Proactive and Reactive Ways to Prevent Overspending on ConsumablesThe COVID-19 pandemic has created the worst financial crisis the healthcare industry has ever experienced.
Volume and revenue declines have resulted in plummeting margins. In April 2020 margins were a whopping 326 percent below budget. Now, more than ever, healthcare organizations must control costs.
Supply chain spending is the second-largest cost for healthcare organizations and is predicted to surpass labor costs in 2020. In 2018, the 25 hospitals with the highest total medical and surgical supply costs spent a total of over $14.2 billion, with an average annual spend of $569 million. Consulting company Navigant found that the average hospital could save $11 million annually by streamlining its supply chains.
How can you reduce your supply chain spending? You can start by taking a proactive approach to controlling the costs of consumables — by negotiating the best prices and contract terms. Contract terms can significantly impact what you pay for consumables and other supplies. For example, to avoid huge capital investments in laboratory equipment, healthcare organizations may enter into a reagent rental agreement. The instrument (e.g., analyzer) is “free” with the purchase of the reagents (compounds used in laboratory analyses to detect substances). The price paid per test (reagent) covers the cost of the instrument, service, reagents, and consumables for the term of the agreement, but there is no ownership at the end of the agreement. The “free” instrument isn’t really free; an upcharge is typically added to each reagent item to offset the price of the equipment and service. This upcharge quickly adds up when you run 100,000 tests per year. At the end of the reagent rental agreement term, the instrument has essentially been paid for, but you don’t own it. If you renew the agreement without renegotiating the terms, you may wind up paying for the equipment more than once without ever owning it.
Furthermore, reagent rental agreements are typically based on the number of tests you’re running. if you don’t estimate the volume correctly, you may wind up with unused tests, pay more than you need to for tests, or pay a penalty for decreased usage. If your volume estimates aren’t accurate, the costs would continue to add up.
To proactively prevent overspending on consumables:
Vet your vendors and products. Evaluate the devices you plan to purchase, the manufacturer, and the contract terms before making purchasing decisions. Personal Protective Equipment (PPE) prices have increased dramatically during the COVID-19 pandemic. Products from traditional vendors are difficult to obtain because of shortages, leaving purchasing departments to rely on non-traditional vendors, whose prices may be up to 20 times higher than they were before the pandemic. You must be sure you are purchasing Federal Drug Administration (FDA)- and National Institute for Occupational Safety and Health (NIOSH)-approved PPE from an FDA-approved vendor. If you don’t, you may wind up purchasing counterfeit products that will not protect your employees as advertised.
Due to high demand, there is a shortage of NIOSH-approved filtering facepiece respirators (FFRs). According to the Centers for Disease Control and Prevention (CDC), an “unprecedented number of products on the market do not perform as advertised.” Watch out for these three common pitfalls: Documents are altered so FFR models appear to comply with a particular standard, but they do not. Certification marks are counterfeit. Manufacturers’ names, logos, and model numbers are counterfeit. When evaluating the contract terms, beware of price gouging and do not be pressured into prepaying for your products. When purchasing international respirators, include contract provisions to protect your purchase through any third-party U.S. intermediary company you use to make the purchase.
Analyze your quotes before you sign the contract. Compare the quoted prices to regional and national benchmarks to determine whether the prices are competitive. Reagent rental contracts often hide the true price that you are paying for the equipment as well as the consumables. In this case, benchmarking is impossible. To analyze reagent rental quotes, you need to obtain transparency by requiring the vendor to separate the price of the reagents and each upcharge that is included. This will allow you to determine if the base prices for your reagents and the prices for your equipment rental and service are competitive.
Negotiate the contract terms. To get the best deal, you need to pay as much attention to the contract terms as you do to the pricing. For reagent rental agreements, include verbiage in the contract to remove the upcharges after you meet your volume commitment. Your long-term contracts should also include language that protects you against price increases and requires price adjustments due to downward market shifts. Purchase prices should be based on the vendor’s price list and should be effective for the term of the agreement. If market prices decline or the vendor provides lower prices to other healthcare organizations, the vendor must notify you and amend the agreement prices to reflect the lower pricing.
Reactive Approaches to Prevent Overspending
In a perfect world, your supply chain staff would compare all your quotes to benchmark data and use that information to negotiate the best prices and contract terms. In reality, your organization may have purchased some consumables without even having a contract. Or different departments may be paying different prices for the same supplies, purchased from the same vendor. Although these scenarios can be costly, you have an opportunity to remedy them moving forward. Reactively, you can learn from your spend data to prevent overspending in the future.
Analyze your spend data to:
Identify overspending by comparing prices to benchmarks, retroactively. Avoid renewing those unfavorable contracts and/or negotiate better terms before you sign a new contract.
Compare what you’re paying for consumables across departments. If different departments are paying different prices for the same supplies, find out why. Is there no contract? Do you have multiple contracts stored in different departments, so one department doesn’t know what another is paying? Storing your contracts in one central database makes them accessible to anyone who needs them, across departments.
A spend dashboard that centralizes your spend data makes it easy to analyze your spend data. You can use this information to:
- Implement contracts (if they have not been used in the past for certain consumables).
- Consolidate contracts. Take advantage of volume discounts by purchasing supplies for multiple departments together.
- Negotiate a better deal (prices and terms) for existing contracts.
Make Smarter Capital Sourcing Decisions
Read The Strategic Role of Clinical Evidence in Value-Based Healthcare Capital Planning white paper to find out how.