Ask progressive doctors, surgeons and nurses to list their top cost drivers and they’ll likely unspool a litany of clinical, fiscal and operational sins familiar to just about anyone on the clinical and business sides of healthcare.
Of course, each clinical specialty may have its own nuances. But cost drivers making the scroll can include overuse of antibiotics, prescription drug consumption, unnecessary testing and treatments in laboratory and diagnostic imaging, population growth and aging, price inflation, technology advancements and changes, as well as over-utilization of services, such as the emergency room as primary care doctor. They also might cite increased demands for administrative participation, such as populating patients’ electronic health records and submitting payer paperwork, as well as searching for needed supplies that may be misplaced or missing for whatever reason. Naturally, they blame Supply Chain, and maybe rightly so.
As supply chain operations expands to assume larger “support services or system services” roles and embarks on the road to becoming what some studies predict as a healthcare organization’s largest expense category, particularly with the inclusion of outsourced labor and purchased services in the mix, what would Supply Chain professionals tag as their top cost drivers?
Healthcare Purchasing News reached out to more than 20 executives from providers, suppliers and service companies to share their insights. Here’s what they revealed in random and wide-ranging order.
Motivating factors
“As reimbursement declines and cost pressures increase, hospitals/healthcare providers must look for new ways to save money,” she said. “They must go beyond product price and place a greater focus on effective management. The Supply Chain team should not be held back by manual processes, and clinicians should be spending more time at the bedside.”
Lisa Zierten, Director, Marketing, Hospital Services,
Cardinal Health Inc.
“The conversations that we are having with leading health systems revolve around their desire to create a more clinically driven supply chain,” Scagliarini said. “The reason this is important is because health systems are looking to Supply Chain to better contribute to value-based medicine. In this era of value we can no longer be focused solely on contracts and price points.”
Mark Scagliarini, President and CEO,
Blue.Point Supply Chain Services
“For a healthcare system with a 3 percent net margin, a $1 reduction in costs is worth $33.33 in revenue. Therefore, if your reimbursements decline by $33.33 million and you want to keep your cash flow stable, you need to save $1 million in costs in the same period. To do this, you can either reduce direct labor, goods or purchased services costs. Supply Chain is responsible for managing goods and purchased services costs representing 45 to 50 percent of operating costs. The imperative, therefore, is to reduce goods and services costs aggressively to make-up for reduced revenues without sacrificing quality. This is similar to industries where cost management is an existential priority like automotive, computers, oil and gas, and retail.”
Chris Gormley, CEO, MedPricer
“The cost of doing nothing is leaving millions of dollars untouched at most healthcare organizations.”
Robert T. Yokl, President and Chief Value Strategist,
SVAH Solutions
Purchased services
“Purchased services typically account for half of health system spend. And purchased services are like the Wild West with many different groups owning contract negotiations. When contracts are created outside the Supply Chain department without oversight and knowledge from those trained to negotiate contracts, it exposes the health system to risk and increased cost, such as warranties that result in exorbitant maintenance and support costs.”
Michael DeLuca, Executive Vice President of Technology and Client Services, Prodigo Solutions
“Of the 45 to 50 percent of operating costs managed by Supply Chain, almost half of this is purchased services. Supply Chain has traditionally focused on reducing costs for physician preference items, medical/surgical goods and pharmaceuticals through price and usage reductions. Purchased services are anything bought by a healthcare system that isn’t a direct labor cost or good and includes items like lawn care, snow removal, elevator repair, transcription services, data storage, legal services, reference labs and radiology services. The large savings is driven in part because these categories have never been centrally sourced by health systems. These systems have grown through acquisition and left contract negotiations to local users in facilities, such as IT, administration and HR, who are not sourcing experts.
“Purchased services are different on several dimensions. For example, services are difficult to compare since there is no ‘part number’ equivalent. Services are based on contracts and statements of work. Services are highly preference-driven. For example, what makes one lawyer worth more than another lawyer? Price and [consumption] volume are difficult to collect because invoices rarely have granular detail. POs are not issued universally. This also makes benchmarking of services difficult. Challenges aside, proper management of purchased services costs can unleash substantial savings.”
Chris Gormley, CEO, MedPricer
“Purchased service expenses represent a significant portion of an organization’s total operating expense — oftentimes totaling even more than recorded supply expense. These significant numbers can be attributed to the fact that the category is largely decentralized with contract processes owned by several departments. This means that purchased services spend is not typically under the supply chain’s purview and, therefore, not subject to standard competitive processes and enterprise-wide terms and conditions. However, this means that if Supply Chain leadership is able to gain ownership of purchased services, the opportunity for savings is significant.”
Christopher J. O’Connor, President, Acurity Inc. and Nexera Inc.
