When examining the cost of product procurement, delivery and distribution within a health network, executives may only be considering about half of their total supply chain spend. The other vastly overlooked half is expenses related to outside service contractors, financial specialists say.
Commonly known as "purchase services," the list could include a litany of contractor-performed tasks, such as elevator maintenance, laundry and landscaping, said Rick Grodin, senior vice president of product management for Atlanta-based MedAssets. Research he's seen suggests that procurement costs typically reach $100 billion per year, but that hospitals are also spending the same amount on services outside procurement.
"They need to have visibility to their spend," he said. "Most providers don't write purchase orders for those services, which is why they don't have that visibility."
Though it is by no means definitive, hospitals commonly don't use requests for proposal to hire local contractors, Grodin said. They also don't typically have the tracking metrics in place to quantify whether they are getting the price points they are promised, he said.
"For laundry and linen, for instance, what do they charge per pound and does it match up with what is in the contract?" he said. "And are they delivering on time – do you have a system in place that can audit delivery?"
MedAssets is currently working with a Philadelphia-area hospital on this very issue and Grodin said the findings so far have been "revelatory" for the organization because "they have contracts all over the enterprise, being executed by those who receive the services."
The key, Grodin said, is "to get folks to pull these contracts out of their drawers to form a composite of what is out there." What many hospitals will find, he said, is that "purchase services have a very long tail as it relates to services needed." If hospitals can source supplies – which they do well – they can also do it for purchase services.
Shortage management
Pharmaceuticals are another area where hospitals may not be maximizing their supply chain costs, said John Barickman, executive pharmacist consultant for Pittsburgh-based Aesynt. One segment in particular is shortage management, which permeates the supply chain, causing hiccups in procurement and provision, he said.
There really is no solution for this problem and if there was "we'd be geniuses," Barickman said. "No one has been able to solve it, including the FDA. There are a lot of theories, but it could be how we manage generics in the country. With generics and low margins on some drugs, few if any manufacturers will produce certain drugs, even if they are fundamental to care."
One example of a drug that is in chronic shortage is snake and spider antivenin. Though snake and spider bites aren't a high volume problem, having that medicine available could mean the difference between life and death.
"These are things hospitals have to think about," Barickman said.
Pharmacy represents approximately 25 percent of supply chain materials and supplies and is about 6 percent to 7 percent of the total cost structure. Centralizing pharmaceutical supply is a recommended strategy for larger IDNs so that supplies can be consolidated and distributed efficiently, Barickman said.
"These opportunities are available because more hospitals are merging and forming IDNs," he said. "Once done centrally, it gravitates to a standardized solution."
Crux of cost cutting
John Cunningham, senior vice president of client operations for MedAssets, says with bundled payments coming down the line, CFOs need to take out millions in costs and that the supply chain is the logical place to start.
"At the end of the day, costs of procedures are coming down with all the reimbursement cuts," he said. "Supply chain is an underappreciated asset in this effort. There are many levers they can pull."
While materials management may be "underappreciated" for cost cutting measures, the role of supply chain management is actually getting higher visibility within healthcare organizations, Cunningham said. More materials people are being promoted to vice president level and supply chain personnel are becoming more involved in strategies to stratify revenues, he said.
"They are a key partner in developing affiliations and collaboratives," he said. "It's more about alternative businesses and strategies."
The supply chain team is also creating a larger appreciation of operational indicators, such as electronic data interchange, productivity within purchasing and accounts payable and utilization of technology, Cunningham said.
Point-of-use technology is giving the C-suite more insight into inventory knowledge and metrics and "they are looking for ways to maximize it and move it to the balance sheet."