In 2021, Definitive Healthcare tracked a total of 314 healthcare mergers and acquisitions. This market activity brings the total number of health systems down to just 1,093—compared to the 8,310 active hospitals in the United States.
Industry consolidation of this scale results in larger health systems with significant market share and influence. Health systems can leverage this influence to negotiate lower healthcare supply costs on behalf of their member facilities. Though consolidation and negotiation should result in lower overall supply chain spending, recent reports indicate that hospital supply costs have increased.
How much do U.S. hospitals spend on supplies?
On average, supply chain costs make up about 30% of total hospital expenses. According to Definitive Healthcare data, average total supply costs were $30 million per hospital in 2020.
In a May 2020 report, the American Hospital Association (AHA) estimated that U.S. hospitals and health systems spent a combined $2.4 billion in additional supply costs during the first four months of the pandemic. These additional costs were primarily associated with purchasing personal protective equipment (PPE) and other necessary supplies to aid in the fight against COVID-19.
The AHA also reports that supply expenses increased by 15.9% from 2019 through the end of 2021.
The extenuating circumstances of the COVID-19 pandemic certainly warranted this temporary increase in supply chain spending. However, the long-term trend of rising supply chain costs can damage hospital and health system finances.
How can U.S. hospitals control supply chain spending?
Unlike labor costs or other elements of total operating expenses, hospital supply costs can be minimized without sacrificing efficiency or care quality. Supply costs are also more discretionary than other facility expenses, which makes them much easier to impact within the hospital or health system budget.
But reducing hospital supply costs is not solely about securing the lowest prices. To control supply chain spending, healthcare facilities must address their spending patterns through physician awareness, financial management technologies, and affiliations with integrated delivery networks (IDNs) and group purchasing organizations (GPOs).
Here’s a closer look at two ways hospitals and health systems can directly impact their supply chain spending.
Physician preference items
Physician preference items (PPIs) are the medical supplies that healthcare providers use in treatments and procedures. These items include medical devices, implants, pharmaceuticals, and other non-clinical items such as disinfectants and disposable examination gloves.
Hospitals can lower their total supply chain costs by reducing physician preference item spending. PPI costs are much easier to impact in high-cost specialties like orthopedics, cardiology, and other surgical specialties—which rely heavily on specialized implants and prosthetics. Other physician specialties, like family medicine, have standardized costs and therefore report much lower annual PPI spending.
PPIs have been commonly used to ensure that healthcare providers could access their preferred supplies, with the understanding that these items were most suitable for a given patient or procedure. These preferred items can, however, be more expensive than alternatives with similar clinical outcomes. Because of this, physician preference item spending can lead to an unnecessary increase in supply expenses—especially given that PPIs can account for between 40% and 60% of total hospital supply costs.
Finding comparable, lower-cost physician preference items is a good way for hospitals and health systems to reduce their overall supply chain spending.
Supply chain management technologies
Electronic supply chain management applications are another way that hospitals can control their supply chain spending. According to a January 2019 survey from Syft and Sage Growth Partners, roughly 97% of healthcare executives and supply chain leaders agreed that supply chain analytics could positively impact hospital costs.
In fact, 87% of survey respondents agreed that these technologies could help improve hospital margins by more than 1%. For a hospital with $500 million in total revenues and a 1% margin, that supply chain management system could result in gains of between $5 and $15 million.
Despite this overwhelming support, 64% of survey respondents reported that they do not use a dedicated supply chain management system. Of those Syft survey respondents who did report using this technology, approximately three-quarters indicated that they were primarily using their supply chain management systems to track inventory and consolidate suppliers.
While these actions are valuable, only 42% of survey respondents reported that they could use their supply chain management system for more advanced functions like tracking costs by surgeon or anticipating supply expiration dates—both of which could help to eliminate or significantly reduce excess spending for physician preference items and other medical supplies.
Interested in staying up to date on the long-term impact of COVID-19 on the healthcare supply chain? Start a free trial today to access healthcare commercial intelligence on hospital financials and more to create new paths to commercial success.
Updated November 2022. Originally published April 2019.