“Of the $160 billion in spend that Valify has collected, cleansed, and categorized, the largest purchased services cost driver for Valify subscribers is in Facility Support Services, which includes categories such as property management, utilities, food service outsourcing, and bioengineering services. The next highest purchased services spend categories include information technology, outsourced clinical services and financial services.
“Property management and utilities are primary drivers due to the fact that there are over 3,000,000,000 total square feet of hospitals and clinics within the U.S., according to the most recent CMS data. Facility directors typically hire third-party service providers to maintain their properties cleaning, heating and cooling, and general maintenance.
“Food and Biomedical engineering services are resource-intensive functions and are commonly outsourced by many health systems. Outsourcing dollars largely contributes to these categories being the top drivers of purchased services spend. Additionally, spend in these areas is increasing year-over-year at a rate faster than other purchased services categories.
“Biomedical engineering cost trends have steadily risen due to increasing need to meet requirements of medical equipment being integrated to hospital technology networks and becoming more expensive to service. Health providers have found it more cost-effective to simply outsource these departments to the original equipment manufacturers and third-party vendors. The price of food has also increased by 26 percent over the past 10 years and is expected to continue to increase based on the USDA’s Food Price Outlook for 2017.
“One of the largest areas of growth in cost is coming from services around technology. Ten years ago, no one was talking about mobile strategies or cloud strategies, and electronic medical records were in their infancy. X-rays were stored in manila envelopes, and scheduling was done using a big book and a pencil. The move of these examples to digital, online and mobile device technologies has created a large need for services in healthcare. Additionally, services are needed to maintain ever more sophisticated hardware and equipment. Why this issue matters to the healthcare providers and payers, is that contracting for these services is something that Supply Chain managers across the spectrum are still figuring out.”
Les Popiolek, COO, Valify
“GPOs have done little in the area of purchased services, specifically IT. [These are] all areas that we have struggled with for years to try to control, and areas that suppliers are reluctant to put on contract as they know that we are not organized nor disciplined.”
Dee Donatelli, President & CEO,
Mid-America Service Solutions LLC
“Purchased services represents 11 percent to 15 percent in new supply chain savings.”
Robert T. Yokl, SVAH Solutions
Data management/science
“[One] key cost area is bad item master data. Without a single source of truth, provider Supply Chain teams may be ordering the wrong products and spending valuable time fixing errors. This means providers can miss out on negotiated contract pricing and reimbursement opportunities that offer significant savings. As a result, many Supply Chain staff teams are focused on reactive activities rather than proactive value-added tasks.”
Chris Luoma, Vice President, Product Management, GHX
“Organizational spend is being consumed by the cost of modernizing discrete technology systems, and attracting and retaining top talent to support an expanding span of responsibility. While provider systems are upgrading their data management platforms to create a digital advantage, they are uncovering the myriad of ways in which these discrete applications do not integrate with each other, and in so doing, create data deficits and necessitate continued and inefficient dependencies on provider-funded labor.
“The focus on single system solutions has converted providers’ significant and continuing investments in data management technology into annual annuities that have not achieved their objectives of automated data analysis, timely access to and evaluation of key metrics, and integration of clinical management systems to critically improve operating margins. All of these goals require unprecedented collaboration by and between suppliers and providers, and depend on a common and sustainable operational infrastructure that supports the independent benefit of all constituents. This collaboration requires technological and operational talent that, if available, is not typically present or funded at the required levels within the healthcare market.”
Mary Beth Lang, Executive Vice President for Cognitive Analytics and Computing, Pensiamo, and Vice President of Healthcare Pharmacy and Supply Chain Management Commercial Services, UPMC
“Data is king and the ability to manage and mine data will heavily influence the speed to which we identify, execute and sustain cost savings, not to mention gain clinical alignment. Data serves to accurately inform, and our ability to get at it [in] real-time can facilitate prioritization, but it also allows the Supply Chain professional to have a meaningful conversation with our clinical partners.
“Unfortunately, our systems and applications haven’t quite caught up to our data needs, and when they do we Supply Chain professionals haven’t adequately invested in the resources to manage and mine the data that exists in these systems. I believe the current situation is further compounded because we’re entering an era of evidence-based decision making where expectations are rising for quality and outcomes data to drive what products we put on our shelves.”
Ed Hardin, Senior Vice President, Supply Chain Management, Beaumont Health
“Managing the GS1 Healthcare US Initiative, we work with providers, suppliers, distributors and GPOs in the healthcare industry. Our perspective is unique in that we lead a collaborative industry group to help companies achieve supply chain efficiencies and comply with regulations through the adoption and implementation of GS1 Standards. So we get a lot of input from many different industry members from all points in the supply chain. We know that supply chain costs represent about one third of providers’ operating budgets – second only to labor.
