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Analysis

Annual Supply Chain Savings Missed by Hospitals Total $25.4 Billion

By Jack O'Brien  
   October 18, 2018

Effective spending on supply chain operations continue to elude most health systems, according to a new study from Navigant.

Health systems across the country spent $25 billion more on supply chain operations than they needed to, representing a 10.2% increase compared to last year, according to a Navigant study.

The study suggested proper supply chain spending would result in a 17.7% average expense reduction, totalling $11 million per hospital annually. That amount equals the annual salaries of 160 registered nurses or 42 primary care physicians.

In an era of shrinking operating margins and challenging revenue streams, supply chain costs are another aspect of the financial enterprise that hospital executives must address to ensure a stable outlook for the organization.

Related: Hospitals Still Lagging on Cost Transformation Measures

Rob Austin, director at Navigant, told HealthLeaders hospital financial executives have a heightened awareness of the potential to save significant costs, but health systems aren't making a big enough impact due to underinvestment.

"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," Austin said. "[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."

Austin added that the systems he has analyzed with the most effective and efficient supply chain operations have implemented strategic initiatives to hire educated employees from outside of healthcare to get new ideas on how to streamline the process for the system.

Along with incorporating college-educated employees into two to three year timeline, Austin said successful systems have also embraced collaboration between the financial and clinical sides of the enterprise to foster new solutions.

Related: How to Limit Waste in Hospital Supply Chains

Peer-to-peer communication, according to Austin, is one of the most effective steps to identifying areas where supply chain leaders, physicians, and nurses can determine what resources are most necessary for the system.

Another crucial step for a high-performing system is data utilization and technology management that results in effective supply chain operations. Austin said that systems may have great a item master or data inventory management system, but without proper usage and knowledge of how to pull the data to act upon it, the system will not benefit in the long run.   

Below are some additional highlights from the Navigant analysis:

  • Hospitals in the southeast had the highest equivalent savings opportunities of any region in the country at 18.7%, while the northeast had the lowest at 15.2%.

  • Systems could build two outpatient surgery centers with the annual $11 million total supply expense reduction opportunity.

  • The average value-based purchasing and HAC performance scores are higher at systems with more efficient supply chain spending.

  • “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.

Jack O'Brien is the finance editor at HealthLeaders. 


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