Why Hospitals Are Outsourcing What They Used to Own

 This is the second part of a three-part series based on Hueman RPO's video interview with Scotty Kinn and Dave Malenfant regarding healthcare supply chains. For more on "5,000 Surgical Knives: The Hidden Cost of Choice in Hospital Supply Chains", see the full video series.

When hospitals are trying to cut costs, it is tempting to look at staffing first.

Still, the real opportunity to save money lies in tackling supply-chain inefficiencies and complexity, not in reducing staff. The supply chain had created a problem no one could cope with. "Custom packs," pre-assembled kits designed to meet a surgeon's exact preferences, address the patient-care side of that issue.

However, someone has to put them together, and assembling them to that level of customization is cumbersome, laborious, and expensive to ship. As Dave Malenfant, founder and CEO of MDM Consulting, pointed out to us, group purchasing organizations now face a choice: either build the capacity within the company to assemble thousands of different custom versions themselves or find a partner geared toward doing so at scale.

They decided to select a partner. "That's precisely what they're doing," he remarked. "They're outsourcing the task of producing the packs." It turned out to be a success not because outsourcing is inherently cheaper, but because it let the GPO negotiate based on combined volume rather than scattered, in-house estimates, while also giving doctors exactly what they wanted.

Outsourcing does not indicate failure.

Outsourcing does not indicate failure; it allows you to focus on your strengths while experts handle everything else.

The section of the story that is overlooked when the term "outsourcing" is employed merely as a cost-reducing buzzword rather than as a deliberate strategy is the fact that the GPOs in this case did not outsource since the assembly of custom packs was not important to them; instead, they outsourced because it was important enough to demand actual capacity that they did not possess and that they would not be able to develop in-house quickly enough to meet the required standard of patient care. Look at another example from the conversation with our sister brand Princeton One Supply Chain series: a refrigerated injectable that had to be stored at -20°C, one that completed all the clinical trials and reached commercialization before failing.

The reason for its failure was not that the drug didn't work, but that no one had previously checked whether the clinics had validated deep freezers capable of meeting the FDA's storage requirements. "I think there wasn't a proper effort made to survey the healthcare sector," he said, "to find out if it could be accommodated. And that leads into this issue in healthcare: the hospital side never communicates with the rest of the supply chain. They are just another silo."There are two very different situations, yet the underlying cause is the same: when the responsibility for a process is unclear and is spread among departments that don't communicate with one another, or is given to the person who has the availability that week, the cost eventually appears, whether as excessive spending or as a product which never reaches completion.

The freezer example illustrates the cost of having a silo, and that cost doesn't appear on a spreadsheet. In some cases it isn't even a separate line item; in other cases it's the product itself, one which never reaches launch since no one checked whether the rest of the chain could keep up.

The message about the custom pack can be conveyed differently. If a problem is such that it is both huge and extremely complicated for a single team to cope with, the solution should not be to simply carry on and try to deal with it themselves; instead, you should find or create a partner who can take responsibility for that section of the process from beginning to end, in order that the parts of the system which are working don't have to compensate for those which aren't.