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How to Control Costs by Balancing the Supply Chain

March 20, 2018 BY Alanna Moriarty

How to Control Costs by Balancing the Supply Chain

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.

Top 10 Hospitals by Highest Supply Costs

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%
Cleveland Clinic $638 $4,688  14%
University of Michigan Hospital $630 $3,111  20%
Duke University Hospital $582 $2,201  26%
IU Health Methodist Hospital $577 $2,595


Stanford Hospital $553 $3,453  15%
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.

Top 10 Hospitals by Case Mix Index

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.

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