Healthcare has a serious problem with wasted spending
October 02, 2018
By John Kupice
Did you know that the U.S. healthcare system wastes about a quarter of what it spends every year? That’s about $765 billion wasted, according to the National Academy of Medicine.
That’s more than the entire budget of the Defense Department. That’s enough to provide insurance for more than 150 million Americans. Think of all we could do if we could recapture even a portion of that waste.
Without a doubt, hospitals and surgery centers do not have open-ended budgets. To the contrary, profit margins have been trending down for years, to 2.1 percent in 2017 and an estimated 1.8 percent in 2018. That means for every $1 in profit, they must earn nearly $56 in revenue; a profit of $100,000 requires $5.6 million in revenue. Those are razor thin margins, and as a result, many hospitals are closing. The American Hospital Association says hospitals have been closing at a rate of approximately thirty per year. Morgan Stanley analyzed data and concludes that more will shut down in the next 12 to 18 months. Eight percent of U.S. hospitals are at risk of closing, and an additional ten percent are considered “weak.”
It is crystal clear that hospitals that succeed will be those that control costs. Labor is the biggest expense at 33 percent of the overall budget, but most hospitals have already leaned this out as much as they can. Right behind labor, and gaining, is supply chain, which represents about 31% of the budget. Therein lie opportunities to unleash greater efficiencies and reduce waste.
Healthcare supply chain contributes roughly $10 billion of waste in our health system every year, about half in non-controlled pharmaceuticals and half in unused, unexpired supplies and devices. There’s legitimate reasons for it, in our complex, fractious, highly regulated system. Things like contract changes, product conversions, restrictive manufacturers’ return policies, equipment upgrades, physician preference items – all contribute to waste and inefficiency. When a physician orders preferred items, like heart valves that cost $6,000 each, for example, then leaves the hospital, those items often go unused. They sit on a shelf until finally they are identified as excess or slow-moving inventory and placed on a pallet bound for the landfill.
The simple fact is that another hospital somewhere would be happy to purchase those excess heart valves at a reduced cost. It’s a win for the selling hospital in that they recover some of their costs, it’s a win for the purchasing hospital in that they’re reducing their spend, and it creates a more socially, environmentally, and financially responsible system.
So why doesn’t this happen? Again, lots of reasons. Healthcare supply chain staff are busy. They don’t have time to find a buyer or seller, do the required paperwork, or set up a hospital as a new vendor in their accounting system. They also have contracts to abide by, and there’s a reluctance to step outside of that, even when it’s advantageous and doesn’t breach contract terms. For example, contracts often specify volumes at which hospitals must purchase items directly from the manufacturer, but that leaves the remaining volume, plus all non-contracted items for out-of-the-box sourcing. In addition, sometimes it makes more sense to purchase, say, two of an item instead of a box of twelve, or you need specialty items not under contract. All of these situations are ripe for sourcing directly from hospitals that have the inventory you need.
The concept is straightforward – supply chain professionals need a way to communicate and collaborate directly with each other, connect unwanted products with a provider that needs them, and streamline the entire transaction. We need a platform that allows hospitals to exchange assets instead of throwing them away, a platform that is a hybrid of Amazon and LinkedIn for healthcare supply chain.
Providing the platform – the technology – won’t be enough. It requires action on the part of supply chain professionals, a change in both the way we think and a slight change in the day-to-day process. All supply chain professionals know they have waste, but rarely do they understand the value of the assets that get discarded. We monitor what is bought and what is used, we also need to measure what assets are being thrown away and their value, so we can understand the cause of the waste and make more informed decisions.
There is tremendous value trapped within supply chain that we need to unleash. If we give it the attention it deserves, we can buy and sell supplies, devices, capital equipment, and non-controlled pharmaceuticals hospital-to-hospital directly. We need the will and the way to create more efficiencies, recover costs, and reduce spend in supply chain.
