The Heavy Burden of Healthcare Supply Costs

Updated on December 26, 2023
Healthcare Supply Chain Management

Healthcare providers today face immense cost pressures. Medical supplies and devices make up the second highest expense for hospitals after labor. With already tight budgets, health care facilities struggle as supply costs continue to rise year after year.

Much of this burden traces back to the structure of the healthcare supply chain. Currently, most providers source the majority of their supplies from a handful of large distributors like McKesson, Cardinal Health, and Medline. In fact, over 90% of hospitals rely on just one or two distributors for the bulk of their purchases. This dependence comes at a steep price.

“By putting all your eggs in one basket with a single large distributor, healthcare providers end up paying inflated costs driven by layers of middlemen markups,” explains Luka Yancopoulous, CEO of procurement platform Grapevines. “They also face massive vulnerabilities if that one distributor encounters disruptions.”

The Hidden Cost of Distribution

Large distributors don’t actually manufacture supplies and devices; they buy them from producers and resell them to providers. As an intermediary, distributors tack on charges to cover their operating costs and turn a profit.

First, extensive brick-and-mortar warehouse networks drive up distributors’ inventory and overhead expenses. They pass these facility and labor costs directly on to buyers through higher product margins. Distributors may also bundle in services like supply chain analytics, group purchasing contracts, and technology integrations. While these offerings provide real value, buyers pay for them regardless of actual usage.

Next, most distributors don’t buy directly from manufacturers either. Instead, they purchase from a range of third-party dealers, wholesalers, importers, and other intermediaries. Every additional supply chain hop compounds margins and adds inflated end costs. Studies show distributor prices can be marked up over 30% compared to direct manufacturer pricing.

When providers rely largely on distributor giants like McKesson or Schein, these layered middlemen costs quickly multiply. Yet custom contracts and volume commitments often restrict buyers from shopping around for better deals. As a result, hospitals and clinics pay far above the true market value for identical supplies simply due to distribution waste.

Single Supplier Vulnerabilities

In addition to premium pricing, dependence on just one or two distributors leaves healthcare providers extremely vulnerable to disruptions. If that major supplier faces inventory shortages, shipping delays, regulatory impacts, or other challenges, providers have zero recourse. Limited diversity means limited options in the face of instability.

Hospitals saw this danger realized all too clearly during the widespread PPE shortages at the start of the pandemic. As major distributors encountered extreme stockouts and backorders, providers that relied predominantly on those channels faced devastating supply crunches of their own. Some were forced to try sourcing from unverified dealers at exorbitant crisis pricing just to maintain lifesaving operations.

According to Yancopoulous, supply diversity serves as a crucial shock absorber: “Any disruption

– whether from natural disasters, vendor issues, or standard instability – can lead to critical shortages if you bet everything on one supplier. By diversifying your network, you ensure backup options to prevent devastating stockouts.”

Diversifying for Resilience and Affordability

While cost savings and supply security make clear cases for diversification, managing more suppliers certainly adds complications like contract complexity, order/inventory tracking, and relationship management. Rather than maintaining the status quo though, providers now have an easier way to diversify through digital platforms.

Grapevine’s online marketplace gives hospitals tools to easily discover, purchase from, and manage relationships with a wider network of manufacturers, importers, and specialty providers. Intuitive procurement software centralizes all supplier data, catalog browsing, cart building, order tracking, analytics, and more onto a single dashboard. This replaces manual paperwork and contract hassles with just simple clicks.

“Our goal is to make supply chain diversification simple and streamlined for providers by handling all the backend complexity,” says Yancopoulous. “This allows buyers to access the pricing and choice of a marketplace model while maintaining the convenience of a familiar procurement system.”

Through expanded supplier choice, Grapevine allows providers to constantly shop around for the most competitive price on each product. Real-time price comparisons across suppliers – both existing partners and Grapevine’s broader vendor network – enable precise spend optimization rather than bulk contract reliance. Healthcare providers can also onboard niche manufacturers to access specialized items unavailable through general distributors.

Serving as a competitive benchmark keeps supplier pricing in check across the board. At the same time, broader selection safeguards providers by allowing instant switching if any one manufacturer hits a shortage. According to Grapevine’s customer data, providers save an average of 80% in supply costs simply by expanding procurement through the platform’s wider vendor diversity.

Yancopoulous summarizes the keys to building supply resilience: “Providers have to move away from dependence on behemoth distributors. By diversifying your supplier network, comparing real-time pricing, and buying direct through streamlined e-procurement systems, you avoid mass markups and ensure constant access to mission-critical supplies.”

The bottom line? Relying predominantly on major distributors like McKesson leaves healthcare providers vulnerable to inflated supply pricing and disruptive stock shortages. Diversification serves as the antidote – if only procurement complexity didn’t stand in the way. But with turnkey e-commerce solutions now easing the path, providers can readily take steps to distribute spend, benchmark costs, and strengthen supply chains. When it comes to vital supplies and strained budgets, access and affordability rule.

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Luka Yancopoulous

Luka Yancopoulous is CEO of Grapevine.