Supply costs are on track to eclipse labor spending as hospitals’ greatest expenditure by 2020 with total supply chain spending representing roughly one-third of all hospital spending last year. Unlike labor costs, hospital supply costs can be minimized without sacrificing efficiency or care quality. Supply costs are also more discretionary than other facility costs, though essential costs fluctuate by specialty.
Other means to regulate and streamline the hospital supply chain is through the use of electronic data collection and sharing software. Not only does this technology aid facilities in tracking the ordering and use of medical supplies, but also allows providers and hospital leaders to analyze the effects of those resources on population health trends. This enables those with purchasing power to determine the most cost-effective options for improving or maintaining care quality and patient outcomes.
Cutting supply costs isn’t solely about finding the lowest prices. Facilities must make a dedicated effort to address spending through technology, physician awareness, and relationships with integrated delivery networks (IDNs) and group purchasing organizations (GPOs). In a healthcare industry that is continually seeing mergers, acquisitions, and partnerships, suppliers must also learn to navigate the shifting relationships between facilities and healthcare organizations.
Physician preference item spending
Some physician specialties, like family medicine, have minimal or standardized costs. In contrast, supply costs for orthopedics and surgical specialties vary widely due to reliance on specialized implants and other medical devices, such as stents and implants. For specialties with high reports of discretionary spending, in which individual physicians carry significant decision-making power, hospitals can lower supply costs through reduction of physician preference item spending.
Physician preference items (PPIs) are the medical supplies providers use in treatment and procedures. This includes medical devices, implants, pharmaceuticals, and nonclinical items such as disinfectants and disposables. PPIs became commonplace expenditures in an effort to ensure providers had access to the supplies they were most comfortable with and that were most suitable for a given patient or procedure. However, if left unchecked, PPI spending could lead to an unnecessary spike in supply costs, as the preferred devices can be more expensive than alternatives with similar clinical outcomes. PPIs account for 40 to 60 percent of total hospital supply costs.
The supplies and tools providers use when diagnosing and treating patients can significantly impact overall care costs, but there are additional factors that can increase a patient’s cost of admission. Hospital case mix also impacts acute care costs, with the average patient supply cost totaling roughly $4,500. For rehabilitation specialists, average patient costs hover around $1,000, but spike to more than $17,000 for orthopedic specialists.
Supply chain management
One method for controlling hospital supply costs is to implement an electronic supply chain management application. In a survey of healthcare executives from Syft and Sage Growth Partners, roughly 97 percent of respondents indicated a belief that supply chain analytics could positively impact hospital costs – yet 64 percent say they do not use a dedicated supply chain management system. Additionally, 87 percent of respondents agreed that supply chain optimization could improve hospital margins by 1 to 3 percent. For a hospital with $500 million in total revenues and a 1 percent margin, that could mean gains of between $5 and $15 million.
According to Definitive Healthcare’s database on hospital and IDN technology, 86 percent of hospitals report using some form of supply chain management module. Many of these are extensions of electronic health record (EHR) systems or are in-house solutions rather than standalone inventory management systems. Approximately two-thirds of Syft survey respondents reported using supply chain management solutions to track inventory and consolidate suppliers. While these are valuable actions, only about half of survey respondents reported being able to track cost-per-case by surgeon, which could improve PPI spending, or anticipate supply expiration dates, which could eliminate excess spending for pharmaceuticals and other medical devices.
Despite the limitations of existing supply chain management technologies, it is still a worthwhile investment. Manual inventory management cannot always or accurately account for how long medical devices and other supplies sit unused, how often each type of device is ordered or used, the clinical effectiveness of specific devices, and other key metrics that could reduce supply spending and improve clinical outcomes.
Effects of healthcare consolidation
Hospitals are no longer the focus of suppliers and policy makers. Last year, Definitive Healthcare tracked more than 350 merger and acquisition announcements between various healthcare facility types. This uncertain environment requires suppliers to keep abreast of financial and operational performance, as healthcare facilities are prioritizing and scrutinizing cost-cutting measures across the board. This includes the utilization of purchasing price negotiators to lower costs across the supply chain.
Understanding the financial and operational relationships between facilities and IDNs, group purchasing organizations (GPOs), and regional purchasing coalitions (RPCs) are the key for suppliers looking for physician influencers and decision-makers. Fewer hospitals and physician groups have final say in purchasing decisions or remain forefront in pricing negotiations – instead, IDNs and GPOs negotiate with suppliers to secure the lowest purchasing costs for member facilities. For suppliers, this means having access to the most updated intelligence on hospital and healthcare facility affiliations.