“Three of the top challenges driving supply-chain costs are preventable errors, transactional inaccuracies, and reliance on manual records or inconsistent management of electronic health records (EHRs). All rooted in the use of proprietary information systems, these issues create major inefficiencies throughout the industry and can be solved with the proper implementation of GS1 Standards. Proprietary data systems are highly inefficient because their information is not easily understood by trading partners up and down the supply chain. The complexity and siloed nature of this model creates costly inaccuracies such as problems with inventory and supply chain disruptions, as well as serious risks in patient care.”
Greg Bylo, Vice President, Healthcare, GS1 US
“Multiple systems — both electronic and manual — that must be maintained with the ‘correct’ information are a cost driver throughout the entire healthcare supply chain. Price is just one of many details that can gunk up the works. Systems are rampant with packaging string, nomenclature and other item and vendor identifier issues. In addition, merger and acquisitions cause havoc on billing and ‘ship to’ addresses. Finally, it seems that most business partners build their systems to make themselves more efficient — not necessarily to make their business partners more efficient. Since these definitions of ‘efficient’ are different for each business partner, systems can tend to work against each other, causing operational cost increases and product not being delivered on time.
“Due to a lack of trust in these systems, human beings still need to interface into systems or between multiple systems. Human ‘middleware’ are left to make judgment calls on what needs to be done to make sure their customers have what they need to do their jobs. Not only is there additional costs associated with this work, the impact on data can be significant. Prices are changed on [purchase orders], but the reason for the need for the change never researched. Vendor representatives make changes on the fly, GPOs issue new contracts and prices but do not affirm that the vendor, distributor and customer all agree and have made the change before transactions go through. Multiple changes across multiple systems cause both data integrity issues and supplies to be delayed.”
Joe Colonna, Vice President, Supply Chain, Piedmont Healthcare
“Our customers have multiple data management systems in place, but it’s becoming increasingly challenging to leverage deep actionable insights when the data is not aggregated appropriately.”
Doug Golwas, Senior Vice President, Corporate Sales,
Medline Industries Inc.
Contract/non-contract pricing
“What if you perform better than 90 percent of your price benchmarks? Is this good enough? A price benchmark is only as good as sourcing approach used to arrive at the prices and terms used in the benchmark. What if all price benchmarks are based on buyers accepting the first offer made by a supplier? What if they are based on simply rolling over a contract with prices negotiated three years ago in a supply market with declining prices?
“The only way to really know that you have the best price in the market is to compare your contracts fairly with appropriate tradeoffs for quality and cost, but to set-up methods where suppliers compete for your business. GM, United Technologies, Dell, Exxon Mobil and Wal-Mart know they must constantly strive to have a lower cost since the market demands it and consumers compare prices every day.”
Chris Gormley, MedPricer
Manual vs. Automated processes
“Time spent on manual tasks, like supply chain management, is nearly 20 percent of physician and nurses’ workweek. Supply chain administrators have an opportunity to improve their role through automated solutions, which reduce the amount of time spent counting inventory. For clinicians, there should be a greater focus on removing non-value added, nonclinical tasks from their workloads. This would allow clinicians to spend more time and effort on patient care. Our survey found that 66 percent of respondents wish supply, inventory and administrative tasks were something they didn’t have to do because it takes the focus off patients, education and training.
“Revenue leakage results from inefficient charge capture. Manual processes that rely on clinicians to document product usage introduce the potential for human error and items beings overlooked. Seventy-eight percent of participants in our survey said they are manually counting their supply chain inventory. Respondents identified a lack of urgency around updating the supply chain and introducing solutions that would address manual inventory management challenges. And nearly one third of respondents believed their facility had not introduced a new inventory management system in six or more years.”
Lisa Zierten, Cardinal Health Inc.
“Even the top health systems average contract utilization rates of 60 percent and many are much lower. They’re paying more for supplies than they should be. The solution to improving compliance is using a contract management and marketplace solution that operationalizes the contract and drives health system users to the right product, at the right price, every time. These same technology solutions can update prices and add new items to your marketplace in real-time, and alert you to contract renewals before they come due. The ROI can be significant due to dramatic cost savings potential.
“If Supply Chain can improve process efficiencies and do more with less, it means more time and money to spend on patient care and other revenue generating activities. Health systems are turning to supply chain technologies that improve the purchasing experience for clinicians, administrators and others involved in the requisition process to give them more time to focus on patient care or their primary business function.”
Michael DeLuca, Prodigo Solutions
“Manual processes and limited ability to forecast supply needs result in poor inventory management discipline. This causes costly overstocking in some instances, ‘fire drill’ logistics in others when products are out of stock when they’re urgently needed, and waste due to product expiration.”
Chris Luoma, GHX
“Spending too much staff time to make up for operational inefficiencies, inadequate data and analytics to provide visibility into supply chain spend, and limited visibility into total landed cost of product.”
Don Carroll, Vice President, Business Development,
Vantage Point Logistics Inc.
