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Hospital Budgets React to Perfect Storm Created by Global Markets

Karen Minich-Pourshadi, for HealthLeaders Media, March 14, 2011

"The indicator that scares me is food; it's always the first to go up, … then after that it's oil and then you start to see a plethora of commodities be affected," says Fleming.

To be sure, oil and energy prices are also on the rise, which will affect not only the cost of supplies transported to hospitals, but also the energy costs needed for the facilities. According to a release by the U.S. Energy Information Administration (EIA) on the short-term energy outlook:

  • West Texas Intermediate (WTI) and other crude oil spot prices have risen about $15 per barrel since mid-February partly in response to the disruption of crude oil exports from Libya.  Continuing unrest in Libya as well as other North African and Middle Eastern countries has led to the highest crude oil prices since 2008.  As a result, EIA has raised its forecast for the average cost of crude oil to refiners to $105 per barrel in 2011.
  •  EIA expects the retail price of regular-grade motor gasoline to average $3.56 per gallon in 2011, 77 cents per gallon higher than the 2010 average and EIA projects gasoline prices to average about $3.70 per gallon during the peak driving season (April through September) with considerable regional and local variation.  There is also significant uncertainty surrounding the forecast, with the current market prices of futures and options contracts for gasoline suggesting a 25-percent probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during summer 2011.

As prices of goods in the global economy increase, Fleming says even supply contracts with fixed pricing or GPO contracts can only weather these additional cost increases for so long without having to pass them along to their customers—if not in the current contract, then in the future ones. 

"The impact it can have on hospital budgets is potentially devastating. They are already being asked to do more with less, and rapid changes in the global economy can mean increases in supply costs that weren't planned for in the budget. [These types of increases] can mean the difference between staff and stuff," he says.

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