Supply chain costs in the crosshairs
In a time of recession and widespread uncertainty about the implications of healthcare reform, hospitals across the United States have been forced to implement innovative purchasing strategies to help cut costs.
“The recession has increased our attention to cost-savings,” said Jim O’Connor, vice president of supply chain management at the Henry Ford Health System in Detroit. “We have a system-wide value analysis process in place, in which teams meet regularly to drive standardization and cost-reduction.”
O’Connor said Henry Ford Health had more than $173 million in uncompensated care costs in 2009 – an 8 percent increase over 2008. This prompted the health system’s supply chain staff to pursue targeted strategies to reduce supply costs.
“We focus a lot of our time and effort on strategic sourcing, in order to mitigate inflation,” O’Connor said. “We report the net impact of our supplier agreements monthly. As we implement or renew contracts we capture the change and report it out to the finance team.”
O’Connor’s experience has been the norm at U.S. hospitals over the past year, according to the results of the recent L.E.K. Consulting Hospital Purchasing Survey. The survey, which assessed the opinions of 200 senior hospital executives, found that two-thirds of U.S. hospitals decreased or froze spending last year, and most hospitals expect further cuts in 2010.
Purchasing is one of the many areas in which hospitals hope to recoup some of their losses.
“Budget pressures have led to more aggressive negotiations with suppliers and payers, delays in facility upgrades, capital expenditure freezes, longer equipment replacement cycles and staff reductions,” said Jeffrey Stevens, vice president of L.E.K. Consulting’s global MedTech practice. “Departmental budgets have been examined and pared according to their strategic value to hospitals.”
Supply chain executives closely monitor the inflation rates of raw materials, particularly those – like petroleum or cotton – which cross over commodity lines.
Mike Alkire, president of Premier Purchasing Partners, said most hospitals are accustomed to budgeting supply expenses for the year, but supply chain officials like O’Connor increasingly desire more frequent forecasts. Premier recently released the latest iteration of its own semiannual Economic Outlook analysis.
“We offer biannual reviews now, but I wouldn’t be surprised to move to quarterly reviews,” said Alkire. “We may eventually have to forecast monthly.”
He said the industry is beginning to place more emphasis on determining “appropriate utilization models” – which means working with physicians to understand why variation occurs in the use of certain products and developing best practices that can help lower supply costs while simultaneously improving outcomes.
“We never want anyone to get between the physician and patient – safety and outcomes are paramount,” Alkire said. “But the IDNs themselves are already doing this, because if you’re not taking the cost out of supplies, then you’re going to have to take it out of labor.”