Time is the commodity that most of us never have enough of bcause so many supply chain operations are conducted using manual processes.”
Glenn Tamir, Vice President, Sales & Business Development, Supplymind LLC
Lack of product/service standardization
“It’s an ongoing challenge to manage product, contract and pricing data with thousands of changes occurring across the industry on a daily basis. The absence of standardization in the way this information is managed, shared and transmitted creates price leakage or missed opportunities for savings maximization between providers and suppliers.”
Chris Luoma, GHX
“Often hospitals report having seven or more separate supply chains running within their organization. A huge driver of supply chain costs are the Clinical Specialty Areas, including the OR, IR, Cath Lab, and several others. In these areas, clinicians have often assumed responsibilities for purchasing — after all, they’re experts in the products used and care delivered. But they don’t have supply chain skills, nor do they have the tools — including data about consumption — needed to drive good decisions. They’re responsible for managing expensive inventory, but without data, they’ll err on the side of overstocking to avoid stock-outs. In turn, expirations run high and costs are driven up. In many organizations, I see such a high number of product expirations that literally, a provider could fund several more nurses, or purchase much needed equipment, by eliminating this unnecessary expense.
“Managing these separate supply chains means more clinical time is spent managing inventory, taking time away from patients and driving up overtime. With a more centralized approach, you can create greater visibility to products being used in each of these areas, which can also drive more product standardization, reducing costs and supporting value analysis efforts.”
John Freund, CEO, Jump Technologies Inc.
“Variation not only drives price but it also increases the overall cost of managing the products. This variation also makes it exponentially harder to make sure that you have the right stuff at the right place at the right time, especially when the definition of ‘right’ is set at the individual user level. Think about the extra effort and cost that go into managing multiple vendors with multiple contracts across potential thousands of items, In some cases you can have a dozen contracts for essentially the same type of device. Price is one thing but making sure you have those items on the shelf is an operational cost driver as well. Beyond cost, keeping all of these same/different items in stock means there is a constant dance of contracts, item adds, purchase orders, invoices and stock management that could lead to an item not being available.”
Joe Colonna, Piedmont Healthcare
“[Variation] is a cost driver that exhibits itself in many forms. Included in this are things like the way clinicians provide care, care pathways, and supplies used in the delivery of care to the business processes used across the healthcare industry. Let’s look at two examples, one clinical and the other business. As the clinical example, joint replacements in any given health system could involve different brands of joint replacements used across physicians. This variation in supply costs money to train clinical staff and to maintain inventories, and could also contribute to the variation in patient outcomes and experience. A business example is the lack of automated ordering and supply chain processes that require manual processes instead of electronic processes using data standards. Both examples contribute to significant costs.
David Reed, Vice President, Healthcare Business Solutions and Operations,
Cook Medical Inc.
“Variability in both clinical and business processes is a challenge. Variation impacts cost through waste, inventory, defects, waiting, motion, etc.”
Richard Beach, Assistant Vice President, Materials Management, Intermountain Healthcare
“Many of the healthcare organizations that we have studied take a fragmented approach to logistics. Each department manages its own logistics or courier function, with no visibility to what the other functional departments are doing. This can lead to service overlap, where drivers pass each other on the highway, or even show up to the same facility at the same time to deliver items from different departments. The waste and expense that this kind of system can produce is obvious. What is less obvious is that lost opportunity cost. By fully connecting the transportation of the entire organization and creating an intra-company logistics network, healthcare organizations can leverage their scale, reduce intra-network shipping and freight costs, and share supplies and pharmaceuticals. They can eliminate waste and overlap, while taking full advantage of the economies of scale and physical connectivity.
“As health systems have expanded geographically, many have built [central] fill pharmacies, laboratory operations, equipment warehouses and print shops in each of their facilities. While this approach allows the health system to provide the services needed to care for patients, it also produces redundancies. As agility and scalability become more necessary for the healthcare of the future, centralizing and streamlining these redundant facilities is top of mind for healthcare leader. An integrated intra-company logistics operation can transport the pharmaceuticals, specimens, equipment and print material to facilities that do not have these departments and liberate real estate, taking significant costs out of the health system without impacting care. It also allows for better inventory management and sharing.”
Bonni Kaplan DeWoskin, Vice President, Marketing, MedSpeed
“The issue of supply chain cost drivers is a multifaceted problem due to variations in reimbursement methodology, particularly how hospitals get paid. Advanced healthcare delivery organizations must understand their costs across all services so they understand their internal expenses per patient episode by procedure, diagnosis and location of service. Reimbursement schemes have taken on a life of their own, and now we are faced with multiple alternative payment systems, ranging from bundled payments to fee-for-service, to shared-value and global-fee models. All these different methods assume the delivery organization has systems and management tools in place to track, monitor and allocate purchases, services, staffing and capital expenditures for actual ‘episodes of care.’ Therefore, the top three cost drivers are the technology to allocate capital, expenses and costs, which must include labor to track, monitor and provide feedback financially and clinically per episode of care to the organization.”
