Rae Woods (00:18):
From Advisory Board, we are bringing you a Radio Advisory, your weekly download on how to untangle healthcare's most pressing challenges. My name is Rachel Woods. You can call me Rae. We know that health system finances are in a pretty tricky moment. On Radio Advisory, we spend a lot of time talking about the strategies health system leaders should consider to stay resilient. Things like finding their differentiated revenue opportunity, looking for smart growth. But we haven't talked that much about the other side of the coin, and that's the cost of doing business. We know that the most expensive line item in any budget is labor, but the second is often purchased goods, which make up about a quarter of health system spend.

(01:03):
Every couple of years, Advisory Board runs a health system purchasing survey to better understand how leaders are approaching the tricky equation of managing cost and purchasing the goods necessary to provide high quality, innovative patient care. And we happen to run this survey in this moment of policy and economic uncertainty. The purpose of this survey is twofold. First, we want to give health system leaders a look across the industry and a way to benchmark their strategies against their peers. And second, it gives vendors who sell those products insight into how they can better position themselves to serve their clients. That's why I've invited Advisory Board expert Nick Hula.

(01:47):
He's actually the one who's led this survey for the last several years now, so he can talk about what's changed and what's uniquely challenging in 2025. Nick, welcome back to Radio Advisory.

Nick Hula (01:59):
Thanks, Rae. Always great to chat with you.

Rae Woods (02:02):
I want to reveal to our listeners that when we were talking about this episode, you actually told us that in the past we've ran this survey and it almost kind of serendipitously happened during moments of peak chaos in healthcare. I'm talking about during the COVID Pandemic, supply chain struggles and all of the aftermath. Now we're doing it in the shadow of tariffs. Tell me, you did this on purpose.

Nick Hula (02:30):
It has not been on purpose at all. It has just somehow aligned to when there's this big moment going on in healthcare, we're planning on looking at how organizations are purchasing.

Rae Woods (02:42):
So then my question is, have you noticed changes in the way that they act in response to these moments of chaos?

Nick Hula (02:50):
This is an area where health systems are at least somewhat agile and they do need to be in chaotic moments for their business. This is a really large area of spend for health systems, again, alongside labor. Nobody wants to cut labor, so when you have some financial pressure brought on by, be that a pandemic, be that a volatile policy environment, purchase goods is typically the first place people look to change to protect their margins.

Rae Woods (03:18):
What's the top line trend that you're seeing in 2025 in health system purchasing?

Nick Hula (03:25):
Highest level thing here is all of this political policy, regulatory, broader economic uncertainty causing health systems to revisit their purchasing strategy. I do want to add a little bit of nuance to that. The way that health systems approach purchasing doesn't only change when there is one of these big chaotic moments. There are some more long term, I call them slow burn changes happening as well. Purchasing is more complex than ever. We're seeing organizations enter more factors into their value equation for any given product. Real world evidence, value-based care, all of that sort of stuff.

Rae Woods (04:09):
And it sounds like that was happening in the background anyways, and then we just kind of added fuel to the fire with the economic headwinds, with the policy decisions that are forcing health leaders to be even more focused on how they reduce costs and maybe also get the right value from the goods that they're purchasing.

Nick Hula (04:29):
Bingo. This stuff we're dealing with right now, this is forcing a temporary change to a lot of health systems in the way they purchase. It's a complicating factor, but this is all just part of a broader, more structural, more long-term change going on within the purchasing environment.

Rae Woods (04:46):
I think we should actually pause for a second before we go any further in this conversation.

Nick Hula (04:49):
Sure.

Rae Woods (04:50):
What is it that we mean when we say purchased goods?

Nick Hula (04:55):
Great question. That could be a lot of things. But in our research what we are looking at is equipment, devices, supplies, and drugs, which an easy way to think about that is anything you could physically pick up and put down that a hospital might purchase. That can range as anything from as big as a CT scanner, which I guess you'd have to be really strong to pick that up, but in theory, but more like a surgical instrument to a glove, to a pill, anything like that.

