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Supply costs will be a hospital’s greatest expense by 2020, according to the Association for Healthcare Resources and Materials Management, with total supply chain spending currently representing 30 percent of all hospital spending. In 2013 hospitals spent an average of $3.8 million on supply expenses, with a median spending cost of $9.1 million. In the U.S., hospital supply chain spending is second only to labor costs.
Unlike labor, supply costs can be easily minimized without sacrificing clinical outcomes and efficiency, making them the primary target of healthcare organizations looking to reduce spending and optimize supply chain management.
Spending on medical and surgical supplies are more discretionary than other types of spending, meaning individual providers can take responsibility for lowering care costs themselves through the use of Physician Preference Items (PPIs). While group purchasing, improved distribution methods, and automated inventory management can produce meaningful savings, studies suggest healthcare providers can be equally important in maximizing supply cost savings.
|Hospital Name||Total Supply Costs (M)||Net Patient Revenue (M)||Supply Cost as Percent of Revenue|
|University of Texas MD Anderson Cancer Center||$686||$2,992||23%|
|New York-Presbyterian Weill Cornell Medical Center||$673||$4,935||14%|
|Florida Hospital Orlando||$668||$3,320||20%|
|University of Michigan Hospital||$630||$3,111||20%|
|Duke University Hospital||$582||$2,201||26%|
|IU Health Methodist Hospital||$577||$2,595||
|NYU Langone Medical Center - Tisch Hospital||$521||$3,192||16%|
|University Of Kentucky Hospital - Albert B Chandler Hospital||$478||$1,317||36%|
Fig 1 Data from Definitive Healthcare.
Case mix and specialty are the two most influential determinants of patient supply cost, with the industry average being $4,470 in supplies per patient. For some specialties, like family medicine and rehabilitation, supply costs are generally lower than for specialties like surgery and orthopedics. An average patient admitted to a rehabilitation specialist will cost $1,095 in medical supplies. The average cost of admission for an orthopedic specialist costs $17,566 per patient.
Surgical patient admissions are so costly in particular due to the heavy reliance of procedures on specific medical devices. Knee and hip replacements would not be possible without silicone or other implants. Heart arrhythmia could not be treated effectively without a pacemaker. Some of these devices simply cost more than others—and often, a physician is responsible for choosing which medical supplies to use.
Medical supplies are defined as tangible goods separate from labor and services. This includes pharmaceuticals, PPIs, nonclinical products, and more. The devices, supplies, and tools care providers use in an episode of care can significantly impact overall care costs—particularly when it comes to PPIs.
The prevalence of PPIs in hospitals began as a way to ensure physicians have access to devices that are most suitable for a particular patient. However, PPIs can be more expensive than alternative devices with similar clinical outcomes, and some PPIs have been associated with worse clinical outcomes. Despite not necessarily being more clinically effective, PPIs constitute between 40 and 60 percent of hospitals total supply costs.
JAMA Surgery published the results of a study in December 2016 detailing an experiment where surgeons, when equipped with proper information and incentives, reduced hospital supply costs. Participating surgeons were given financial incentives to reduce supply costs by 5 percent. One group was given scorecards with details regarding monthly costs, high-cost items used, and rankings of other surgeon’s costs. The control group was given no information. In one year the median supply costs for the group given extra information fell 6.5 percent, while the median costs of the control group rose by 7.5 percent. The results were still accurate after accounting for case mix.
Cost awareness isn’t the only influential factor in reducing hospital supply costs—the clinical effectiveness of a device is equally important. Clinical effectiveness is not easy to measure, and therefore providers are not able to leverage this information as well as price. Hospitals and health systems have the option to utilize third party organizations that specialize in comparative effectiveness research for medical devices. Similarly, hospitals and other care facilities can leverage independent data providers to improve cost-awareness and compare financial performance. Group Purchasing Organization (GPO) Premier, Inc saved member facilities approximately $8.1 million in cardiac stents and surgical mesh between 2014 and 2016.
A recent study by Navigant found that hospitals could save $9.9 million annually by streamlining their supply chains. This is particularly true for pharmaceuticals, which constitute between 5 and 10 percent of hospital supply costs, and PPIs such as hip and knee products, pacemakers, and stents. Supply chain management is complicated even further because more than 75 percent of hospitals still rely on manual inventory management.
|Hospital Name||Case Mix Index||Total Supply Costs||Net Patient Revenue|
|Childrens' Medical Center at Legacy in Plano||6.55||$14,960,691||$341,763,847|
|Nebraska Spine Hospital||4.01||$17,427,289||$56,062,366|
|Oklahoma Spine Hospital||3.63||$29,041,435||$63,496,947|
|The Heart Hospital Baylor - Plano||3.56||$88,036,969||$297,717,483|
|Unity Medical And Surgical Hospital||6.44||$15,829,826||$40,614,079|
|Miracle Mile Medical Center||3.39||$2,392,290||$9,648,664|
|CHI Health Nebraska Heart||3.38||$30,080,389||$76,238,915|
|Northwest Hills Surgical Hospital||3.38||$16,560,111||$28,351,349|
|The Spine Hospital of Louisiana at the NeuroMedical Center||3.37||$16,686,596||$36,654,738|
|Tulsa Spine & Specialty Hospital||3.23||$24,922,107||$59,471,556|
Fig 2 Data from Definitive Healthcare.
Manual inventory management cannot always account for how long medical devices and other supplies have been sitting unused, how often each type of device is ordered, clinical effectiveness, and more. This disorganization leads to overspending and, and could lead to unfavorable clinical outcomes.
Lowering supply costs is more difficult than shopping around for the lowest price. As studies have shown, long-term improvements require continuous effort and awareness on the part of physicians, suppliers, and administrators. By leveraging public and proprietary industry data, care providers can ensure they are fully equipped to implement a successful supply chain management strategy and lower operating costs.
To read more about how Healthcare Payers Can Cut Overspending, visit the Definitive Blog.