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Alanna Moriarty
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March 20, 2018

*Updated January 2020

According to 2019 Definitive Healthcare data, analyzed by Navigant Research, U.S. hospitals are spending close to $25.7 billion more per year on supply chain products and related operations, processes, and procedures than necessary. Average supply chain expenses currently make up about 15% of total hospital expenses, on average, but can rise as high as 30% or 40% in hospitals with a high case-mix index like surgery-intensive facilities or children's hospitals. The average U.S. hospital currently spends about $12.1 million more than it needs to on supply chain costs.

Hospital supply chain optimization

Unlike labor expenses, 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.

Medical supply spending is more discretionary than other types of spending, meaning individual providers can take responsibility for lowering care costs 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.

Top 10 Hospitals by Highest Total Medical & Surgical Supply Costs

  Hospital Name Definitive ID Total Supply Costs (M) Net Patient Revenue (M) Supply Cost as Percent of Revenue (rounded) 
1. New York-Presbyterian Weill Cornell Medical Center 541974 $816  $5,951 14% 
2. Cleveland Clinic  3120 $807 $5,164 16% 
3. University of Texas MD Anderson Cancer Center 4017 $801 $3,481  23%
4. University of Michigan Hospital 2096 $759 $3,297  23%
5. AdventHealth Orlando (FKA Florida Hospital Orlando) 873 $713 $3,770  19%
6. IU Health Methodist Hospital 1365 $684 $2,852  24%
7. NYU Langone Tisch Hospital 2843 $676 $4,101

 17%

8. Stanford Hospital 588 $653 $4,132  16%
9. Duke University Hospital 2973 $646 $2,339  28%
10. University Of Kentucky Hospital - Albert B Chandler Hospital 274110 $560 $1,433  39%

 Fig 1 Financial data from Definitive Healthcare's Hospital Financial Metrics Search Tab (via the latest Medicare Cost Report, accessed 1/14/2020)

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 those for high-cost 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 as much as $17,566 per patient.

Most common healthcare supply chain management challenges

Surgical patient admissions, in particular, are so costly due to the heavy reliance of procedures on the use of 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 of these 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 treatment costs—particularly when it comes to PPIs.

The prevalence of PPIs in hospitals began as a way to ensure that physicians could 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 even 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.

Supply chain management solutions

As the industry continues to consolidate, and independent hospitals are gobbled up by GPOs and IDNs, supply chain costs could decrease with clinical standardization and distribution bundles. JAMA Surgery published the results of a study in November 2019, revealing that consolidated purchases of spinal implants with a single vendor (versus dial vendors) generated a 21% reduction in costs. This showed that significant cost savings can be achieved from consolidating purchases of spinal implants with a single vendor.  Thus, large hospital systems benefit from sole-source purchasing, and this can be used as a viable cost reduction strategy.

Consolidation 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. For instance, Group Purchasing Organization (GPO) Premier Inc., says that it has saved its clients more than $700 million in costs on purchased services.

Top 10 Hospitals by Highest Case Mix Index

Hospital Name Definitive ID Case Mix Index Total Supply Costs  Net Patient Revenue
Nebraska Spine Hospital 552489 5.26 $15,090,401 $46,023,224
Oklahoma Spine Hospital 3321 4.59 $39,595,716  $72,672,290
Northwest Hills Surgical Hospital 4164 4.23 $21,419,727 $31,313,470
Doctors Hospital LLC 1561 3.89 $10,450,164 $22,523,663
Tulsa Spine & Specialty Hospital 3364 3.87 $22,347,010 $65,207,008
The Spine Hospital of Louisiana at the NeuroMedical Center 1756 3.75 $19,057,957  $47,950,838
Akron Children's Hospital 6419 3.60 $59,288,177 $828,176,726
Baylor Scott & White the Heart Hospital - Plano 3901 3.60 $94,924,010 $315,992,746
Saint Camillus Medical Center 923870 3.52 $11,124,379  $18,785,696
Saint Thomas Hospital for Specialty Surgery 3744 3.42 $18,685,384 $69,535,576

 Fig 2  Financial data from Definitive Healthcare's Hospital Payor Mix Search Tab (via the latest Medicare Cost Report accessed 1/14/2020)

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.

Future of the healthcare supply chain

In 2020, we expect to see the healthcare supply chain shift in two key ways:

1. Amazon's impact: More and more hospitals (particularly those in rural areas) are using Amazon's shipping services to order their supplies. What makes Amazon stand apart is its unmatched network of warehouses, automated inventory management, and quick transportation services with one hour or same day shipping. Because of its size, it's able to keep supply costs low, and deliver the supplies faster than many other third-party sellers.

2. Augmented intelligence: Over the next five years, AI will be helpful when it comes to managing intelligent supply chains by predicting and managing transportation capacity at a highly granular level. Manufacturers also expect significantly increased use of robotic process automation (RPA). 


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