Hospitals have an unrealized $25.4 billion supply chain opportunity

By Alex Kacik | October 18, 2018

Hospitals can save $25.4 billion if they improve their supply chain operations and harness data, according to a new report.

That amounts to a 17.7% average supply chain expense reduction, or up to $11 million a year per hospital, according to a Navigant Consulting analysis of 2,300 hospitals that compared the top-tier hospitals’ supply cost per adjusted patient day with their peers. That is equivalent to the annual salaries of 160 registered nurses or 42 primary care physicians, or the cost of building two outpatient surgery centers.

The highest-performing hospitals engage data-driven physicians to identify and standardize the use of physician-preference items and medications that produce clinically equivalent outcomes at a lower cost, according to the report. They also hire quality staff to analyze data that tie costs to patient outcomes.

“Physician-preference items remain a huge opportunity,” said Rob Austin, director at Navigant. “It’s not easy to do. You need to get physicians, clinicians and nurses engaged and agreeing to limit their choice and standardize care.”

Collaboration is key, Austin said. Physicians, nurses and other clinicians need to work with supply chain, finance and IT departments to identify what opportunities exist and adapt operations accordingly, he said. They also need to engage suppliers often to establish value-based contracts and follow up to ensure they are hitting their targets, he said.

Austin cited a regional group purchasing organization for about 75 hospitals in Pennsylvania and West Virginia. Provider Supply Chain Partners arranged a panel of physicians, suppliers, finance and supply chain experts to drill down on physician-preference items, ultimately cutting costs by 14%.

The physician panels consisted of doctors that specialized in orthopedics, spine and cardiovascular surgeries. They met once a month to weigh which vendors and products to use as well as how to best standardize purchases.

Limiting the number of suppliers a hospital would use saved money and made the procurement process more predictable. Provider Supply Chain Partners would collect data from each hospital to ensure they were hitting their targets.

“It was ultimately successful because we had physician input and the data to hold them accountable,” Austin said.

More health systems are saying they are trying to standardize purchasing. But some don’t understand what that really means, Austin said.

It goes beyond buying the same type of equipment and supplies to secure better pricing. Hospitals need to standardize vendor contracts, item sourcing and the bidding process, as well as unify the enterprise resource planning technology and item masters at each hospital, he said.

“And when the people, process and technology is standardized, does that tie all the way through to clinical operations, efficiency and quality? A lot of times it doesn’t,” Austin said.

There are also concerns that streamlining supply chain processes could negatively impact quality. But that isn’t the case, according to the report.

Medicare hospital-acquired condition rates and value-based purchasing scores are slightly better at top-performing supply chain facilities, the analysis showed. Navigant also found that savings opportunities are relatively equal across hospital size, location and affiliation.

The $25.4 billion in potential cost savings is 10.2% higher than last year’s results of $24 billion, possibly because the top-tier hospitals are honing their supply chain operations, experts said.

The supply chain department needs to act as waste or utilization consultants for the entire health system, said Paul Weintraub, a Navigant director.

“Doing so requires having the right data at the right time, and the right experts who can leverage it to help reduce variation in pricing, product use and clinical outcomes,” he said.