About the author: John Kupice is the CEO of H-Source.
Did you know that the U.S. healthcare system wastes about a quarter of what it spends every year? That’s about $765 billion wasted, according to the National Academy of Medicine.
That’s more than the entire budget of the Defense Department. That’s enough to provide insurance for more than 150 million Americans. Think of all we could do if we could recapture even a portion of that waste.
Without a doubt, hospitals and surgery centers do not have open-ended budgets. To the contrary, profit margins have been trending down for years, to 2.1 percent in 2017 and an estimated 1.8 percent in 2018. That means for every $1 in profit, they must earn nearly $56 in revenue; a profit of $100,000 requires $5.6 million in revenue. Those are razor thin margins, and as a result, many hospitals are closing. The American Hospital Association says hospitals have been closing at a rate of approximately thirty per year. Morgan Stanley analyzed data and concludes that more will shut down in the next 12 to 18 months. Eight percent of U.S. hospitals are at risk of closing, and an additional ten percent are considered “weak.”
It is crystal clear that hospitals that succeed will be those that control costs. Labor is the biggest expense at 33 percent of the overall budget, but most hospitals have already leaned this out as much as they can. Right behind labor, and gaining, is supply chain, which represents about 31% of the budget. Therein lie opportunities to unleash greater efficiencies and reduce waste.
Healthcare supply chain contributes roughly $10 billion of waste in our health system every year, about half in non-controlled pharmaceuticals and half in unused, unexpired supplies and devices. There’s legitimate reasons for it, in our complex, fractious, highly regulated system. Things like contract changes, product conversions, restrictive manufacturers’ return policies, equipment upgrades, physician preference items – all contribute to waste and inefficiency. When a physician orders preferred items, like heart valves that cost $6,000 each, for example, then leaves the hospital, those items often go unused. They sit on a shelf until finally they are identified as excess or slow-moving inventory and placed on a pallet bound for the landfill.
The simple fact is that another hospital somewhere would be happy to purchase those excess heart valves at a reduced cost. It’s a win for the selling hospital in that they recover some of their costs, it’s a win for the purchasing hospital in that they’re reducing their spend, and it creates a more socially, environmentally, and financially responsible system.
So why doesn’t this happen? Again, lots of reasons. Healthcare supply chain staff are busy. They don’t have time to find a buyer or seller, do the required paperwork, or set up a hospital as a new vendor in their accounting system. They also have contracts to abide by, and there’s a reluctance to step outside of that, even when it’s advantageous and doesn’t breach contract terms. For example, contracts often specify volumes at which hospitals must purchase items directly from the manufacturer, but that leaves the remaining volume, plus all non-contracted items for out-of-the-box sourcing. In addition, sometimes it makes more sense to purchase, say, two of an item instead of a box of twelve, or you need specialty items not under contract. All of these situations are ripe for sourcing directly from hospitals that have the inventory you need.
The concept is straightforward – supply chain professionals need a way to communicate and collaborate directly with each other, connect unwanted products with a provider that needs them, and streamline the entire transaction. We need a platform that allows hospitals to exchange assets instead of throwing them away, a platform that is a hybrid of Amazon and LinkedIn for healthcare supply chain.
Providing the platform – the technology – won’t be enough. It requires action on the part of supply chain professionals, a change in both the way we think and a slight change in the day-to-day process. All supply chain professionals know they have waste, but rarely do they understand the value of the assets that get discarded. We monitor what is bought and what is used, we also need to measure what assets are being thrown away and their value, so we can understand the cause of the waste and make more informed decisions.
There is tremendous value trapped within supply chain that we need to unleash. If we give it the attention it deserves, we can buy and sell supplies, devices, capital equipment, and non-controlled pharmaceuticals hospital-to-hospital directly. We need the will and the way to create more efficiencies, recover costs, and reduce spend in supply chain.
About the author: John Kupice is the CEO of H-Source.