Ascension forges first-ever global supply chain company to reduce costs

Ascension is partnering with a large Australia-based international hospital company to form what appears to be the first-ever global supply chain firm.

A major goal of the joint venture between Ascension and Sydney-based Ramsay Health Care, announced Tuesday, is to reduce costs at Ascension’s 151 U.S. hospitals and hundreds of other not-for-profit facilities to the levels in lower-cost countries.

“We believe our providers, and any providers, want products at high quality and lower cost,” Ascension CEO Anthony Tersigni said in an interview. “This gives us visibility into product offerings around the world, and patients will benefit from this greater awareness.”

The joint venture is part of Ascension’s new strategic direction, announced in March, that includes downsizing hospital operations and expanding ancillary businesses such as group purchasing.

Until now, there have been no meaningful efforts to rationalize the healthcare supply chain internationally, even though that’s been done in other industries. Much higher prices for drugs and other products in the U.S. are a major contributor to much higher healthcare spending here compared with other advanced countries.

Rob Austin, director of healthcare consulting at Navigant, said the deal could help reduce U.S. healthcare costs if it helps Ascension learn how much other countries pay for medical products, and it uses that knowledge to negotiate lower prices for U.S. providers.

“Especially with pharmaceutical drugs, if they could get the pricing, that would really make an impact on bending the cost curve,” he said.

But Austin cautioned that it won’t be easy for the new buying group to navigate the differing regulations in each country, particularly when it comes to drugs and medical devices.

The deal, finalized on Tuesday, will be owned equally by Ascension and Ramsay, a for-profit company founded in 1964. Ramsay owns 230 hospitals and outpatient surgery centers in six countries—Australia, France, Indonesia, Italy, Malaysia and the United Kingdom. It’s the largest private hospital operator in Australia and France. It reported revenue of about $6.5 billion (in U.S. dollars) last year, with a net profit of $451.5 million.

Ascension reported $552.7 million in operating income on net operating revenue of $22.6 billion in 2017, down 27% from $753.2 million in operating income on revenue of $21.9 billion in 2016.

In a written release, Ramsay CEO Craig McNally said the new global buying group will seek products internationally that deliver a high level of service and clinical outcomes. This partnership “will allow us to share learnings, best practices and industry knowledge to seek improved quality and outcomes whilst also reducing costs,” he said.

Ramsay’s share price dropped 4% Monday on news that McNally sold 75,000 shares of his company last week for about $4.8 million. The company said McNally sold his shares primarily to meet personal income tax obligations, The Motley Foolreported.

Through the joint venture, Ascension initially will seek out global sources mainly for medical-surgical products such as gowns, sutures and mattresses. It may also source some pharmaceutical products, most likely generic drugs. Later, the buying group may move into medical devices, implants and a broader range of drugs—all of which would face much tougher regulatory hurdles.

Tersigni said he wants the joint venture to extend Ascension’s reach domestically and internationally, strengthen Catholic healthcare, and help his organization gain insight into clinical research around the world.

“Vendors will benefit from having a single point of negotiation to an international platform like ours and streamline discussions between them and health systems,” he said.

Ascension will benefit from Ramsay’s experience in buying products to meet the needs of providers and patients in different countries. For instance, in some Asian countries, people are smaller in stature and require smaller scrubs. In addition, each type of hospital staffer may wear a different color scrub. In the U.K., hospital basins and bedpans are made of disposable cardboard rather than plastic.

Ramsay could gain insights from the operating model of Ascension’s group buying division, called the Resource Group. It focuses on streamlining the purchasing process to reduce vendor costs and thus enable them to offer lower prices without sacrificing profit.

The Resource Group manages a portfolio of $7.7 billion in annual spending for supplies, purchased services, pharmacy, construction materials, capital and IT, and it claims to save participants $1 billion annually.

It plans to channel about $143 million in spending through the new buying group in the first year.

Hospitals around the world buy the same types of products but pay sharply different prices in different countries. “If the new buying group shares any of that comparative pricing, that will be really eye-opening,” Navigant’s Austin said. “Imagine price transparency around the globe. That will call suppliers on the carpet for pricing much more aggressively in the U.S. than in other places.”

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