Baptist Health of South Florida yesterday. Those guys are already facing a situation in which they're almost at full capacity on their acute care areas now. So tell me, tell us, something about that.
Speaker 1:I mean, I think your, I think your stats are probably directionally correct and it's not a pretty picture. You know, up until a few years ago a hospital, I believe, could. If they could get down their expenses down to a point where they were breaking even or making money on their Medicare patients, they were in good shape, right. That's a pretty efficient and well-run organization. And now, with the threats to Medicaid, that's part of the revenue picture and in the past the healthcare supply chain has been called on to help cut some of that overhead in terms of the cost of supplies and equipment. But it gets to a point between labor and supplies, which of course are the two biggest components of health care expense, where I'm beginning to question how much more can you take out and really not begin to impact the quality of care that's being offered by a health care provider, the quality of care that's being offered by a health care provider? It's also, I think, interesting to note that I think the program, at least in my opinion, that's at greatest risk and perhaps your friend has a different opinion is, I think Medicaid is probably first on the chopping block. On the first on the chopping block, I'm pretty convinced that they're not going to do anything, at least this year, with Medicare. At least that's what's being said right now.
Speaker 1:Your point about the government run facilities is an interesting one, and it mirrors a trend where patients are going home earlier and they're really being cared for at home. You know the so-called hospital at home type programs and telemedicine and all of those things factor into. Well, if the person is discharged from a VA hospital a long distance from their home and they need rehospitalization, where do they end up going? And that also adds to the burden of care overcrowded emergency rooms and hospitals that have a largely full census. You know we've talked for years about eliminating duplication in hospitals and health care and we've been doing that. It's been sort of going on each year, but we're getting down to the point, at least in some markets, where, to your friend's point, the hospital's full now, and you know what are we going to do about that?
Speaker 3:Yeah, I was at a two-day session with the Cleveland Clinic last week and they are running at tremendously high occupation rates. And the other thing is, when you talk about who it's going to impact, baptist Health of South Florida is sort of a community health system. It's got 11 hospitals, it's got several hundred outpatient facilities and stuff, but it's not like the clinic and so it has probably more Medicaid than the Cleveland Clinic does. I think the Cleveland Clinic probably has less. So in Cleveland, ohio, who gets hurt if Medicaid gets hit? Oh, that would be Metro Health Medical, the county hospitals that would be. And the next question is not a supply chain question but a care distribution question. Where do these people go for care?
Speaker 1:Oh, that's exactly right, fred. I mean, you look at cities across the country. There's one or two safety net hospitals like MetroHealth in Cleveland that picks up a large share of the Medicaid patients, and you have to question with all the cuts and changes going on, how do you keep the ship afloat, number one, and then how you keep it navigating in a straight course forward so that you can invest in things like plant and equipment and people and all of those necessary things in health care.
Speaker 3:Yeah, and it was amazing. The clinic's presentation was amazing and it was amazing what large organizations with the ability to acquire and utilize the correct number of resources to get things done can accomplish. Most people aren't in that situation, and when you're talking about, you know, turning the inventory by getting the people out quicker, it reminds me of there's a country songwriter named Billy Joe Shaver who wrote a song that had this lyric in it. They say my mama left me the day before she had me. Well, that's pretty much what we're doing with people now. We're discharging them before they're admitted, and you can only you know you've squeezed all the stuff out, so what else are you going to do?
Speaker 1:Right, I mean sadly it's getting to that point yeah.
Speaker 3:I mean, sadly, it's getting to that point. Yeah Well, the other thing that you talked about, we've actually done one and two sorted together here Cost of supply, oh, supply shortages. That's different than what we're talking. Supply shortages are increasing, notwithstanding tariffs, notwithstanding anything else just happening. Talk about that for a moment.
Speaker 1:Sure. The good news, I guess, is that over the last few months, the number of new drug shortages has declined somewhat. It's certainly not at a point where we can sleep easy at night, but the number of drug shortages has come down modestly. At the same time, it appears that there's an increasing number of shortages of basic supplies, and there's several problems associated with all of this. Of course, in pharmaceuticals they're pretty obvious.
