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The power of many: How hospitals sourcing aggregation will be the key for healthy India

The power of many: How hospitals sourcing aggregation will be the key for healthy India

Tuesday February 05, 2019 , 5 min Read

While many states in the country are doing a commendable job of providing health insurance, to make universal affordable healthcare a reality, the cost of healthcare services needs to come down significantly. This is where healthcare procurement and supply chain management needs a new approach. 

India is often blamed to have a relatively higher cost of healthcare services as compared to the other countries in the developing world. The numbers are the real testimony. A recent study published in the journal BMC Cardiovascular Disorders draws a comprehensive comparison between costs for ECGs (electrocardiography), cardiac markers, echocardiography, angiography, angioplasty with one drug-eluting stent, angioplasty with a bare metal stent, heart bypass surgery (CABG) and single day’s stay in a cardiac intensive care unit across India, China, South Korea, Hong Kong and Singapore. It suggests that most of the above procedures were about 10-20 percent more expensive in India as compared with South Korea, a country with per capita income more than five-and-a-half times vis a vis India. The situation becomes even more critical as more than 70 percent health-related expenditure in India is borne by consumers, burning a big hole in their pocket. This pushes about seven percent population below the poverty line every year and has a negative impact on the socio-economic progress.

Need for inclusive healthcare

To understand this situation further, we need to deep dive into the cost structure of the healthcare organisations operating across the country. In June 2018, the Association of Healthcare Providers of India, a body of private hospitals, came out with first of its kind study in this regard. The report states that Indian hospitals spend about 28-32 percent of their operating cost on drugs and consumables. This is followed by another 10 percent spent on diagnostics. The cumulative cost of maintaining a bed in a super-speciality hospital can cost a patient somewhere between Rs 15,000 and Rs 25,000 every day. High quality, specialised healthcare services in India are out of reach of most people in the mid- and low-income segment. Hence, this segment of the society is often forced to compromise on the quality of healthcare services they pick.

Around the world, traditional models of healthcare procurement are fast losing relevance and economic viability. Therefore, it is important to find new ways for cost optimisation and supply chain management. The biggest victim of cost incompetency are small- and mid-sized hospitals and clinics in India and, eventually, the patients admitted there. These are operated by doctor-entrepreneurs, or a group of doctors working in collaboration, and cater to a large population in villages and small towns around the country. Due to a lack of market intelligence, and small order size, they are not in a position to effectively negotiate with the suppliers, just as big hospital chains can. Keeping a track of replenishment, new or more affordable alternative products in the market, and logistics cost is also a persistent challenge for procurement managers.

The need for GPO

Powered by technologies such as machine learning, artificial intelligence, data analytics and procurement expertise, a Group Purchasing Organisation (GPO) addresses this challenge to a great extent. For the uninitiated, it is a virtual business entity incorporated by aggregating the procurement requirements of several small- and mid-sized hospitals and nursing homes. The collective scale of purchase allows the GPO to negotiate with different suppliers and apply market intelligence like a large hospital. At the same time, these member hospitals and nursing homes can continue to enjoy their operational independence, i.e., not allowing a takeover by a larger business. At present, about 96 percent acute-care hospitals and 98 percent community hospitals in the US have at least one GPO membership. It is seen that those small- and mid-sized hospitals in India that subscribe to the GPO-based procurement model save about six to eight percent on their annual operational cost. As the model gains further momentum, economies of scale will allow more savings for hospitals, their patients, government, as well as the entire society.

Affordable healthcare critical

As the government aims to take affordable healthcare services to the last mile through Ayushman Bharat and other state-funded schemes, State governments, especially in Southern India, are leading the way. For instance, Tamil Nadu recently announced an enhanced cashless health insurance cover of Rs 5 lakh for 1.58 crore families. The Tamil Nadu health insurance scheme spent about Rs 225 per enrollee in 2016, while Andhra Pradesh and Telangana spent an average of Rs 14 0 per enrollee4. Similarly, the Kerala and Punjab governments have also taken significant steps to expand the health insurance umbrella in their respective states.

However, to make universal affordable healthcare a reality, the cost of healthcare services needs to come down significantly. Public healthcare schemes alone cannot take this responsibility. Therefore, more small- and mid-sized hospitals and clinics should be sensitised about the benefit of sourcing aggregation and utilising the GPO-based model to procure their essential supplies. Going by the early trends, US$200 billion is expected to be spent on medical infrastructure by 2024 and additional three million beds needed for India to achieve the target of three beds per 1,000 people by 2025.

With GPO-based procurement, this could well mean savings of about US$800 million-1 billion for subscribers, which can be further be passed on to consumers. With the right push from the industry and favourable policy measures, it can reshape the healthcare sector in the country and save millions of innocent lives in the coming years. Additionally, India can become the most preferred medical tourism destination in Asia.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)