Posted March 28, 2019
Ask progressive doctors, surgeons and nurses to list their top cost drivers and they’ll likely unspool a litany of clinical, fiscal and operational sins familiar to just about anyone on the clinical and business sides of healthcare.
Of course, each clinical specialty may have its own nuances. But cost drivers making the scroll can include overuse of antibiotics, prescription drug consumption, unnecessary testing and treatments in laboratory and diagnostic imaging, population growth and aging, price inflation, technology advancements and changes, as well as over-utilization of services, such as the emergency room as primary care doctor. They also might cite increased demands for administrative participation, such as populating patients’ electronic health records and submitting payer paperwork, as well as searching for needed supplies that may be misplaced or missing for whatever reason. Naturally, they blame Supply Chain, and maybe rightly so.
As supply chain operations expands to assume larger “support services or system services” roles and embarks on the road to becoming what some studies predict as a healthcare organization’s largest expense category, particularly with the inclusion of outsourced labor and purchased services in the mix, what would Supply Chain professionals tag as their top cost drivers?
Healthcare Purchasing News reached out to more than 20 executives from providers, suppliers and service companies to share their insights. Here’s what they revealed in random and wide-ranging order.
“As reimbursement declines and cost pressures increase, hospitals/healthcare providers must look for new ways to save money,” she said. “They must go beyond product price and place a greater focus on effective management. The Supply Chain team should not be held back by manual processes, and clinicians should be spending more time at the bedside.”
Lisa Zierten, Director, Marketing, Hospital Services,
Cardinal Health Inc.
“The conversations that we are having with leading health systems revolve around their desire to create a more clinically driven supply chain,” Scagliarini said. “The reason this is important is because health systems are looking to Supply Chain to better contribute to value-based medicine. In this era of value we can no longer be focused solely on contracts and price points.”
Mark Scagliarini, President and CEO,
Blue.Point Supply Chain Services
“For a healthcare system with a 3 percent net margin, a $1 reduction in costs is worth $33.33 in revenue. Therefore, if your reimbursements decline by $33.33 million and you want to keep your cash flow stable, you need to save $1 million in costs in the same period. To do this, you can either reduce direct labor, goods or purchased services costs. Supply Chain is responsible for managing goods and purchased services costs representing 45 to 50 percent of operating costs. The imperative, therefore, is to reduce goods and services costs aggressively to make-up for reduced revenues without sacrificing quality. This is similar to industries where cost management is an existential priority like automotive, computers, oil and gas, and retail.”
Chris Gormley, CEO, MedPricer
“The cost of doing nothing is leaving millions of dollars untouched at most healthcare organizations.”
Robert T. Yokl, President and Chief Value Strategist,
“Purchased services typically account for half of health system spend. And purchased services are like the Wild West with many different groups owning contract negotiations. When contracts are created outside the Supply Chain department without oversight and knowledge from those trained to negotiate contracts, it exposes the health system to risk and increased cost, such as warranties that result in exorbitant maintenance and support costs.”
Michael DeLuca, Executive Vice President of Technology and Client Services, Prodigo Solutions
“Of the 45 to 50 percent of operating costs managed by Supply Chain, almost half of this is purchased services. Supply Chain has traditionally focused on reducing costs for physician preference items, medical/surgical goods and pharmaceuticals through price and usage reductions. Purchased services are anything bought by a healthcare system that isn’t a direct labor cost or good and includes items like lawn care, snow removal, elevator repair, transcription services, data storage, legal services, reference labs and radiology services. The large savings is driven in part because these categories have never been centrally sourced by health systems. These systems have grown through acquisition and left contract negotiations to local users in facilities, such as IT, administration and HR, who are not sourcing experts.
“Purchased services are different on several dimensions. For example, services are difficult to compare since there is no ‘part number’ equivalent. Services are based on contracts and statements of work. Services are highly preference-driven. For example, what makes one lawyer worth more than another lawyer? Price and [consumption] volume are difficult to collect because invoices rarely have granular detail. POs are not issued universally. This also makes benchmarking of services difficult. Challenges aside, proper management of purchased services costs can unleash substantial savings.”
“Purchased service expenses represent a significant portion of an organization’s total operating expense — oftentimes totaling even more than recorded supply expense. These significant numbers can be attributed to the fact that the category is largely decentralized with contract processes owned by several departments. This means that purchased services spend is not typically under the supply chain’s purview and, therefore, not subject to standard competitive processes and enterprise-wide terms and conditions. However, this means that if Supply Chain leadership is able to gain ownership of purchased services, the opportunity for savings is significant.”
