What makes up 2% of health systems' spend yet 30% of their headaches? The non-acute supply chain — and there's a better way to manage it

About 95 percent of patient visits occur in the outpatient space, according to The Advisory Board.1 Urgent care, home health, long-term care, behavioral therapy, rehabilitation clinics and other alternate care sites increasingly represent the primary access points for patients.

And although nonacute sites are at the heart of much healthcare M&A today, health system supply chain leaders are largely unfamiliar with how best to service and manage delivery to these settings.

This article is sponsored by McKesson. 

With such a large portion of patients seeking care in non-acute settings, health systems are looking to increase their touch points outside hospitals to better manage care in low-cost settings and cultivate more substantial, longterm relationships with patients. Some stakeholders estimate health system acquisitions of non-acute providers will represent 84 percent of total provider acquisition volume in 2018, according to Accenture.2

Quickly integrating non-acute business operations into a health system's overall supply chain is key to generating value for both parties. But compared to the acute space, the logistics and regulatory oversight involved in non-acute supply chain can be enormously complicated. Diversity of specialties, ongoing acquisitions, disparate operating systems and small facilities with low product spend spread over a broad geography all complicate managing the non-acute supply chain.

To unpack supply and delivery needs across unfamiliar non-acute sites, health system supply chain leaders can leverage supplier and distributor partnerships in more strategic ways compared to more traditional, transactional relationships.

"Many [hospital supply chain leaders] have not even looked at long-term care or home care and other delivery models that fall in the extended care bucket," said Greg Colizzi, vice president of health systems marketing at McKesson. "Supply chain leaders need a single resource to tie together all these pieces across all these different care settings. Every setting has different product, delivery and technology requirements. They need a resource to integrate that information and give them a view into their complete business to drive standardization, or whatever initiatives they have, across literally hundreds of locations."

Distributors increasingly provide that comprehensive, non-acute resource for hospitals and health systems. Their expertise in operations management, regulatory compliance and safety controls can help health systems streamline efficiencies while alleviating many of the logistical headaches that come with non-acute distribution.

The greatest supply chain waste is productivity — or lack thereof

Hospitals and health systems have renewed their focus on reducing costs across the care continuum as new payment models emerge, reimbursement from payers shrinks and expenses rise. Supply chain costs are a big target for improvement, as they are often providers' second-greatest expense after labor. Cost-cutting in the supply chain today involves more than saving dollars and cents on purchase contracts; improving how health systems distribute resources, labor and time is another major opportunity to enhance value, especially in the non-acute space.

"When we talk to supply chain leaders, we'll hear that non-acute makes up about 2 percent of their overall spend, but 30 percent of their headaches3," Mr. Colizzi said. "Because it's only 2 percent, it's pretty hard to save meaningful dollars; the greatest waste is really in productivity or lack thereof."

Logistical complexity is a major obstacle to productivity. Health systems have hundreds nonacute facilities, each acting as their own micro-supply chain. For every 100 physicians a healthcare provider has, there are roughly 425 different stocking locations, according to data from McKesson. But what makes the non-acute supply chain even more challenging is the fact that purchasing is typically managed by clinic staff or clinicians who are not trained in managing supply chain or in inventory principles, said Jody Dobson, vice president of business development, health systems for McKesson.

"Everyone always wants a competitive price [on product], but when you start to assign a value to the activity and on the staff time involved in ordering, receiving [product], and the payment of hundreds of small orders — when you start to quantify that value, it's a different story," Ms. Dobson said. "Managing all of those micro-supply chains can really create complexity."

Regulatory oversight presents another serious challenge for health systems in non-acute distribution.

"It's harder and harder for health systems to be compliant and mitigate risk in the nonacute continuum," Ms. Dobson said. "If you think about how onerous the requirements are on any given topic regarding regulations in a health system, now multiply that by 200 facilities that are operating autonomously. You can see the risk is magnified proportionally."

Partnering with a distributor to mitigate risk and reduce costs in non-acute space

"If you partner with a distributor with our expertise in an array of non-acute sites, you get a portfolio of supplies and services to meet specific needs for different types of care settings," Ms. Dobson said.

Non-acute distributors provide major strategic advantages in three areas: data transparency, product integrity/security, and operational efficiency.

Visibility and transparency into purchasing data. Few health systems currently use data to drive their purchasing strategy, since it's difficult to collect, organize and store the immense amount of inventory, cost and utilization information on a centralized platform for a system's network.4

This data is critical, however. Reducing cost and improving patient care requires visibility into spend and the agility to quickly get the right products at the right time to the right place.

