By: ProcurementIQ Analyst, Mark Seraydarian
Healthcare providers spend billions each year on products ranging from catheters to ultrasonic test equipment as well as on services that include hospital linen supply and management and medical laboratory services. The nonprofit newsroom ProPublica estimates that a quarter of all expenditure in the healthcare industry – about $765 billion per year – goes to waste. Taking the wrong approach during the procurement process can not only lead to wasteful spending, but also an inability to provide adequate care. Results from a Cardinal Health survey completed in March revealed that 40% of surgical staff and hospital supply chain decision-makers have canceled a case and 69% have delayed a case due to missing supplies.
Several companies are stepping in to prevent these potential pitfalls, including Amazon. Just this year, the company, widely known for its e-commerce business, launched a pilot healthcare supply chain business to help improve sourcing efficiency for a Midwestern hospital system. In its latest endeavor, Amazon aims to fulfill supplies and simplify the purchasing process for 150 outpatient facilities.
Providers don’t require Amazon to improve their supply chains, though. Hospitals and health systems can independently implement a number of sourcing strategies to improve both their bottom lines and the quality of care.
Providers Feeling the Pinch
As reimbursement rates have declined in the three years to 2018 and revenue growth rates have stalled, healthcare purchasing departments have experienced added pressure to find areas of saving. Additionally, costs across key spend categories have increased. For example, ProcurementIQ estimates that hospital linen supply and management service prices have increased an estimated annualized 1.7% from 2015 to 2018 and are slated to accelerate to an annualized growth rate of 2.7% during the coming three-year period. Similarly, ultrasonic test equipment prices have increased at an estimated annualized rate of 0.8% during the three years to 2018, and prices are anticipated to continue rising an annualized 1.4% through 2021.
In addition, according to global management consulting firm McKinsey & Company, the three-year compound annual growth rates for hospitals’ non-labor expenses, including supplies and services, are currently outpacing their budget growth by a two-to-one margin. As a result, today’s purchasing climate in the healthcare space offers the perfect opportunity for purchasing departments to implement new, forward-thinking sourcing strategies.
Sourcing Strategies: What Can Providers Do?
Luckily, there are ways for providers to save during the purchasing process. The first is by investing in supply chain IT infrastructure, such as supply chain management software or ERP software. These systems provide spend management, analysis and procurement automation technology that uses trackable data to prevent waste. Savings from lower supply, storage, personnel and inventory management costs can reach 6% per year by the fifth year of software use, as estimated by Indiana University Health.
Buyers can also use strategies to boost their leverage during negotiations with suppliers. One tactic is to form a supply chain coalition. For example, Kaiser Permanente has teamed with the Mayo Clinic, Intermountain Healthcare, Mercy and Geisinger Health System to create the Healthcare Transformation Group, which places pricing pressure on suppliers and also advocates for the adoption of various business communication standards, including GS1. Hospitals can work together and use their collective purchasing power to sign favorable contracts with suppliers, rather than negotiating individual contracts with suppliers for each site.
Providers can also sign fewer, larger contracts by reducing the prevalence of provider preference cards, which allow individual physicians to choose the supplies they want. When limited, providers can achieve greater standardization of the products and services that are used throughout their facilities. With less differentiation, buyer power increases because it is easier to find suppliers that can fulfill the needs of a single contract.
Finally, providers can trim their procurement expenditure by improving their awareness of hidden costs. Suppliers of medical products and services typically charge distribution and inventory holding expenses. Buyers should be sure to ask about such fees during the RFP process to select vendors that have limited or no fees. Other hidden costs include waste from purchasing products that expire before use or purchasing excess supplies, as well as managing and moving supplies throughout facilities. Providers should also make sure the appropriate staff is handling procurement duties. For example, procurement departments can perform labor-intensive supply chain work more efficiently and cost-effectively than untrained nursing or operating room staff.
In today’s climate of falling reimbursement rates, it is increasingly important for healthcare providers to find new strategies that streamline the sourcing process. Overall, providers that implement a strategic sourcing process and improve their supply chain management can not only significantly cut costs, but also improve their standard of care.
- Healthcare providers waste about $765 billion each year on the procurement of products and services.
- As reimbursement rates decline and prices for non-labor expenses rise, pressure is on providers’ procurement departments to implement strategic sourcing practices.
- Possible strategies include investing in supply chain IT solutions, improving negotiating leverage to receive discounts and limiting hidden costs.
- With new sourcing strategies in place, healthcare providers can limit purchase costs and improve the quality of care.