Rae Woods (05:27):
So there's obviously this huge storm of pressures and changes in the policy environment that are forcing this kind of reaction from health systems. You already named some of them. Tariffs, which can directly impact purchasing, but then there's also the looming Medicaid cuts, which put pressure on margins. Leaders are then being forced to put new, maybe even bigger cost-cutting measures in place to make up for those margin shortages. My question though is who are the leaders that are most likely to take action and what is it that they are doing in response?

Nick Hula (06:02):
So the people taking action here are largely on the front lines of purchasing, supply chain leaders. Also, the committees that health systems have who make decisions for drugs. This is the Pharmacy and Therapeutics committee, typically the P&T committee we call them, as well as for some of the devices, the supplies, what's called the Value Analysis Committee. In terms of what they are doing, again, we're seeing things like tariffs, Medicaid cuts that you mentioned, put pressure on the health system, and those are trickling down to the decisions that those individuals make about what products are we having available within our health system.

Rae Woods (06:36):
So I mentioned the first thing that they're doing is just trying to preserve as much cash as possible,

Nick Hula (06:41):
Right. Preserve cash, maximize budget flexibility as well. So some actions they're taking here in our survey, over half of all systems right now, today, are doing things like reducing short-term spend. Not necessarily looking out, "Hey, we need to be slashing our budgets over the next three or four years," but saying, "Hey, where could we find some immediate cost savings right now?" Prep our margin for constraints for a lot of the stuff that you mentioned.

Rae Woods (07:08):
And so that might mean maybe not buying the new CT scanner knowing that they have to keep buying gloves.

Nick Hula (07:15):
Exactly, absolutely. Or just finding, "Hey, is there a cheaper vendor we can go right now for gloves?" For example, to preserve some cash. The other thing we're seeing organizations do is stockpiling for both drugs and devices, trying to get stuff in before tariffs hit. There are some pros to that, but certainly a lot of cons or a lot of things I caution people around that strategy of stockpiling.

Rae Woods (07:43):
Is that a good idea for a health system to stockpile? I'm getting deja vu to a couple of things within the COVID era, and the first thing that came to mind was actually how consumers acted in the beginning of the COVID era, right? When everyone was stockpiling toilet paper and that ended up actually being a bad idea.

Nick Hula (08:00):
This is a great example of the health system needs to look back on what they learned during COVID, what they learned worked, what they learned didn't work, and stockpiling, like you said, is a great example here. Most health systems don't have massive warehouses. Most health systems are not experts at rotating inventory properly. Most health systems are not experts at managing large quantities of supplies, and I'm not saying that they should be. Walmart is good at that. Amazon is good at that. Health systems, not experts in those supply chain inventory management, not well-equipped to do something like stockpiling.

(08:36):
That's something that we learned during COVID, and I think people should be looking at and saying, "Hey, maybe we should be relying on others to help us do that. Our distributors, for example, relying on them to help us do that."

Rae Woods (08:48):
Not to mention the fact that I'm sure many healthcare goods cannot be stockpiled for a long term, right? If I'm thinking about drugs in particular, some are shelf stable.

Nick Hula (08:56):
A lot aren't.

Rae Woods (08:57):
It strikes me that there might be a difference between, I might even use the word hoarding instead of stockpiling versus making the do I buy now or later decision, at least in the context of tariffs specifically. So I already mentioned maybe delaying the purchase of something to preserve cash, but I can also see the other end of the spectrum, which is, "Oh no, no, buy that new CT scanner now before the tariffs hit."

Nick Hula (09:24):
Exactly, yes. I think it's all a matter of how are we going to maximize our spend in the short term to prepare us for future budget constraints. For some things that we need to buy the cheaper version, for something that's going to be, "We need to buy this thing anyway, do it right now so that we don't have to do it a year from now when Medicaid cuts have hit our revenues or some of these tariffs make it a lot more expensive."

Rae Woods (09:48):
So while these moves might be smart, at least when they're deployed in specific purposeful ways, they also just aren't permanent solutions. Right?

Nick Hula (09:57):
Exactly.

Rae Woods (09:58):
Our health systems then just preparing to spend more money or potentially buy fewer products as they respond to the potential long-term change of tariff-driven price increases.