William D. Kirsh, D.O., MPH, Chief Medical Officer, Sentry Data Systems
Clinical preference items, implantables & technology
“Many organizations do not have a process in place to address their strategic clinical technology needs effectively. This includes reviewing existing clinical assets, including imaging, laboratory and robotics, etc., monitoring the life cycle of key systems, assessing risk (such as cyber threat monitoring), or analyzing the impact of new technologies on improved patient outcomes, throughput, and reimbursement. This is a critical area for acute care providers to consider as they face shrinking reimbursement and limited access to capital while more patients are seeking care in outpatient settings.
“As organizations shift from fee-for-service to value-based reimbursement, the supply chain needs to play a leading role in creating a strategy for managing new implant technology as well as a safe and effective way to assess its effectiveness. For example, the decision to shift the ratio of cardiac valve implants more toward a transcatheter approach (TAVR) can spell the difference between a cardiovascular surgery program that is profitable or one that is not. Providers must be able to quantify and weigh a product purchase based on the impact of that decision on the clinical and financial outcomes of the procedure for which it is used.”
Christopher J. O’Connor, Acurity Inc. and Nexera Inc.
“Technology continues to advance to the point where depreciation isn’t completed before the next ‘big thing’ needs purchased. Software and devices that are expensive in both purchase, implementation and training costs also require health systems to maintain current upgrades on all systems to reduce risks from hackers, potential ransomware and obsolescence. Often, facilities also face additional costs to make certain staff understand how to use the technology and keep up with medical advances.
Suzanne Alexander-Vaughn, Senior Product Manager, Product Development, Global Automation & Medication Adherence division of Omnicell Inc.
“The cost drivers for pharmacy play out across the rest of the healthcare continuum, particularly correlating to the clinical equipment parts and orthopedic implant markets. The primary issue in both spaces is the cost to manufacture and store small volume parts both of which are prevalent for differing reasons. In the clinical engineering space, the time over which equipment is maintained leads to an issue with the availability of parts. Original equipment manufacturers purposefully maintain a decreasing inventory of parts over time, the exact inverse of what is required for the strategic maintenance of assets for which there is no capital or differential reimbursement driving replacement. Non-existing dynamic parts management and predictive failure models only exacerbate the OEMs’ inability to drive to a more cost-effective life-cycle maintenance model. Unless OEMs accept the economic reality of equipment being maintained and used until such time as a total-value assessment justifies replacement, this cost-pressure will remain. Change in this space is possible but not while OEMs continue to target large margins on their sale of service and parts.
“The same macro-issues exist in the orthopedic and spinal implant markets where hundreds of thousands of SKUs are produced by suppliers who are supporting actual annual SKU demand measured in the low-thousands. This issue is marked by supplier inventories of implants and specialty instrument trays with turn-rates lower than 1.8. The inventory carrying cost to the supplier is translated as increased and non-negotiable cost to the provider. Until collaborative evidence based practice and product-patient demand-matching is facilitated, the costs of this critical area — as well as other similar categories — will drive unsustainable contribution margins for providers.”
Mary Beth Lang, UPMC
“Our customers are also consistently faced with how to manage holding costs for high-value inventory — not a small challenge. The ability to move non-traditional med/surg items into the traditional distribution channel allows our partners to save on the buy side, have greater control over the inventory that may reside on consignment or trunk stock, save on freight and receive it with their daily orders on the same trucks delivering their med/surg items.”
Doug Golwas, Medline Industries Inc.
“Collaboration with physicians continues to be of concern. Many aggregation groups are working to reduce physician preference item expenses but to do so needs commitment. To drive commitment we need to reduce the variation in practice and products. That’s difficult to do even in the very best managed organization.
“Recently I had a member of our aggregation group say [that] we spent millions on capital last year without a budget. The lack of asset management, new technology review and processes and the impromptu spending in capital is costly and dangerous. How many pieces of new technology do you have under a dust cover in the OR corridors?”
Dee Donatelli, Mid-America Service Solutions LLC
Mergers & acquisitions/continuum of care
“As hospitals merge and affiliate with other institutions and non-acute providers, the additional operating and supply chain costs represent new cost saving opportunities. However, they must first address the complexity of disparate systems (such as enterprise resource planning systems), overlapping services (such as warehouse and distribution/services centers), and labor (such as multiple purchasing departments), as just a few examples. Failure to create an integration plan to address these complexities can result in challenging hurdles that prevent the organization from realizing cost savings across the expanded corporate supply chain and instead result in increased operating costs.”
Christopher J. O’Connor, Acurity Inc. and Nexera Inc.
