The unnecessary costs hidden in healthcare supply chains

Healthcare is in a period of radical chance, as indicated by the growing movement of paying for value (not volume), using range of alternate payment structures including bundle payments, ACOs, and global capitation.

This dynamic perspective and its new payment models will require every healthcare system – even the currently profitable ones – to examine its business model. One obvious area for disciplined scrutiny is supply chain management, which industry reports note represents nearly half of a hospital or healthcare system's operating expense and is rife with unnecessary costs or waste.

There are several factors that breed unnecessary costs in healthcare supply chains, including nonstandard ordering and delivery methods; varying drug formulary across pharmacies; the hoarding of supplies by clinicians; drug diversion; and a lack of intelligence and visibility surrounding what inventory is redundant, what can be repaired, and what needs to be upgraded. While most healthcare providers are members of at least one group purchasing organization, that is just a meager first step toward standardizing purchases.

One way to identify unnecessary costs is through Lean Supply Chain Management – a practice that enables the true performance potential of a healthcare organization to be realized. As Lean is applied to a healthcare organization's inventory processes, revelations uncovered through data analysis (quantitative and qualitative) can begin to eliminate waste from the cost of holding inventory.

  • Lean supply chain management can cut waste by:
  • First, implementing price improvements and standardizing the ordering and distribution process
  • Next, by reducing the number of suppliers and processes
  • Finally, by aligning physicians and purchasing staffs to care models

As a result, providers see care quality increase along with employee and patient safety and satisfaction – all while slashing supply chain costs in the process.

Below are some examples of how hospitals and health systems are cutting costs by honing in on their supply chain practices.

Med-surg makeover: At a northern California critical access hospital, distrust in the materials management staff caused clinicians in the med-surg unit to waste time looking for supplies and, at times, reorder them in excessive quantities. That led to frustration for employees as well as patients, who endured longer wait times than necessary. Addressing these issues freed up 403 square feet of space, including a much-needed patient room that staff had co-opted for storage. It also reduced supply outages and nearly eliminated the occurrence of items lost or delayed at the loading dock. In total, the benefits gained from streamlining the supply chain processes of this hospital and its cross-county sister hospital added up to a nearly 80 percent reduction in expired inventory items, as measured against baselines; a 40 percent reduction in inventory altogether; and an increase in clinician satisfaction with supply chain processes, as measured by surveys.

Dashboarding supply data: At a mid-Atlantic regional health system, software applications used by the supply chain staff were not interoperable with clinician EHRs and other hospital data systems. This technical hurdle delayed timely analytics for managing inventory and ordering supplies at its flagship 400-bed hospital. Building separate dashboards for perioperative services, pharmacy, lab, and food/nutrition teams unlocked these data sets for both department workers and supply chain staff. In turn, the dashboards helped accelerate analytics processes by 66 percent, standardized vocabulary of supplies, reduced duplication of efforts by giving all stakeholders more up-to-date inventory information, and, most importantly, established accountability for supply expenses where it had previously functioned on an ad-hoc basis.

Pulling for OR supplies: A medium-sized Napa Valley hospital, revamped supply chain processes and storage space for operating-room carts and changed other storage spaces from "push" restocking into a "pull" as-needed system. This not only freed up 420 square feet of space and $97,000 worth of costs tied up in endomechanical supplies (which represented 30 percent of total inventory value), but it also empowered clinicians to assist the supply chain team in revising their storage of supplies to the benefit of patient workflows.

Every hospital is facing the challenge of how to reduce the expense of supplies and drugs. Many are successful in managing price, and to some extent standardization, but they experience excessive waste in managing utilization of their supplies. As the healthcare industry moves toward an emphasis on value-based care, careful management of supply chain costs is critical.

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