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

Rand Ballard, for HealthLeaders Media, October 9, 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.

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