How to Control Costs by Balancing the Supply Chain

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According to 2019 report from Navigant Research, U.S. hospitals are spending close to $25.7 billion more per year on supply chain products than necessary. Average supply chain expenses currently make up about one-third of total hospital expenses, but can rise higher in hospitals with a high case-mix index (CMI) 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.

How do hospitals optimize their supply chain spending?

According to Definitive Healthcare data, the top 25 hospitals by reported supply chain expenses spent a combined $15.5 billion in total medical and surgical supply costs as of July 2020. What’s more, this figure doesn’t include other facets of supply chain spending like laundry and linen costs.

Unlike labor expenses, however, these supply costs can be easily reduced without sacrificing clinical outcomes and efficiency—making them a primary target for healthcare organizations looking to reduce spending and optimize supply chain management.

Medical supply spending is more discretionary than other types of spending, meaning that 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, healthcare providers can be equally important in maximizing supply cost savings.

How does hospital case-mix impact supply chain spending? 

Case mix and physician specialty are two of the most influential determinants of patient supply cost. According to a 2017 HMPI report, the average patient in the U.S. requires $4,470 in medical supplies per admission. For some specialties, like family medicine and rehabilitation, supply costs are generally lower than those for high-cost specialties like surgery and orthopedics.

For hospitals with a high case-mix index, however, the average supply cost per patient might be much greater than it is for hospitals with a lower case-mix index. Nebraska Spine Hospital, for instance, reported a case-mix index of 5.26 as of April 2020—the highest CMI of all 7,247 active U.S. hospitals tracked by Definitive Healthcare. This means that the patients seeking care at Nebraska Spine Hospital are more clinically complex and require more hospital resources than they do at other hospitals—which could impact supply chain spending. 

What are the most common challenges in healthcare supply chain management?

Surgical patient admissions, in particular, are so costly due to the heavy reliance that some procedures have on specific medical devices. Knee and hip replacements, for instance, 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. These include pharmaceuticals, PPIs, nonclinical products, and more. The devices, supplies, and tools care that 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. 

Supply chain management solutions

Industry consolidation can have a significant impact on supply chain spending.  As independent hospitals are absorbed into large integrated delivery networks (IDNs), these health systems could use clinical standardization and distribution bundles to reduce overall supply chain costs.

According to a 2019 study published in JAMA Surgery, consolidating purchases of spinal implants with a single vendor—as opposed to a multi-vendor model—generated a 21 percent reduction in implant costs. This demonstrates that large hospital systems can 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 they can with 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.

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 could lead to unfavorable clinical outcomes.

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, augmented intelligence 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).

Learn more

Want to know more about how events like the COVID-19 pandemic might impact hospital expenses? Catch an on-demand replay of our webinar, Updated Healthcare Industry Trends: Selling to Doctors and Hospitals in a Changed Market

Definitive Healthcare CEO, Jason Krantz, discusses some of the ways in which the COVID-19 pandemic has impacted hospital performance—including financial performance. 

Originally published March 20, 2018

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