Why procurement optimisation is essential for Private Equity clinic consolidation

WORDS: Mara Mueller, Charlotte Schiolko, and Likun Wang

When examining recent years’ healthcare sector trends, one phenomenon quickly becomes evident: Private Equity (PE) firms are buying and consolidating clinics, hospitals, and clinic groups at speed. Research from Bain & Company shows that PE firms invested over US $150 billion in the healthcare sector in 2021 – more than double over the previous year at US $66 billion.¹

Consolidation brings both changes and challenges for clinical care organisations, but it is also a chance for procurement to strengthen its central role by bringing significant benefits and opportunities – both in terms of costs and in harmonising operating models to maximise efficiencies.

Hospitals benefit from consolidation with opportunities to generate savings by reducing suppliers and realising profit from volume bundling. Thus, synergetic effects and benefits can be achieved through standardising procurement target operating models in terms of processes, systems, guidelines, and role profiles.

Clinic consortia – a trend with no limits

Private equity’s clinic consolidation is occurring broadly across healthcare, regardless of clinic size, location, or sector. Both smaller hospitals and larger clinic groups are included in consortia activities – small clinics are integrated into large clinic groups, and large clinics are consolidated. Not limited to traditional medical clinics, the trend is also seen across eyecare, rehabilitation, and fertility clinics, to name a few.

Consortia activities are also occurring broadly across different regions. For example, a PE client acquired multiple clinics and clinic groups in both Germany and the UK and sought to standardise the business model and leverage efficiencies through optimised procurement practices that would benefit all locations.

How can clinics benefit from consolidation?

Procurement cost accounts for up to 40% of a hospital’s operating budget, and an average hospital has around 35,000 SKUs in portfolio and 6,000-8,000 SKUs of inventory at any given time.² Taking up such a significant portion of budget, procurement offers substantial cost saving opportunities for the consortia:

• Leverage volume bundling: There are many products that are used across different healthcare providers, so consolidation of the organisations also means consolidation of volume, creating more leverage to negotiate a better deal with the suppliers (for example, lower per-unit-costs, discounts, and rebates). A past collaboration between South London Cardiac Operational Delivery Network (ODN) and NHS Supply Chain saw devices commonly used in interventional cardiology procured for five NHS trusts combined. The result projected savings of 30% of the total spend (£1.3m each year) on the devices across the five trusts.
• Direct & Indirect category savings: When volume bundling for healthcare providers, the first thing that usually comes to mind is direct procurement, or clinics-related products. However, provider also share many common indirect procurement products, such as technology and office supplies. Originally procured individually, indirects can now also be consolidated and procured in bulk to generate cost savings.
• Supplier aggregation: Through aggregating demand, large volume contracts for different products can be established with key suppliers. Reducing the number of suppliers can significantly increase the total contract value with the remaining suppliers.
• Define a standardised product portfolio:
  • Individual healthcare providers utilise many products that are very similar but with subtle differences (for example, cotton pads shapes and sizes or different-sized syringes), for which it might be possible that the variety of each product could be reduced to a minimum – without impacting the clinical requirements – to increase volume bundling.
  • Clinical product and SKU standardisation leads to improved compliance in supply chain management.
  • A well-defined product portfolio should also meet all requirements at all times for all the providers (with minimal exceptions). Together with a robust process, this should reduce the amount of maverick buying throughout the group.

Opportunities with a standardised, strategic procurement function

Harmonisation and standardisation throughout clinics are not only valuable to drive down costs, but they also enhance efficiency in procurement’s target operating model. We see with our clients that if the target operating model is not harmonised across clinics, costs cannot be managed effectively. An effective target operating model is created by centralising strategic procurement in one function with standardised systems, processes, guidelines, and role profiles.

• Systems: Digitisation is a well-known buzzword, and clinics cannot ignore this trend. Procurement must be digitised, to include user-friendly P2P, contract management, and KPI systems. However, we still see a significant amount of manual paperwork and processes, as well as outdated systems, in our clients’ locations. For example, we were able to enhance efficiency in the purchase order audit process and reduce the amount of manual audited invoices by 65% for a German client by adapting its system to best-practice industry standards.
• Processes: Harmonised processes are essential in procurement to avoid high maverick buying quotes and inefficiencies. As mentioned in systems, it is important to have digitally harmonised processes to reduce manual efforts.
• Role profiles: Strategic procurement must have standard role profiles for clear responsibilities. This is not only important within the procurement department, but also for the individual clinics to have clear contact persons for all procurement related queries.
• Guidelines: Having a central procurement guideline that describes the procurement function and procedures and is applicable across clinics is a key support element for all of the aforementioned factors. Therefore, for certain categories it is useful to add category-specific guidelines, for instances such as when the ordering process does not comply with the standard process.

Each component must be considered individually, but do not underestimate the dependency between them.

In addition to the components mentioned, we recommend staying in close contact with experts that make daily use of products in the clinics’ locations and establish focus groups to benefit from their experience and knowledge. A regular exchange between them and procurement provides the opportunity to improve the product portfolio and capture the exact needs of the end-users. Clinics without focus groups show high maverick buying quotes and fragmented product portfolios.

Procurement functions of healthcare consortia should be forward-looking

Apart from the direct operational benefits that result from consolidation of healthcare organisations, overlooking the opportunities from procurement would mean the consortia are nowhere near maximising all the benefits they could realise.

Procurement should not be regarded as a standalone function; in fact, it must be closely integrated with core operations. For example, clinical product standardisation not only reduces cost but also improves care quality and operational efficiency. Differences in clinical products, such as quality and usage method, could result in human and clinical error. Standardisation leads to greater efficiency because caregivers have fewer clinical products to learn, and application becomes streamlined.

All things considered, it is essential that the procurement function be considered more strategically by healthcare consortia, and substantial steps should be taken to reap all the benefits procurement could bring.

We have significant experience with clients in the pharma and healthcare industry. If you would like to explore the development journey of your procurement function and related value generation and cost reduction opportunities, please contact us by filling out the form on our Pharma & Healthcare service page.

_{¹ Healthcare Private Equity and M&A Report 2022 | Bain & Company}

_{² Darling M and Wise S. Not your father’s supply chain. Materials Management in Health Care. 2010; 19(4)}