Speaker 1:The one that's flying sort of under the radar is just general health care supplies in many cases, and when you take it all together, I think a recent premier said that it costs the average hospital about $3.5 million a year in lost revenue from things like canceled surgeries or delayed procedures and that sort of thing, and so there is a real cost to all of this, and I don't think self-manufacturing is the way that we can. I think for some hospitals it certainly helps and it's an answer, but for the average hospital they're not going to invest in the manufacturing of products, and so I think the supply chains need to be beefed up and they need to be strengthened. We've talked a lot about onshoring, and I think, with the threat of tariffs now and other things, we're going to see new interest. Even though it costs slightly more to onshore basic commodity goods, I think you're going to see renewed interest in buying some of that domestically, perhaps for the first time, except during a crisis like COVID and so I think we're really going to have to face the fact that we have to have secure supply chains, and without a secure supply chain and without the well-functioning supply chain should result in lower costs for everyone, and we don't have that in health care right now.
Speaker 1:It's just sort of a mess. There's lots of opinions on why it is the way it is, but the bottom line is this gets very distracting for supply chain folks. In some cases, pharmacies and hospitals have more than one pharmacist dedicated every day just to dealing with drug shortages pharmacists dedicated every day just to dealing with drug shortages and the same thing's starting to happen over in general purchasing for the routine medical surgical supplies, and so it's a distracting, costly problem, and we don't seem to be much closer today than we were three years ago in solving any of this.
Speaker 3:Yeah, and we can say it's always been this way, but it's really never been this way. And the other thing is that if onshore manufacturing were a good solution and it probably is for many things we still have to deal with the ramp-up time to create the facilities and create the capabilities to start doing that. Is that fair?
Speaker 1:It is, but there's existing capacity out there. If you look at even some health care systems that have built their own capacity take Ochsner, for example, down in New Orleans. They've done a yeoman's job of building up their capacity to manufacture certain products onshore and they're looking for additional customers and so seeking those out and really utilizing them makes us a stronger domestic supply chain. Makes us a stronger domestic supply chain. It may cost a little more, but my question is what, at the end of the day, actually does cost more interruption in supply or paying a few pennies more and having it available when you need it without having a warehouse full of stock safety stock that you may be stuck with? I mean, look at what happened during COVID. People bought hundreds or thousands of cases of PPE and now you can't even give it away.
Speaker 3:Yeah, now you open up some of those rotting gloves that you put your hands in and your fingers come out the hole.
Speaker 1:Well, that's exactly right.
Speaker 3:That's exactly right. So I've got Regine V beyond coming on in a couple weeks and I'm gonna. I say I will tell her that john strong said that, yeah, you're selling a lot of services. I'll let her do a sales pitch for, uh, using osh you, you should.
Speaker 1:Regine's one of my favorite people in the supply chain and she's built a nice business yep, that's great.
Speaker 3:So the final thing that you were talking about is creating real value and the uh and uh real competition.
Speaker 1:Uh, tell us a little bit about your thoughts on that sure you know, um, insanity, uh, is supposedly the definition of doing the same thing over and over again and expecting different results. And I think we've reached the point of insanity with some of our tendering for goods and services, whether they're really expensive ones, like a hip or knee, or really inexpensive ones like gauze, band-aids and other plastic products, those types of things and I think by doing the same thing over and over again over the last 20 or 30 years, we've allowed prices to creep up to levels that are probably not justified in many cases. It's easy for manufacturers to cry poor, but at the same time, if hospitals are unwilling to do meaningful value analysis and look really at products objectively and create real competition between companies, they're going to continue to pay, in my humble opinion, 30 to 50 percent more for common goods, and in many cases they don't need to be paying this, and I think there's a huge bolus of savings out there. I'll give you one example when I was at Premier, we elected to do a sole source contract on contrast media and everyone at the time said John, you're crazy.