“Our customers are increasingly moving towards an integrated care model that includes acute care, post-acute, physician and other specialized services so they can keep patients within their system. With this includes the challenges of controlling the total cost of the supply chain across the entire continuum of care. As health systems increase in size, so does the complexity of managing the overall health system’s supply chain needs. The question becomes how can they deliver the right product, at the right time, to the right location? Then the new question becomes how can they replicate that process across the entire system?
Doug Golwas, Medline Industries Inc.
“All costs are going up — from supplies, technology, medications, utilities and construction projects while reimbursements continue downward. Care locations are also changing to areas of lower reimbursement, including urgent care and community-based healthcare facilities. Many health systems that house these facilities are still working through how to manage the expenses of supply and medication delivery to those areas while maintaining an effective level of cost oversight. Consumers are more likely now to shop for care and base decisions on information found online, sometime requesting certain products that may not be the most effective treatment for their need, financially or clinically. Increased regulatory requirements around tracking expiration dates, temperature and environmental monitoring also add to operational expenses. “
Suzanne Alexander-Vaughn, Omnicell Inc.
“The extent of coordination across multiple clinicians for a single patient can drive costs up or down. And as consumer expectations enter healthcare this also can have a huge impact on things like patient satisfaction and even their ability to follow care instructions. Let’s look at an example. Two doctors are seeing the same patient. Doctor A, the patient’s primary care physician, orders a chest x-ray and refers the patient to a specialist. The next day the same patient goes to see Doctor B, a specialist, who orders a chest x-ray as well. Historically, both chest x-rays get done and read, and in some instances, get paid for. But there’s no value in that. Situations like that highlight poor care coordination and can leave a patient wondering why they are having the same test performed twice. Care coordination extends beyond the healthcare institution all the way through to the patient’s home. Do I have the patients’ drug/devices when they go home? Do I have their procedure of care documented?”
David Reed, Cook Medical Inc.
Labor/management expertise
“Labor costs continue to increase and many hospitals are challenged to find and retain employees with the skill sets they need. This includes clinical positions, supply chain positions and leadership positions. All departments and roles require a range of skills to manage their operations while balancing growing uncertainty in healthcare due to reimbursement constraints and rapid technology changes. In many areas the addition of opioid addiction, and associated costs of drug diversion and compromised care also impact labor costs.”
Suzanne Alexander-Vaughn, Omnicell Inc.
“Finding qualified supply chain personnel to manage the expanded operational demands has become increasingly difficult. Experienced professionals are in high demand and are expensive to recruit and retain. As such, many smaller healthcare delivery organizations are unable to sufficiently invest in the talent required to optimize their operations. Further complicating this issue is the disproportionate talent gap that exists between large healthcare suppliers and the customers that they serve. This gap has resulted in, at its most progressive, a non-reciprocal model that focuses on improving the provider inefficiencies while leaving supplier opportunities for operational reductions untapped.”
Mary Beth Lang, UPMC
“It’s rare that an organization doesn’t have a handful of non-labor cost savings initiatives and with that financial objectives, but the ability to put them into effect and sustain the savings is most often a direct reflection of the supply chain professional’s ability to execute on multiple initiatives at once. Good project management helps to facilitate execution of initiatives, particularly multiple initiatives, but most importantly helps to coordinate and prioritize resources and, when necessary, can say no to competing expectations. Unfortunately, well-meaning ideas and their subsequent initiatives to drive down costs don’t deliver because of a lack of good execution. I’ve often quoted a line I heard many years ago as a consultant working for what was then one of the Big 6 firms: ‘The execution of ideas is really what separates capable from great talent. Be the latter!’”
Ed Hardin, Beaumont Health
Pharmacy
“Two key drivers of rising pharmacy supply chain costs are inefficient pharmaceutical inventory management and drug price inflation. Provider organizations are faced with complex choices around optimal inventory selection and volume, managing classes of trade, including 340B and specialty, and supporting drug shortage mitigation. Inefficient or nonexistent predictive data modeling leads many healthcare organizations to select suboptimal strategies to manage inventory, therefore increasing costs and complexity.
“The acquisition cost of the drug inventory that needs to be managed also continues to rise. The onerous FDA approval process for DESI drugs, continual launches of new specialty, biologic, and orphan drugs, high cost shortage management alternatives, and standard inflationary drug pricing practices are drastically increasing the cost of pharmaceutical products in inventory.”
Mary Beth Lang, UPMC
“From the pharmacy supply chain perspective, the top three cost drivers we see are pharmacy practice compliance mandates (e.g., USP 797/800, DSCSA, DQSA, 340B); the need for capital expenditures on physical plant, IT, and related software applications; and the new high-priced biotech drugs that are coming to market. “
Christopher J. O’Connor, Acurity Inc. and Nexera Inc.
“The primary cost driver that our CEOs voice is pharmacy costs. The ever-increasing expenses are becoming unmanageable at the in-patient level based primarily around reimbursement, or lack thereof.”
