Hospitals Seek Value-Based Contracting in Healthcare Supply Chain

November 21, 2018 - Nearly three-quarters of hospital and health system leaders are interested in value-based contracting in the healthcare supply chain, but opportunities to secure contracts with suppliers are lacking, a new survey from Premier Inc. shows.

The survey of over 200 C-suite leaders and heads of materials management and operations revealed that 73 percent of health systems prioritize value-based contracting on their list of initiatives to improve contracting return on investment (ROI).

Another 81 percent of respondents also want more suppliers to offer value-based contracting options.

However, only about one-third of health systems (38 percent) are currently participating in value-based contracts with suppliers or pharmaceutical companies.

And just 16 percent of respondents reported engaging with true value-based contracting with two-sided financial risk, in which vendors agree to pay providers back for the costs incurred if the product does not meet pre-determined cost and quality outcomes.

READ MORE: Data Analytics Add Value to Healthcare Supply Chain Management

“In today’s healthcare environment, health systems are increasingly being pushed to assume risk for the total cost and quality outcomes of all delivered care,” Myla Maloney, Vice President of Strategic Accounts for Premier Applied Sciences, stated in a press release.

“In an environment where value is the new economy and measures are its currency, we are seeing an uptick in the number of providers interested in securing outcome guarantees from their business partners,” she continued. “The challenge is that value-based contracts between providers and suppliers are a relatively new phenomenon, and there are few best practice examples for how they should be structured.”

Hospitals and health systems are currently engaging in three types of value-based contracting in the healthcare supply chain. The types of value-based contracting are:

• Evidence-based care discounts in which suppliers offer a discount off the purchase price in exchange for the reliable performance of an evidence-based clinical intervention
• Product or service guarantee in which suppliers reimburse hospitals or health systems for the purchase price of a product if the product does not meet quality or performance standards
• Risk share by product in which suppliers reimburse hospitals or health systems for an added cost to the system as a result of a poor outcomes

Premier’s Maloney added at Xtelligent Healthcare Media’s recent Value-Based Care Summit that a fourth type of value-based contracting exists in the healthcare supply chain. The fourth type is value-based contracting with two-sided financial risk.

“For those of you that are in a healthcare system or you are part of an ACO, let's pretend you used a product that actually helped you make money at the end of the year. You had an upside. You would share that money back with the manufacturer,” Maloney explained.

READ MORE: Leveraging Group Purchasing for Hospital Supply Chain Management

However, she considers that type of value-based contracting aspirational at this point in time.

And the recent Premier survey shows that hospitals and suppliers are currently far from engaging with true value-based contracting with shared risk.

Health systems are not robustly engaging with two-sided risk contracts with suppliers just yet because most leaders do not know enough about the shared risk contracts. Approximately 55 percent of C-suite and materials management and operations leaders said they did not know how to implement a value-based contract with a supplier that included two-sided financial risk.

Data is the number one challenge with understanding how to engage with and implement value-based contracts with shared risk, the survey showed. Twenty-two percent of respondents cited data as their top obstacle.

Internal communications were also an issue with shared risk value-based contracts with suppliers among 14 percent of respondents, followed by coordination with suppliers (12 percent) and infrastructure support (11 percent).

READ MORE: Why Healthcare Needs Value-Based Supply Chain Management

Hospitals and health systems should have specific capabilities before engaging with value-based contracting in the healthcare supply chain, Maloney said at the Value-Based Care Summit. Premier assesses its member hospitals for their readiness for value-based contracting and organizations need capabilities like data interoperability, care management, clinical coordination, and financial incentive alignment to be truly prepared for value-based contracting with suppliers.

Healthcare organizations are still developing many of the capabilities needed for value-based contracting. For example, only about four-in-ten hospitals reported they can find patient health information as well as send, receive, and integrate patient summary of care records from sources outside their health system, ONC officials recently reported.

Additionally, financial incentives within organizations are still primarily tied to fee-for-service. Just 39 percent of provider compensation incentives were value-based, a 2017 Merritt Hawkins survey found.

Some hospitals and health systems are further along with implementing value-based contracting capabilities. But these organizations are also facing challenges with value-based contracting in the healthcare supply chain, the survey showed.

Health systems are unable to secure value-based contracts in the healthcare supply chain because of a lack of supplier engagement according to about 67 percent of respondents.

Maloney explained that value-based contracting in the healthcare supply chain will take off when leaders of provider and supplier organizations understand that one, both parties are interested, and two, they are both ready.

Opening dialogue between hospitals and suppliers, whether through a group purchasing organization like Premier or on their own, will be the start of more robust adoption of value-based contracting.