Speaker 1:All the price has been wrung out of that. It's too high clinical preference. You're going to have egg on your face at the end of the day, and we went ahead and did it and the result was, when we awarded the contract, there was about a 40 to 48 percent savings, depending on the SKU by product or by product line or category within contrast media, and it dropped the market overnight. I think there's many, many opportunities for that across the health care supply chain many people willing to take on right now the disruption and the cost, both in terms of time and effort, to evaluate products in more meaningful ways and make change. I've always told my folks, no matter where I was, that nothing gets a supplier's attention like making a product change, and I see very little of that going on across the country. I think we're almost frozen in terms of what people are buying and until we get out of that habit, we're going to pay higher prices.
Speaker 3:Yeah, you know, and sort of staying on this thread, you know the supply chain has historically been transactional and under-resourced. Do you think that's the reason that we haven't been doing our homework or do you think that many of the leaders were just not proactive? And before you answer, I want to get back on your contrast media thing. So you went out and got a sole source agreement that affected prices by 40-plus percent Very good. But what did the Cleveland Clinic do? By 40 plus percent, Very good, but what did the Cleveland Clinic do?
Speaker 3:The Cleveland Clinic realized that people were switching entirely to non-ionic contrast media because they didn't want anyone to die on the table and they were paying a factor of about 16 to 1 on the difference between non-ionic contrast media and ionic ones. So they figured out that they could go 75% ionic and 25% non-ionic. So they saved way more in utilization costs than in pricing costs because they were proactive instead of just going along status quo. So would you agree that a lot of the situation that we get ourselves into is that as long as no one's yelling at us, we haven't done anything in many ways?
Speaker 1:Well, I think that's part of the story. Your story about the Cleveland Clinic is a good one, because it gets right at the heart of what you should be doing with value analysis. It's not all about price, it's about utilization, it's about getting the best product for the best outcome and the best results for the patient, and so I think that's a classic story of value analysis. I think there's several things that contribute to this. I think number one we get because there is a shortage, I think, of help and resources in supply chain. I think of help and resources in supply chain. I don't think we have the hands we need all the time to really effectively evaluate products and negotiate the way we need to.
Speaker 1:I also think, though, there's an overwhelming emphasis on price, and the reason I think that that emphasis exists is because most purchasing people's goals and objectives are written on cost savings.
Speaker 1:Everybody has one, you know, probably 95 percent of the country, I don't I don't know the real number, but and so everybody's focused on price and being able to document that they took, you know, three hundred and fifty thousand dollars out of the cost of certain products, $150,000 out of the cost of certain products.
Speaker 1:Nothing wrong with that, except this overwhelming focus on price allows you to get into kind of a routine and you continue to do the same routine over and over, while you're ignoring some of the elements that value analysis could bring about to save money. Now, when you're doing effective value analysis, it's a multidisciplinary project within various departments and those departments all have to work together to make the value analysis happen. It's not just a supply chain thing, it's not just a laboratory thing or a surgery thing. Everybody has to work together to make that happen. And I think often in the press of day-to-day activities there's not enough time taken to really evaluate what a change in product means and maybe you end up in some cases paying a little more, but the output at the end of the day, to your point, is that you use products either more effectively or not at all or less, and I don't think people are seeing that in many cases and it's frankly frustrating to me after having tried to do this for many, many years.
Speaker 3:Yeah, I know it's that people don't understand the difference between price and cost, and we could probably spend an entire episode just on explaining that to people. We could.
Speaker 3:And we've run out of time now, though, john, so I want to thank you. We're going to have to have you. We always have to have you back, john, because you're like me. We've been in this industry a long time. We've observed things, and we've observed that, you know, insanity is demonstrated by people continuing to try to do things the same way and expecting a different result. Except in Cleveland, insanity is defined as paying $230 million for a quarterback that can't play.
Speaker 1:That's true, Fred.
Speaker 3:So thanks again, john. It's been great having you on the show and have a good one Take care Absolutely.
Speaker 1:Thank you, Fred.
Speaker 2:And that wraps up another episode of Taking the Supply Chain Pulse. A big thank you to John Strong for joining us again and to Fred Kranz for leading another engaging conversation. If you enjoyed today's discussion, be sure to subscribe, leave us a review and share the episode with your network. If you have a topic you'd like to discuss or want to be a guest on the show, you can reach out to Fred directly at F-C-R-A-N-S at S-T-O-N-G-E dot com. Thanks for tuning in. We'll catch you next time.
