How the Cost of the Value Chain Is Determined in Healthcare

How the Cost of the Value Chain is Determined in Healthcare

Lindsey Simmons

Grantham University

 This paper will highlight the cost of the value chain in healthcare organizations, and how it is determined. It will also cover what the “walking map” is and how it relates to the value chain and strategy. There are several entities that are involved in the value chain within healthcare organizations and they include the payer, the intermediary, the hospital, the purchaser, and the producer.

First, I would like to start off with what a value chain is. It is a high leveled model that is used to portray how an organization receives raw materials, adds value to these materials through multiple steps and processes, to create a finished product. Finally, the finished product created, is sold to customers and other organizations (Ginter, 2013)

The health care industry is different from other business models in the way that is reimbursed. Normal business models the end in user pays for the product and services, where as in the healthcare industry, most of its payments are driven through third party payers such as employers, commercial insurance companies or government programs (Okoye, 2015). Fundamentally, hospitals are businesses that are equipped with trained staff and medical equipment to treat various diseases and illnesses, whether acute or chronic.  Hospitals provide two types of services. These types of services include inpatient services, or services that require an overnight stay or outpatient services that the patient is treated then discharged home in the same day. Multiple healthcare systems such as LifePoint facilities, HCA, or SEM facilities provide both of these services for the costumer or patient (Patrick, 2014).

Suppliers in the healthcare organization also differ from suppliers in the traditional business world. Almost half of the costs in hospitals come from purchasing medical devices from manufactures and drug related expenses. Whole sale distributors, group purchasing organizations and mail order distributors assist hospitals with these expenses (Patrick, 2014). They help with managing expenses by implementing policies related to which type of supplier they are. Group purchasing organizations assist with expenses by implementing group buying policies within the healthcare organization. Mail order distributors assist with expenses by ordering drugs directly from manufacturers or other wholesalers to cut down on cost. Although industries within healthcare have been under pressure to produce cost effective medical devices and drugs, factors such as the aging population, investments in healthcare and increased coverage from health insurance are expected to produce decent revenues (Patrick, 2014).