US hospitals are spending $25.4 billion more than necessary on supply chain

October 24, 2018
by John R. Fischer, Senior Reporter
U.S. hospitals are spending approximately $25.4 billion more than necessary annually on supply chains, costing themselves a potential savings of $2.4 billion when compared to 2017.

That’s the finding of an annual Navigant analysis of 2,300 hospitals, representing a 10.2 percent increase in possible savings in an area where many providers have not accumulated the resources and leadership needed to take advantage of cost saving opportunities.

"There's a huge opportunity to reduce supply costs, the second-largest costs for a health system behind labor; but [executives] need to do a few specific things," Rob Austin, director at Navigant, told HealthLeaders Media. "[Executives] have to engage clinicians, focus on data, and have more people professionally trained in the supply chain. For a CFO to invest in supply chain, [they need] a supply chain leader who has a vision and skills, sometimes [from] outside of the industry, that they can apply to healthcare."

Providers in the southeast had the highest equivalent savings opportunities of any regions in the U.S. at 18.7 percent while the northeast showed the lowest at 15.2 percent.

Saving opportunities, though, were found to be relatively equal among providers regardless of size and regional location, as well as whether they were urban or rural; for-profit or not-for-profit, and system-based or standalone.

Lower supply spending also does not necessarily reduce quality, as evidenced by scores for Medicare hospital-acquired condition and value-based purchasing at top-performing supply chain facilities which have shown slightly better results.

The study indicates that with proper investments, an average total reduction of 17.7 percent in supply expense is possible. This adds up to $11 million a year in extra savings annually per hospital, an amount equivalent to the average annual salaries of 160 registered nurses or 42 primary care physicians or the average cost of constructing two outpatient surgery centers.

To achieve this, providers need actionable information that draws comparisons between costs and patient outcomes, and staff who are capable of analyzing the data.

Such resources enable hospitals to utilize products used in routine procedures and engages data-driven physicians to standardize use of physician preference items and medications that have been proved to produce clinically equivalent outcomes at a lower cost. This leads to reductions in price variation and the use of certain drugs and products.

In addition, enhancements to supply chain departments usher in greater collaboration among physicians, nurses and other clinicians with supply chain, finance and IT departments, as well as with suppliers on value-based and other contracting initiatives.

“The key takeaway for health system executives is that investments in supply chain management pay off,” Kevin Connor, vice president of Supply Chain Management at TriHealth, said in a statement. “Those systems with the highest-performing supply chains are combining data analytics, collaborative clinician engagement, and deep subject matter expertise to drive care delivery improvements to the benefit of the communities they serve.”

Navigant works with providers, clinicians and health plans to provide strategic, performance improvement, and business process management solutions that help them meet quality and financial goals.

Total supply costs refer to medical and implantable device prices, medical/surgical and pharmaceutical supplies charged to patient care departments, and supply costs regarding buildings/fixtures, maintenance and plant operations.

Capital equipment, labor, utilities and some specialty pharmaceuticals were not included in the analysis. The study used data from 2016-2018, derived from Definitive Healthcare.