Today’s efforts by many health systems to reduce costs only lead to incremental impact. When elevated, supply chain is primely positioned to drive sustainable savings and improved outcomes to set the stage for larger initiatives.
As we start a new calendar year, many health systems are looking at their numbers to assess financial performance. Have they moved the needle to drive not only short-term gains but long-term, sustainable margin improvements?
For many organizations, these assessments look bleak.
On a macro level, the American Hospital Association reports that hospital operating margins have dropped 47.4 percent on average over the last two years, outpacing net patient revenue by approximately 14 percent. This precipitous drop is being driven by steep declines in inpatient hospital stays, which have fallen 17 percent since 2009.
The simple truth is that with the advent of value-based care and its built-in incentives to curb utilization and care delivered in high-cost, acute care settings, hospitals are losing volumes and taking massive financial hits.
For those that have not diversified by optimizing performance and expanding into non-acute services, the struggle to stay above water is a constant challenge, forcing hospitals to make drastic choices such as cutting staff, merging with others, eliminating service lines or closing underperforming facilities in hopes of survival.
But are these immoderate options all that’s left? In Premier’s experience, there remain other ways to optimize efficiencies and improve margin – all without compromising care services or quality.
Supply Chain: From Gatekeeper to Driver of Outcomes
With supply expense being the second highest cost behind labor, health systems often look here to enhance their finances. But historically, success has been muted, with most working tremendously hard to shave a few percentage points off total supply and purchased services expenses, typically after a multi-year period. Considering the financial pressures in today’s market, these are hardly the results that are needed for long-term organizational survival.
So, what’s next? How can an organization achieve the double digit savings that are needed?
A long-term, sustainable plan needs to move beyond what’s historically worked, evolving the supply chain management function away from an isolated, transactional activity of the health system and toward a strategic function integrated within clinical decision-making teams.
In other words, the supply chain isn’t just a purchasing function. It’s an overall financial management strategy that should be leveraged to assess the total cost of care, across the continuum, to influence clinical care and supply choices.
Working All Together Now
At Premier®, many of our members are integrating their supply chain, physicians, clinicians and quality teams as part of a more holistic approach to managing expenses, evaluating total costs, standardizing care processes and evaluating supply choices to achieve optimal outcomes and financial returns.
Central to the process is data.
Integrated financial management teams need to understand certain and agree to certain core facts: where does variation occur in terms of cost and quality, how that variation affects outcomes and what is driving the outcomes. Those answers must be rooted in data-driven evidence. Premier’s members typically leverage national, benchmarked data to see how they compare to peer facilities in terms of cost and quality. If the data show that costs are higher, but quality outcomes are no better, that’s an area for further exploration. From there, systems can drill down to see what departments or what physicians are driving that variation and take action to remediate. To give a concrete example, we recently worked with one health system that experienced higher than average cardiac surgery costs. Drilling down, they saw that most of the expense was being driven by overuse of sutures. From there, they saw that one physician in particular had dramatic outlier expenses. In the investigation, they learned that the physician was performing a specific type of closure technique that required three times as many sutures all other peers.
In this case, supply chain data was the catalyst for a change in clinical practice.
In other cases, clinical practice can be the catalyst for supply chain standardization. Using the same data sets, systems can embark upon value analysis, measuring the total cost and quality impact of a particular supply, device or pharmaceutical across a procedure or an episode. In this case, a product that may list for a more expensive price than a competitor offering, but if its use is effective at improving total outcomes and reducing costs over the course of the episode, it’s yielding a better value. Once these high-value products are identified and their value quantified based on the evidence, health systems can standardize around them, often leveraging high-commitment programs that can generate dramatic cost reductions – both in terms of the contractual prices paid, but also in the form of greater purchasing efficiencies and better workflow. In fact, health systems in Premier’s highly-committed program, known as SURPASSTM, typically achieve average overall savings of 20 percent on the products they standardize. Savings like this is sure to make a large impact to their organization.
Central to the effort, however, is a unified decision-making team focused on data empowered outcomes, rather than emotion or biased preferences. Further, continuous communication between supply chain, physicians, clinicians and quality teams must occur so that there is common understanding of financial and outcome implications of decisions made. Technology must also be in place, utilized appropriately and on a regular basis, and data reviewed to track outcomes so that adjustments can be made if needed.
In integrating and optimizing the supply chain, some may shy away, arguing that only some, large-scale IDNs have the fire power to pull off work of this nature. Nothing could be further from the truth. In fact, a 2018 survey of Premier health systems found that system size was not an indication of ability to conduct data assessments and value analysis work, as the most advanced organizations are often small- to mid-sized facilities with fewer than 10 hospitals, while those with 20 or more tended to experience more challenges. In addition, organizations like Premier are investing millions on more turnkey value analysis solutions to create scale and options for systems of all sizes.
Getting It Done
As patient volume shifts outside of the four walls of the hospital, the function of supply chain management needs to evolve to look at product outcomes across the continuum. This mindset shifts the focus away from mere ordering, and toward a financial optimization process and outcomes driver. Armed with data and perspective as to how products are being used and the impact they make, mature supply chain organizations with an integrated process can now be ready to tackle initiatives like population health, care delivery optimization and care management.
The potential for sustainable savings needed to survive amid today’s market pressures is out there, but it will take knowledgeable partners and sophisticated business intelligence capabilities to execute quickly. Like a house, supply chain is the mortar that holds together other processes and drives a system forward. Organizations need to stop thinking of supply chain as just a gatekeeper to control costs, and more as an imperative to drive overall financial health.
David A. Hargraves
Senior Vice President of Supply Chain
Driving strategic sourcing initiatives, David leads Premier’s group purchasing differentiation and e-Commerce strategies