Nick Hula (10:14):
I would say no, Rae. The general sentiment I'm getting from health systems is actually, "We're not going to take this rolling over." In our survey, 54%, so just over half, of respondents say they already or plan to renegotiate contracts with suppliers or wholesalers, whoever they're buying from. This is stuff like using AI to scan all their contracts for languages tied to price increases due to tariffs.

Rae Woods (10:44):
Meaning they're just going to negotiate and say, "Nope, actually we want to maintain the same price structure that we have. Sorry, try something else."

Nick Hula (10:52):
Exactly. Or say something like, "Put language in our contract that prevents price increases due to tariffs, but in exchange for that, we'll sign on for a longer term for purchasing from you." So trying to find that middle ground with the vendors to protect their long-term budgets. Now, a really important thing though is inevitably there will be some price increases that health systems will face.

Rae Woods (11:15):
I'm thinking they can't just renegotiate forever.

Nick Hula (11:18):
They can't renegotiate forever. They can't renegotiate for everything. In that instance, there's still things that health systems can do to, again, not take this rolling over. They might be thinking about, "Hey, do I use this action in negotiations with my payers as well advocate for higher reimbursement by saying, 'Hey, my cost of doing business is going up so much.'" Some are going to be successful at that, some are not, but eventually we're going to lead that down the line further when payers push that to purchasers in a form of higher premiums as well.

Rae Woods (11:47):
I just had massive deja vu to a Radio Advisory episode that we must have done in 2020. Because I want to say the title was something along the lines of the Suddenly Strategic Imperatives of Supply Chain, and what you just described is actually that sentiment. It is about, first of all, doing what you can do to negotiate around the supply chain conditions themselves, but also using that information or that reality in your business model to think about your strategy more broadly. So in this case, using this information to go to payers when health systems are going to be inevitably asking for better rates.

Nick Hula (12:25):
Absolutely, and those effects are going to ripple across the health carry ecosystem for years.

Rae Woods (12:31):
You mentioned some of the key players within the health system that are doing this work. Are they doing that alone?

Nick Hula (12:39):
No. Health systems are not going to be going this entire thing alone. A lot of organizations are going to be relying on, for example, their GPO, their group purchasing organization who manages a lot of these contracts. One leader who I spoke with, I love this line, it's so simple. They said, "GPOs are our first line of defense against price increases." This is going to be a really complicated thing for a lot of health systems to go through. They need to be relying on partners. They're GPOs, other consultants who they may have for help as part of this.

Rae Woods (13:12):
So what you've told me so far is that health systems are using this time to make short-term changes to positively impact their margin. They're also thinking about long-term approaches to their vendor relationships and their partnerships. You already told me that while of course health systems are responding to the immediate policy and business pressures, there was already this kind of looming change in the background when it comes to the approach to supplies more broadly. How are health systems taking action to build more of a kind of resilient approach to purchasing beyond these immediate tariff related pressures?

Nick Hula (13:52):
Absolutely. It's all about strengthening their supply chain. You mentioned that word resilience, and that's a key word here that we used a lot. Again, during COVID, people try to add resilience to their supply chain, but I think a lot of people of the past two or three years have said, "Do I want to run my business based off a once in a hundred-year event? Do I really need to be having this resilient supply chain?" Well, we've had two or three events over the past five years where having a resilient supply chain has been incredibly, incredibly imperative. So I think this really cements that strategy of strengthening supply chain that's useful not just once in a hundred years, but more permanently.

Rae Woods (14:29):
If that's why resilience is important, what are they doing to be more resilient?

Nick Hula (14:34):
So in our survey, 86% of our survey respondents said they are diversifying their suppliers, and that's-

Rae Woods (14:42):
86%?

Nick Hula (14:43):
Almost nine in 10. That's a really smart thing to be doing, and that's very promising to see that people are doing that. That looks like, "Hey, identifying suppliers, looking at organizations who have diversity in their manufacturing locations, thinking about the appropriate number of vendors they should have for drugs and devices, not just the smallest number of drugs and devices they can have or vendors for drugs and devices they can have.

Rae Woods (15:09):
You just said something that perched my ears, diversifying where they're getting these products, which brings me to conversation about business more broadly just outside of healthcare and the purpose of the tariffs from this administration is to push business leaders to buy more American-made products. Is that happening here?

