Strategic Procurement of High-Cost Medical Devices

Introduction

Healthcare supply chains are challenged with supporting innovative treatment regimes, containing costs of medical services, and providing diversified sources of supply to protect against market dominance and disruptions to production and distribution in global supply networks. Healthcare providers are under constant pressure to contain costs in a sector of the USA economy that now exceeds 18% of GDP (Papanakolis et al., 2018; DiChiara, 2016). After staffing and professional services, medical supplies constitute the second-largest category of cost for healthcare organizations and supply expenses can average nearly 15% of total expenses for hospitals (Belliveau, 2017; Abdulsalam and Schneller, 2017). The market for medical devices has been characterized as having opacity of pricing, incomplete data on comparative effectiveness of alternative products, and dominance of physicians’ preferences in purchasing decisions (Lind, 2017). Healthcare supply chains therefore need internal improvements to manage materials (procurement and usage) effectively (Beaulieu and Bentahar, 2021).

To their credit, healthcare supply chains have adopted technologies such as RFID, IoT (Internet of Things), Automated Guided Vehicles (AGV), and Blockchain for their logistics and inventory management (Jayaraman et al., 2019) operations. However on the procurement front, healthcare information systems are generally not geared to facilitate a thorough investigation of alternative sourcing strategies, and integrating information from different sources is a challenge (Sligo et al., 2017). Crucial for qualifying suppliers and managing relationships with them is information about costs, quality and service for particular products. Subjective assessments of these attributes may be acquired from surveys and summarized in supplier scorecards, but such ratings derived for scorecards are known to be subject to bias (Peterson and Wilson, 1992; Lance et al., 2010). Complicating the purchasing process further in a hospital setting are individual physicians’ strong preferences for particular branded devices which increase purchasing expense and reduce flexibility in responding to supply-chain disruptions (Atilla et al., 2018). Procuring medical supplies through national alliances known as group purchasing organizations (GPOs) can generate cost savings through bulk buying and this is the norm for many hospitals. GPOs, however, do not tend to forge multivendor contracts for physician preference items (Burns and Briggs, 2020). In-house purchasing strategies that deliver bulk-purchasing efficiencies for a hospital’s specific product requirement need to be explored separately.

Ahmadi et al. (2018) assert that, as healthcare organizations search for ways to reduce costs while mitigating supply-chain risk and delivering high-quality services, they need effective tools to integrate quantitative and qualitative information from various sources and to organize it in a form for strategic decision analysis. They call for the use of techniques such as mathematical optimization methods for the management of procurement in healthcare. With such support, healthcare purchasing managers can investigate the effects of various constraints and economic incentives in the purchasing process, and facilitate discussion among stakeholders as they strive to improve performance of the healthcare supply chain. The model and analytical processes presented in this paper are designed to assist healthcare supply chain teams in confronting these challenges.