Dee Donatelli, Mid-America Service Solutions LLC
Supplier partnerships
“It has been well documented across other industries that companies and suppliers that have true partnerships have lower costs. Unfortunately, there are few examples of this in healthcare. The good news is that a shift in approach is occurring. We are working with health systems and suppliers to assist them as they partner on value based contracts. All parties should be measuring outcomes, cost, and quality tied to product decisions and working together to optimize the value achieved through the correct level product at competitive prices.”
Mark Scagliarini, Blue.Point Supply Chain Services
“One inventory management-related cost contributor is poor vendor collaboration practices. Lack of visibility to consumption and on-hand inventory limits supplier partners’ ability to help providers minimize costs through efficient ordering and inventory management practices. All of these issues lead to time and cost inefficiencies for providers.”
Chris Luoma, GHX
Inventory consumption/usage patterns
“According to our benchmarks we often see where a health system has market leading price, but total costs and usage are higher than peer hospitals. Supply Chain needs to understand where there is waste, overuse of items, and misalignment of use when compared to clinical best practices. Variation in product selection leads to variation in clinical care and can impact outcomes.”
Mark Scagliarini, Blue.Point Supply Chain Services
“Increased use of products, equipment and technology are all good for improved healthcare but there is an associated cost. We must ask the question: Are we doing the necessary cost-to-outcomes analysis to determine the efficacy of the increased use?
“Over utilization of tests, procedures and services is another issue. These result in a waste of time, energy, and resources. Over-utilization also has safety aspects for patients.”
Richard Beach, Intermountain Healthcare
“Inventory waste, including expired products, lost products, and the risk of over or under stocking is an issue. Without proper visibility into the supply chain, many hospitals/providers could be ordering too much or not enough. Our survey found that one in four hospital staff have seen or heard of expired products being used on a patient and 18 percent have seen or heard of a patient being harmed due to a lack of necessary supplies.”
Lisa Zierten, Cardinal Health Inc.
“One area that’s getting a lot of attention lately is bulk buys. I’ve had a number of Supply Chain leaders comment that they’ve been able to successfully negotiate great pricing with key vendors by making some pretty significant bulk buys. Often, the dollar amount of these buys is in the millions, and of course, the product pricing is significantly discounted. But when you look at actual usage data on these items, you might see the hospital has now purchased enough inventory to last several years and frequently, they’ll end up with product that’s going to expire and be wasted before it can be used. More cash is tied up, more cash is wasted. These bulk buys are great in theory but need to be approached with more caution — and more data.”
John Freund, Jump Technologies Inc.
“By creating a demand-driven supply chain, where all purchasing, inventory, and demand systems in the health enterprise are connected using a single standardized platform, dramatic reductions in inventory excess can be realized.”
Glenn Tamir, Supplymind LLC
“The biggest cost driver we help our clients with in relation to supply chain is the underutilization and over-purchasing of mobile equipment. For example, IV pumps, of which hospitals have hundreds if not thousands, cost upwards of $3,000 each, and they typically sit idle 60-70 percent of the time. Yet nurses will tell you they never have enough because they can’t find them when they need them. We often see hospitals with a 3:1 ratio of IV channels to beds, to cover this perceived shortage. This is a case of over-purchasing, spending millions on equipment that goes unused the vast majority of the time.
“Realistically, and we’ve seen this with clients, most hospitals can operate at a 2:1 ratio or even lower if they have a method to keep track of this equipment. The issue is compounded when missing equipment causes delays or risks to safe patient care. A lack of readily available IV pumps can impact on-time case starts in the OR, and not being able to find equipment for recall or preventive maintenance presents patient safety risks. Multiply this across not only IV pumps but wheelchairs, specialty beds, sequential compression devices, bladder scanners, mobile radiology equipment … the cost is far more than most hospitals realize.”
Charlie Springsteen, Product Manager, Versus Technology
“Inventory management inside and outside of the care facility with visibility reduces inventory carrying costs, reduces obsolescence and ensures integrity regarding recalls, lot control, etc., and ensures material availability at the point of use by the clinician.
“Technology is a force multiplier. Reducing the constant search for available goods saves time on behalf of the clinicians, increasing their ability to focus on patient care. Overstocking, due to lack of confidence in material availability, creates wasted space in an already confined space.”
Norman Brouillette, Vice President, Operations for Technology & Healthcare, Ryder
“Supply utilization management represents 7 percent to 15 percent in new untapped supply chain savings.”
Robert T. Yokl, SVAH Solutions
Lack of clinical alignment/support
“Standardization efforts should focus on a department and patient formulary approach, not just a contract and SKU approach. Value Analysis team’s first step is to define and/or understand clinical best practices and the optimal use of products for their patient needs. Once this is done then supply chain can focus on getting the appropriate contracted suppliers and the most competitive price. Too often this process happens in reverse. An analysis is performed on the price of a product that has always been used without understanding functional alternative products that can perform the same task at a fraction of the cost.”