Nick Hula (15:30):
If I just look at the data, while 86% of respondents say they're diversifying suppliers, far fewer are trying to bring all of their purchasing back to the United States. Now purchasing from the United States, that's an important part of that diversification strategy, but we have seen instances in the United States where when all manufacturing is located in one setting and a hurricane or a truck driver strike or something like that happens, if everything is manufactured in one location, that is not a very resilient action of a supply chain perspective. Be that domestic or be that anywhere else in the world.

Rae Woods (16:06):
And that's a positive lesson that we learned from COVID. Right? There are some things that we don't want to repeat from the COVID era or we learned are not sustainable like stockpiling but diversifying your purchase goods is absolutely something that some people get hit with pretty hard in COVID and are not going to make that mistake again.

Nick Hula (16:24):
I think you said it best, Rae. This is a positive learning we had from COVID.

Rae Woods (17:48):
You mentioned earlier that there are a lot of different factors that go into making purchasing decisions and just to be blunt, factors beyond just the price of goods. It sounds to me like at least one of the big components is now supply chain security and how that influences things like standardization, appropriate product use, but you also called out some other factors and you said a big word in healthcare, which is value.

(18:17):
You said another big phrase in healthcare, which is real-world evidence. How are you seeing these factors reflected in purchasing strategies?

Nick Hula (18:26):
You're getting at the long-term change in purchasing. Again, I mentioned before that slow burn we've seen over the past decade. Organizations are getting a lot more sophisticated in their purchasing decisions. I call it holistically evaluating goods, changing that definition of that word value to account for things like not just the price tag on the product, but what is the total margin impact of that product? What are the revenue implications or from a outcomes' perspective, not just, "Hey, what's the immediate outcome on this procedure or on this condition, but what are the real-world outcomes that we've seen? How does this work in my unique population in addition to a controlled clinical trial?"

(19:08):
And there's other things that are complicating that definition of value from patient to clinician experience, to vendor relationships, to procedure turnaround times, all the stuff like that. Again, 10 years ago you might've had a definition that's like you said, the price tag versus the immediate outcome, but these more complex evaluations are a lot more common today.

Rae Woods (19:30):
Interesting. So it's also not merely coming out of the new pressures that happened at the start of 2025 when it comes to things like tariffs and policy.

Nick Hula (19:41):
A lot of this stuff is driven by things that have been going on in the industry for a really long time. Value-based care, right? Forcing people to look at long-term outcomes for stuff like this. Growing competition among health systems, forcing them to focus on things like patient experience as they compete for patients. Focusing on things like clinician experience to compete for a shortage of clinicians. All this stuff is based off of trends that we have seen occurring in the industry for years now.

Rae Woods (20:06):
But the more data you need to include in a decision also makes that decision more complicated. Let's be honest. It is easy to just say the price of, "This surgical robotic arm is X and that one is Y, and I'm going to go with the cheaper one." What you're talking about might be right, and our listeners are nodding along at home, but it's also more complicated. So how exactly do health systems make that decision with a more holistic evaluation?

Nick Hula (20:32):
It's not easy, Rae, and quite frankly, I don't envy anybody who is in that position for having to manage all of those data sources and compare data that's quite frankly difficult to compare against. In a lot of cases, you're comparing apples to oranges and needing to make a real decision.

Rae Woods (20:50):
How can you quantify the impact of the clinician and the patient experience in the context of the price tag when first of all, you're not actually just dealing with dollars in each side of that equation?

Nick Hula (21:02):
Right, exactly. And some organizations are building out some forms of in-house analysis to make sense of all those factors, but again, going back to what we talked about in terms of partnerships and not going at it alone, as these decisions get more complex, health systems are increasingly looking to third parties for help here. They're looking at their GPOs, they're looking at health tech assessment tools, so types of technologies that can compare products against each other. Again, in our survey data that plays out 80% of value analysis committees use GPOs as a top four source of evidence.

(21:41):
For P&T committees, the drug side, half of all of them use health tech assessments as a top four source of evidence. Both of those were a lot lower five years ago.

