Sushet Gautam
Sr. Consultant - Healthcare Advisory,
PwC

Managing Supply Chain In The Era Of Ayushman Bharat

Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY) is a significant milestone in the evolving healthcare ecosystem of our country.

A major upside of the scheme is the beneficiaries it targets, thereby making healthcare accessible for the most economically challenged and vulnerable segment of the population. Besides this, it is a significant step, where the government has changed its stance from being a provider to a payor. This is also seen as India’s journey toward universal health coverage (UHC).

A year after rollout, upon receiving a moderate uptake by the private healthcare providers, AB PM-JAY has undergone some major re-engineering of the health benefit packages it offers. The prices of more than 275 packages were increased in an effort to ensure better uptake and utilization of the scheme. However, rates revised are still lower as compared to other central government schemes, such as CGHS; this heterogeneity in prices creates bottlenecks for the private healthcare providers to participate.

The private healthcare providers are expected to drive majority of healthcare services owing to the limited capacity of public-health systems. The scheme will ensure increased patient volumes, higher occupancy, and better utilization of the private healthcare facilities. But owing to the lower package prices, these increased volumes will come at a reduced operating margin. Hospitals will encounter lower ARPOBs, decrease in EBITDA margins, and overall less return on capital employed.

With these pricing pressures, hospitals need to proactively realign their practices and bring down costs involved in the delivery of care while also making reasonable profits.

According to Central Statistics Office (CSO), healthcare costs are increasing faster than general inflation so the providers should look at all the cost heads scientifically, and work strategically toward optimizing compressible cost heads across all spend categories, i.e., materials, manpower, clinicians, and other overhead costs.

While looking at hospital expenses, the cost of material is second to the employment cost (clinical and non-clinical), it accounts for ~20–24 percent of total revenue or approximately one-thirds of the total expense incurred by a multispecialty tertiary-care hospital. Management of the supply chain has evolved significantly over the past decade, but hospitals are still facing multiple challenges at large. A typical multispecialty tertiary-care hospital has to manage a large number of SKUs (stock-keeping units) ranging from 3000 to 4000, while managing multiple stakeholders and clinician’s preferences; uncertainty of demand adds to the complexity of operations and leads to a rise in supply chain cost.

Thus, it becomes a captivating area for cost control when it comes to strategizing supply chain management in the era of AB PM-JAY. Four key areas that will help in the efficient management of supply chain while better managing the costs are: procurement optimization, efficient inventory management, vendor relationship management, and standardizing the material usage.

Procurement Optimization

Hospitals should move from stand-alone to an integrated procurement function, i.e., involving all the concerned stakeholders including clinicians in the process of procurement. Integration is important as clinicians want to use familiar products, while hospital management aims to procure products securing better margins. An integrated system will help identify and procure cost-effective and high-quality products, ensuring good clinical outcomes and higher acceptance. This can be achieved by involving clinicians in Drugs Therapeutic Committee (DTC) and frequently including them in product selection. The focus should be on co-finding the compressible spends across various material categories with an aspiration of cost savings by material consolidation, brand substitution, and renegotiation.

Co-creating a standard formulary will not only help in material consolidation and keeping the costs in check but will also meet the clinical requirements; any revision should only be done after taking the consent of relevant stakeholders. Brand substitutions should focus on equitable quality products and should be routed through strict quality approvals from the users. A satisfied user will respond better in terms of product adoption; user training should be provided for any substitution or technology upgrade.

Purchase team should adopt strategic and structured negotiations to reduce the total cost of ownership. The focus should be on reducing the number of stakeholders in the procurement cycle and move toward direct procurement; thus, increasing the margins especially for high-value items. The healthcare providers should strategically move from hospital-owned inventory to supplier owned inventory; in procurement term, from direct purchasing to consignment purchasing. This will not only improve the procurement process but will also reduce the overall spend on materials.

Efficient inventory management

In today’s era of data, hospitals should adopt automated solutions for supply chain analysis, which are both patient-centric and help reduce the cost of ownership. Currently, many hospitals are using manual methods for issuing patient and department indents and overall inventory management, which are highly inefficient, unscientific, susceptible to errors, and human resource intensive. Most importantly, such manual systems generate a minimal amount of meaningful data.

An automated supply-chain system will not only help in streamlining the process but will be highly patient-centric with better monitoring of material issues and movement. This will also help in managing inventory effectively on the basis of historic data analysis, while also minimizing the losses due to product expiry. More importantly, automated systems will reduce the chances of stock-outs, thus ensuring timely dispensing of the medicines as per the treatment guidelines. Backed by data, the hospitals should focus on using inventory-management tools like ABC, VED, and FSN. The focus should be on quick turnaround of inventory, thus reducing the overall cost of managing and handling inventory.

Vendor relationship management

Vendors/suppliers are key to any supply chain function; the hospitals should move from transaction-based management to relationship-based management of vendors. Efficient relationship with the vendors helps in better management of inventory, reduces lead time, and improves the procurement margins. Hospitals should focus on consolidation of vendors, thus providing higher volumes to a single vendor leading to better margins.

Vendor relationship not only helps in the reduction of overall cost but also increases efficiency by reducing risks associated with stock-outs and delayed supplies, which leads to gaps in patient management. Proactive relationship building with the vendors will help to reduce the time spent on follow-ups. The focus should be on maximizing the vendor engagement, while maintaining lower creditor days. Vendor ratings should be done to identify valuable vendors and building relationships further to a prosperous future.

Standardizing the material use

There is an increasing need to standardize the clinical pathways for efficient patient management. Standardized treatment protocols will reduce the variation and over-usage of material, which is otherwise not recommended. This is a complex step involving high engagement from the clinicians, who can specify requirements as per the standard protocols. The hospital management should work closely with the clinicians to bring standardization in material usage. Together, all stakeholders should co-define the usage and reuse policy (wherever applicable). Data analytics can be used to ensure the right use of material based on historic data. Specialized pre-pack kits should be designed for ease and limiting any deviation from the bill of material used. This can be achieved by a highly integrated procurement and supply-chain system.

These measures will not only help in the efficient management of supply chain but will also reduce the overall cost of managing material in the era of Ayushman Bharat, where margins are already shrinking due to increasing cost pressure and lower realization. By adopting these practices hospitals will be able to optimize the overall supply chain cost by ~15–20 percent.

Share this:
Stay Updated on Medical Equipment and Devices industry.
Receive our Daily Newsletter.