Mark Scagliarini, Blue.Point Supply Chain Services
“The proverbial low-hanging fruit does not exist or certainly not to the degree it once did. It’s harder to reach and it’ll take a multi-disciplinary team of people to get it down, including the willing involvement of one’s physicians. As a former consultant and most recently with the provider roles I’ve been a part, my initial weeks on site working with my new customers would always include, among other things, an assessment of cost saving initiatives, their success and sustainment. What I have repeatedly found is that a correlation exists between lack of clinical alignment and the inability to manage and drive down costs. I don’t know how we as supply chain professionals can expect to bend the cost curve without walking side-by-side, as partners with physicians but to do that our position must be that physicians aren’t the drivers of cost. Rather, it’s in our ability to align with them — or not — that serves to drive costs.”
Ed Hardin, Beaumont Health
Off-contract/Rogue/Shadow Purchasing
“Purchasing control leakage that allows off-contract, rogue buying techniques is a cost driver. For many hospitals, the requisition process is highly reliant on end-users to manage inventory and submit orders, making it labor-intensive and error-prone. A fully automated supply chain provides visibility and control to help providers pay on contract and identify savings opportunities.”
Chris Luoma, GHX
Overstocking
“An enormous driver of costs in provider organizations is the overstocked inventory that sits on shelves “just in case” it’s needed. In facilities I’ve worked with recently, I’ve consistently seen supplies by overstocked by 40-50 percent and even higher in some areas. Recently, I had an opportunity to meet with 15 hospital CFOs and when I asked them about supply chain, to a person, they seemed to downplay the importance. Either supply chain reported into a different area of the hospital or they didn’t really think it had a high impact on their overall financial performance. But when I asked them about their total supply spend and if they knew what their annual inventory turns are, I could see them starting to think about how much cash is sitting on their shelves in unneeded inventory. After some conversation, they agreed that a major source of cash for capital projects was reducing the inventory sitting on their shelves. With cost of cash high, these wasted dollars in inventory grow even more significant, because at the bottom line, it’s game changing.
“Remember, supply chain is an area where you are punished for stocking out, but not rewarded for managing inventory to velocity. The incentive is to over stock a supply room.”
John Freund, Jump Technologies Inc.
Strategic sourcing
“Many healthcare systems have outsourced their sourcing capabilities and price control to GPOs. GM, United Technologies, Dell, Exxon Mobil and Wal-Mart wouldn’t combine with other industry players and buy off the same contract. These organizations recognize the importance of strategic sourcing and purchasing excellence as a critical differentiator against the competition. They fund their operations and invest in their own teams, technology and methods. They use the appropriate sourcing strategy for each category whether it is conducting competitive bids for leverage categories or forming close partnerships with mission critical suppliers.
“Leading IDNs in healthcare have adopted a similar approach shifting over 60 percent of their spend to contracts managed by their own teams or with closely affiliated independent regional groups. This is because they gain more savings and save fees through their own sourcing efforts than as a part of a national GPO. This is not simply because of their volume, but also committed contracts and targeted sourcing strategies. The tools, technology and information sources that power GPOs exist to power your own sourcing team and gain similar results to larger IDNs even if you are a smaller healthcare system. It just takes a commitment to invest in the resources for a repeatable and efficient process.”
Chris Gormley, MedPricer
Outcomes & readmissions
“Outcomes are a key cost driver. To start, I am making the assertion that outcomes and readmissions are interlinked. This becomes important as healthcare funding moves toward outcomes-based payments that are bundled together for an episode of care. I don’t think anyone wants to have a patient readmitted. However, readmissions do happen. As funding models shift towards value-based care we need to think about what each patient needs to get back to health beyond the procedure or event itself. Think about a patient who is chronically showing up at the emergency department with respiratory issues. They receive treatment and are sent home — only to show up again a few days later with the same issue. In an outcomes-based reimbursement model a provider may not receive any additional reimbursement for the readmission. Ensuring that the patient recovers and remains healthy may require that a healthcare worker visit their home only to discover that environmental issues in the patient’s home contribute to the cause of readmission.”
David Reed, Cook Medical Inc.
Operational Risks
“As healthcare takes on added clinical and financial risk, one of the areas that we are asked to solve is how to reduce risk. Intra-company logistics is an often overlooked source of risk. A branded vehicle that gets into an accident can cause negative publicity for a healthcare operation, impacting reputation in the community. A specimen or controlled substance pharmaceutical that goes missing can inconvenience a patient or affect the care they receive. Even a late delivery of an item needed for surgery, could force a hospital to delay the surgery and cause physician and patient dissatisfaction.
Bonni Kaplan DeWoskin, Vice President, Marketing, MedSpeed