Aggregated purchasing data offers supply chain leaders heightened visibility into spend and utilization habits, all of which inform purchasing decisions and product standardization. Healthcare organizations can better inform their purchasing decisions with technologies that enable them to share data and drive efficiencies across sites of care.

"Thoughtful health systems realize the outpatient is very different [from acute supply chain] and that the key is transparency into their spend," Ms. Dobson said. "To improve non-acute supply chain in a thoughtful way, it centers on transparency to spend and having appropriate data to know what [supplies] that clinic is using."

When your facilities operate on different systems, distribution partners can offer sophisticated solutions to aggregate purchase history, utilization rates and other information across non-acute facilities into a single dashboard for measuring overall performance.

"We want to make sure we meet our customer expectations, and that means sitting down and figuring out what their needs are and what their spend and purchase history is, and then develop a plan so that Day 1 we're successful," said Ammie McAsey, senior vice president of distribution operations for U.S. Pharma at McKesson.

Safety and integrity. Partnering with a nonacute distributor is an effective way health systems can mitigate risk, patient safety and regulatory concerns in the distribution process.

"It's all about mitigating risk," Ms. Dobson said. "If you save a million dollars in your supply chain, but one person is harmed because of lack of transparency or confirmatory data or that your process was wrong, then you really haven't saved anything."

A lot can happen to compromise product integrity during the journey from a distribution center to the final supply closet. Temperature and moisture changes, manual product handling and even criminal elements threaten the quality and condition of supplies.

"If you think about the hub and spoke [distribution] model with the health system, there's a lot of transportation involved, which equates to risk of diversion or being able to confirm chain of custody," Ms. Dobson said. "Many of the products used by the clinic are cold chain, so they require special handling. Think of lab reagents that need to be refrigerated, vaccines are frozen — clinic staff need to know supplies were properly handled and refrigerated the entire way."

Cold chain — the management of temperature- sensitive products as they move through the supply chain — is extremely important for pharmaceuticals. If drug quality is compromised due to exposure to inappropriate conditions during transportation and storage, patients may experience adverse results. Having multiple systems and technologies in place to closely monitor temperature control is essential to ensure these high-value products remain viable.

"In our system [at McKesson], we have triple redundancy, so that if something happens inside one of our distribution centers there are three different ways we'll be alerted," Ms. McAsey said.

Distributors invest in a host of sophisticated technologies and infrastructural elements across their networks to provide the highest degree of safety, compliance and quality assurance.

"If you have McKesson deliver your medical surgical and Rx directly to the patient care sites, we provide digital track and trace info, we're compliant with all regulatory and safety requirements," Ms. Dobson said.

Operational Efficiency. Inventory and labor are the two main drivers of supply chain costs. Taking control of these expenses requires a focused strategy. Distributors can help health systems manage their non-acute and acute settings more efficiently.

Utilizing your distributor's operational and technology capabilities to design the most effective method of distribution will provide long-term benefits. For example, if the nonacute facility has limited storage space and high patient turnover, choosing a just-in-time (JIT) distribution method might be the best option. Items are delivered in smaller quantities to maximize the limited space.

"If you have your deliveries made as close to the point of care as possible, it's a great way to manage cash that's tied up in inventory," Ms. McAsey said. "[McKesson's] ability to deliver quickly and accurately and on time allows acute and non-acute facilities to order inventory in a 'just in time' manner so they don't have unused inventory waiting on the shelf."

Distributors free up labor. Picking, packing, shipping and delivering to the point-of-care allows clinicians and support staff to focus elsewhere, rather than on the supply chain.

"McKesson can pick and pack supply totes in a specific and strategic way so that a delivery of totes that goes to five different floors doesn't need to be unpacked and repacked by hospital or clinic staff onsite," Ms. McAsey said.


Non-acute spend may only represent a fraction of a health system's supply chain budget, but it is a major source of logistical and operational concern. It is also an increasingly important part of how systems deliver and manage care in an era of value-based purchasing. Visibility into data, integrity and safety concerns, and logistical complexity across disparate care sites present significant challenges for even the most adept supply chain leaders. By partnering with a non-acute distributor, health systems gain an expert resource to more efficiently manage operations and patient outcomes across a diverse and growing non-acute portfolio.


1. The Advisory Board, Healthcare Advisory Board interviews and analysis (2017).

2. Accenture, "Healthcare M&A: Mastering the 3D Chessboard" (2015).

3. These statistics are not an actual measure of health systems' spend nor administrative burdens.

4. Becker's Hospital Review and McKesson, "3 obstacles to managing the non-acute supply chain — and ways to overcome them (2017).

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