Rae Woods (21:52):
You mentioned health technology assessment organizations, HTAs. We actually just talked about those organizations a couple of weeks ago on Radio Advisory in the context of helping payers understand the value of their purchasing. It sounds like you're telling me that these HTAs are also filling a gap for health systems, and this is the third or fourth time you've brought up the role of partners in our conversation thus far. How important are these partners in helping these committees actually do the assessing?

Nick Hula (22:26):
Absolutely critical, especially in the short term. Not only are, like we just talked about, there's more and more and more things that health systems need to review for all of these types of purchases, there's more inputs in mind, but the rate of innovation, it's only increasing. There's only more stuff for people to be reviewing. I always compare it to 10 years ago for a certain procedure, a health system may have been thinking, "Hey, I can do this as a procedure, or I can prescribe a medication, and those are my two options. I need to compare those two options."

(23:01):
Today it might be, "Hey, I can do that as a procedure in patient, or I can do an outpatient, or I could prescribe one of four different drugs based off of the patient's genetics." The amount of stuff that they're having to review is just growing alongside the amount of inputs that they're making to sit [inaudible 00:23:22]

Rae Woods (23:22):
So it sounds like you're telling me that health systems need to, and I think health systems would appreciate hearing this, that they need to almost stay in their lane and focus on what they do best. So what they do best might be capturing the clinician and patient experience, but they're not going to be able to do the full analysis in-house or build out all of those capabilities, which by the way would probably also cost a lot of money.

Nick Hula (23:46):
And take years to do.

Rae Woods (23:48):
And take time, and we've talked about how, one, there is no time, and two, you need to maintain your margin as much as possible. So it's thinking about these partnerships as what kinds of data and information and decision-making can you bring to the table versus the others. Or maybe your role is more in implementation, so the partners help you decide you're actually just going to use these three knee implants. It's your job to talk about the change management with your care teams about why you're just going to stick to those three knee implants.

Nick Hula (24:18):
Absolutely. Change management, getting physicians on board with it. The other part is going through the process, deciding when do I use implant A versus implant B versus implant C. Thinking about appropriate use for all of those things, and you can rely on clinicians as well to help you figure that stuff out. But absolutely, when it comes down to making the analysis of what are those three implants or what are those three drugs or what are those three types of needles, relying on partners is going to be essential there.

Rae Woods (24:48):
We focus much of this conversation on the hospitals and health systems and the direct partners that are going to help them make decisions on their purchased goods. Before we close out this conversation, I want to expand the scope of the kinds of players in healthcare that we're talking about here. My immediate thought is if I'm in the market of selling data or analytics tools, there could be a big opportunity here to provide that support for the hospitals and health systems.

(25:17):
I'm less clear on the role here if I am a medical device company or I'm a pharma manufacturer. What can the life sciences companies that sell to hospitals and health systems, what can they do to best position themselves in this moment?

Nick Hula (25:33):
I think in the short term, as we're thinking about this chaotic moment, be transparent, clearly communicate. Proactively be transparent with customers about, "Hey, how tariffs might impact you and your customers by extension." Sometimes the most valuable thing you can do is providing insight for any peace of mind, allowing your customers to proactively plan.

Rae Woods (26:03):
It's almost like the unknown of a price increase is more scary than knowing just how much that price increase is going to be.

Nick Hula (26:12):
Absolutely, a hundred percent. So being transparent about that, being proactively transparent about that is going to win you a lot of points. Now, when it comes to your overall value proposition and thinking about, "Oh my God, it's longer term change of more people evaluating or health system evaluating more pieces of data for more products." That needs to show up in your value proposition, making sure your value proposition is holistic. If your customers want to review products on that wide array of factors, you have to know how your products impact all of those factors.

(26:41):
But the important part is also knowing where you have your comparative advantage and not just on cost. I think, again, that's a really important part, knowing where your comparative advantage amongst that holistic array of factors really lies and pushing that. Is it from a clinician experience perspective? Is it from a reimbursement perspective? Is it from a patient experience perspective? Own that thing you hang your hat on. That's what's going to set you apart.

Rae Woods (27:11):
Last question, I assume we're going to run this survey again in the next several years.

Nick Hula (27:15):
Yep.

Rae Woods (27:16):
Does that mean you know when the next big chaotic moment in healthcare is going to be?

