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Five Steps the C-suite Should Know About Optimizing the Hospital Supply Chain

 |  By HealthLeaders Media Staff  
   October 09, 2009

As hospitals across the country feel pressure to cut costs and improve operational efficiencies, the role of the hospital supply chain becomes increasingly important. Hospital supply chain issues are no longer just the concern of materials management departments and service line VPs. C-suite executives are also getting heavily involved. When they do, they should first know five critical points when it comes to supply chain management.

  • Disconnects in supply chain and revenue cycle lead to financial loss

Many hospitals don't realize that cash is leaking out of their organization due to a lack of coordination between their supply chain and revenue cycle areas. The financial impact of this fragmentation can be substantial—millions of dollars each year for some providers-- particularly associated with costly medical devices, such as implantable items. It's essential that hospitals connect the revenue and spend management sides of their organizations in order to gain a true understanding of their financial issues and needs.

  • Traditional supply chain metrics are failing hospitals

Expense performance metrics have been traditionally based on a percentage of hospitals' revenue, expense or Medicare Case Mix Index. What's missing from these metrics is a way to account for the supply intensity for the specific patient population of a particular hospital. Without this information, hospitals cannot accurately predict supply costs. Today there are new ways for hospitals to answer the questions of: "What should my level of supply chain spending be given the numbers and types of patients I treat?"; "How are we doing on our supply expenses?"; "How do we compare to other facilities?" and "What can we do better?" Executives should ensure that the methods they are using to predict supply costs can truly answer these questions.

  • Business intelligence tools are essential for controlling supply costs

When supply costs are not managed well, savings erosion can accumulate quickly and can be as high as 60% on any key supply contract within as little as six months after execution. That's why it's critical for hospitals to have access to the right metrics for managing supply costs. Business intelligence tools today can accurately gather, interpret and report clinical, financial, and cost data to help drive physician engagement and impact clinical supply cost and utilization. Executives should ensure that their organizations have ongoing access to metrics, such as: gross profit margin by case; net profitability by case, procedure and service line; physician payer mix, reimbursement and profitability by case, procedure and service line and detailed costs and supply utilization profiles by physicians, by case. Finally, having a road map in place to create actionable initiatives is an essential component.

  • Physician engagement is a must in reducing supply costs

Physician preference items (PPI) account for 40% of non-pharmacy supply spend, with prices and consumption continuing to rise. To successfully engage physicians and get them on board to reduce supply costs, hospitals must have the right data and information to ensure physicians that cost reductions will not compromise patient outcomes such as length of stay, time in the OR, and other clinical factors. Physicians are significantly more likely to accept implant cost reduction when a complete context of what drives cost for their cases is presented, along with recognition of the complexity of their daily jobs. Executives should ensure that their organizations have a way to marry supply costs and demand information with patient billing and utilization data to develop the complete picture of current clinical practice and utilization at the hospital and successfully engage physicians.

  • Supply chains as agents of change

When managed correctly, hospital supply chains can become a change agent for accomplishing organization-wide goals and objectives. With the right metrics and methodologies in place, supply chains can optimize both their transactional and strategic roles to drive bottom-line improvements for hospitals.


Rand Ballard is senior executive vice president and chief operating officer with MedAssets, Inc. He may be reached at solutions@medassets.com.

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