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Hospitals could save about $10 million a year in supply chain, study finds

Supply chain represents 30 percent of hospital operations, ranking second only to labor in cost.

Susan Morse, Senior Editor

Hospitals are spending about $10 million more a year in the supply chain than is necessary, according to a new Navigant study.

The study looked at 2,300 hospitals and their supply spend and found the providers could reduce their annual supply budgets by a total $23 billion, or about $10 million per year, per hospital, according to Alven Weil of Navigant. This is a savings of about 18 percent.

When supply chain represents 30 percent of hospital operations, ranking second only to labor in cost, 18 percent represents a significant amount of savings.

[Also: Sustainable supply chain management, and how it can save millions]

Pharmaceuticals, which are the single largest supply item, remain an elusive target for savings. Drugs represent 5 to 10 percent of the total 30 percent budget.

"You don't have a lot of control over the pricing of drugs," said Rob Austin, associate director of Navigant. "The way you can control pharmaceutical expense is through formularies."

There's also not a lot of wiggle room in commodity purchase prices for clinical supplies such as tongue dispensers, paper products or office supplies. Ninety-six percent of all health systems use a group purchasing organization and the prices are comparable and competitive.

[Also: Data is king for hospitals to save money in the supply chain]

What the study found, according to Austin, is an opportunity to save money in areas where prices vary widely. This is in physician preference items such as hips and knees, pacemakers and stents, and on services for food, janitorial services and other contracts.

On the physician preference items, the price of a pacemaker, for instance, varies from $9,000 to $21,000, according to Austin.

Prices may vary even on the same product from the same supplier, for hospitals, he said. It depends on the contract with the hospital.

"On the supply side we've seen prices for a knee from $2,000 to $8,000, same product, same supplier," Austin said.

Navigant found that across two health systems in Dallas, the price of a hip and knee replacement varied from $16,772 to $61,585.

[Also: Supply chain needs security, visibility to stem billions in product loss for healthcare]

The national average is $31,124, while in New York City it is $69,654.

"What we think it's about," Austin said of the study results, "is reducing variability."

Supply representatives often have access to physicians or work with them on studies, in the same way pharmaceutical reps, who are now barred from many offices, once developed relationships with physicians.

"We're starting to see lower cost suppliers which don't have marketing budget and reps," Austin said. "Their cost is probably another 20 to 30 percent lower than the main players."

Hospitals need an experienced supply chain manager who can get a good contract, communicate with physicians, who is part of boardroom discussions over strategic planning, and who uses more than a spreadsheet to keep track of spend. This takes an investment in software to get data and analytics on what things costs, Austin said.

In many systems, the head of supply chain still has an office in the basement, Austin said. That's changing as more hospitals are hiring a vice president of supply chain who has an advanced degree.

The Centers for Medicare and Medicaid Services has tried to rein in knee and hip cost through bundled payments.

In August, CMS made a bundled payment program for joint replacement voluntary in 33 of the 67 former mandatory areas.

Navigant does work with health systems on bundles, such as working with Baptist in San Antonio to reduce implant costs by $4 million.

Surprising, the study found that the top performers for supply chain also scored well in the top performing measures for quality metrics.

Twitter: @SusanJMorse
Email the writer: susan.morse@himssmedia.com

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