Nick Hula (27:23):
Rae, if I knew that I would be a very, very rich man.

Rae Woods (27:27):
Well, I think it's pretty obvious then that you'll be coming back on Radio Advisory, so thank you.

Nick Hula (27:32):
Hopefully so.

Rae Woods (27:38):
I want to reflect back on the purpose of this conversation, and frankly the purpose of this survey. One goal was to help vendors better understand health system purchasing strategies. I think we checked that off. The other goal was to educate health systems themselves on how their peers are responding to the short-term policy pressures of the day and how they're building towards long-term resiliency. Because the truth is you have to do both. And remember, as always, we are here to help.

Chloe Bakst (28:11):
Here's what our Advisory Board research team is watching this week. CMS released their proposed rules for the Medicare physician fee schedule, outpatient perspective payment system, and ambulatory surgical centers for calendar year 2026. In many ways, the proposals represent what we saw across the four years of the first Trump administration. But this time, their priorities have been condensed and kickstarted into their first year of regular rulemaking. It's a good reminder of what Eric Hargan, the former Deputy Secretary of HHS under Trump's first term, told us.

(28:46):
That even in the aftermath of the breakneck pace of this administration thus far, business as usual policy and rulemaking is still happening. There's a lot packed into these rules, but the underlying theme is that we're seeing a continuation or acceleration of this administration's previously stated goal. Let me give you an example.

Trump released an executive order this past spring asking CMS to conduct a survey of hospital's drug acquisition costs. This is the first step toward potential cuts to 340B drug reimbursement. CMS has moved forward with that plan in the proposed OPPS rule. Here are the three biggest takeaways we're tracking from CMS's proposed rules for 2026. First, let's look at the physician fee schedule. CMS has proposed minor increases to physician payments for the first time in six years. While in previous years physicians have faced cuts, these increases are not enough to constitute a real win. And when we dig into the details, not all physicians will be impacted in the same way.

For example, changes to RVUs and proposed efficiency adjustments will impact up to 9,000 procedure codes. That means that specialists, proceduralists, and surgeons are actually getting hit with serious payment cuts. Second, we're going back in time to the first Trump administration when it comes to site neutral payment. Currently, hospital outpatient departments receive higher Medicare reimbursement than physician offices or ambulatory surgical centers. CMS has now proposed phasing out the inpatient only list, which mandates certain surgeries only take place in hospitals. This was proposed in the first Trump administration, but was later rescinded under the Biden administration.

The first phase would roll out in 2026 with around 285 procedures becoming ASC eligible, mostly in the musculoskeletal space. But we're actually seeing the most aggressive shift towards site neutral payment on the drug side. CMS has proposed reducing the amount of pays hospitals for off-campus administration of outpatient drugs like chemotherapy by about 60%, making it equal to the amount Medicare pays for drug administration at physician offices. This is the first step toward broader site neutral payment measures. The agency has asked for commentary on whether it should expand to clinic visit services provided at on-campus HOPD.

Lastly, there are some new proposals that match this administration's rhetoric around value-based care. CMS announced a new mandatory VBC model in an effort to push for faster adoption of two-sided risk. The five-year ambulatory specialty model would kick off in 2027 and would require specialists to improve care for low back pain and heart failure in the outpatient setting across a randomly selected set of geography. CMMI under Trump 2.0 has come out with three new strategic pillars that seek to protect the federal taxpayer by focusing on models that show the greatest promise for saving. They want to move past long-term experimentation and transformation.

They're focusing on shorter timeline, fewer pilot, nationwide mandatory model, more downside risk, and immediate fiscal impact. As breaking news stories continue to play out around the One Big Beautiful Bill Act, tariffs, research funding cuts, and more, these proposed rules are a good reminder of the ways that business as usual policymaking can have significant impacts on healthcare business. The comment period is now open and ready for healthcare leaders like you to share your thoughts. We'll keep an eye out on what moves forward and how it will impact healthcare strategy.

Rae Woods (32:46):
New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by me, Rae Woods, as well as Abby Burns, Chloe Bakst, and Atticus Raasch. The episode was edited by Katy Anderson, with technical support provided by Dan Tayag, Chris Phelps, and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. See you next week.