“Of the $160 billion in spend that Valify has collected, cleansed, and categorized, the largest purchased services cost driver for Valify subscribers is in Facility Support Services, which includes categories such as property management, utilities, food service outsourcing, and bioengineering services. The next highest purchased services spend categories include information technology, outsourced clinical services and financial services.
“Property management and utilities are primary drivers due to the fact that there are over 3,000,000,000 total square feet of hospitals and clinics within the U.S., according to the most recent CMS data. Facility directors typically hire third-party service providers to maintain their properties cleaning, heating and cooling, and general maintenance.
“Food and Biomedical engineering services are resource-intensive functions and are commonly outsourced by many health systems. Outsourcing dollars largely contributes to these categories being the top drivers of purchased services spend. Additionally, spend in these areas is increasing year-over-year at a rate faster than other purchased services categories.
“Biomedical engineering cost trends have steadily risen due to increasing need to meet requirements of medical equipment being integrated to hospital technology networks and becoming more expensive to service. Health providers have found it more cost-effective to simply outsource these departments to the original equipment manufacturers and third-party vendors. The price of food has also increased by 26 percent over the past 10 years and is expected to continue to increase based on the USDA’s Food Price Outlook for 2017.
“One of the largest areas of growth in cost is coming from services around technology. Ten years ago, no one was talking about mobile strategies or cloud strategies, and electronic medical records were in their infancy. X-rays were stored in manila envelopes, and scheduling was done using a big book and a pencil. The move of these examples to digital, online and mobile device technologies has created a large need for services in healthcare. Additionally, services are needed to maintain ever more sophisticated hardware and equipment. Why this issue matters to the healthcare providers and payers, is that contracting for these services is something that Supply Chain managers across the spectrum are still figuring out.”
Les Popiolek, COO, Valify
“GPOs have done little in the area of purchased services, specifically IT. [These are] all areas that we have struggled with for years to try to control, and areas that suppliers are reluctant to put on contract as they know that we are not organized nor disciplined.”
Dee Donatelli, President & CEO,
Mid-America Service Solutions LLC
“Purchased services represents 11 percent to 15 percent in new supply chain savings.”
“[One] key cost area is bad item master data. Without a single source of truth, provider Supply Chain teams may be ordering the wrong products and spending valuable time fixing errors. This means providers can miss out on negotiated contract pricing and reimbursement opportunities that offer significant savings. As a result, many Supply Chain staff teams are focused on reactive activities rather than proactive value-added tasks.”
Chris Luoma, Vice President, Product Management, GHX
“Organizational spend is being consumed by the cost of modernizing discrete technology systems, and attracting and retaining top talent to support an expanding span of responsibility. While provider systems are upgrading their data management platforms to create a digital advantage, they are uncovering the myriad of ways in which these discrete applications do not integrate with each other, and in so doing, create data deficits and necessitate continued and inefficient dependencies on provider-funded labor.
“The focus on single system solutions has converted providers’ significant and continuing investments in data management technology into annual annuities that have not achieved their objectives of automated data analysis, timely access to and evaluation of key metrics, and integration of clinical management systems to critically improve operating margins. All of these goals require unprecedented collaboration by and between suppliers and providers, and depend on a common and sustainable operational infrastructure that supports the independent benefit of all constituents. This collaboration requires technological and operational talent that, if available, is not typically present or funded at the required levels within the healthcare market.”
“Data is king and the ability to manage and mine data will heavily influence the speed to which we identify, execute and sustain cost savings, not to mention gain clinical alignment. Data serves to accurately inform, and our ability to get at it [in] real-time can facilitate prioritization, but it also allows the Supply Chain professional to have a meaningful conversation with our clinical partners.
“Unfortunately, our systems and applications haven’t quite caught up to our data needs, and when they do we Supply Chain professionals haven’t adequately invested in the resources to manage and mine the data that exists in these systems. I believe the current situation is further compounded because we’re entering an era of evidence-based decision making where expectations are rising for quality and outcomes data to drive what products we put on our shelves.”
Ed Hardin, Senior Vice President, Supply Chain Management, Beaumont Health
“Managing the GS1 Healthcare US Initiative, we work with providers, suppliers, distributors and GPOs in the healthcare industry. Our perspective is unique in that we lead a collaborative industry group to help companies achieve supply chain efficiencies and comply with regulations through the adoption and implementation of GS1 Standards. So we get a lot of input from many different industry members from all points in the supply chain. We know that supply chain costs represent about one third of providers’ operating budgets – second only to labor.
“Three of the top challenges driving supply-chain costs are preventable errors, transactional inaccuracies, and reliance on manual records or inconsistent management of electronic health records (EHRs). All rooted in the use of proprietary information systems, these issues create major inefficiencies throughout the industry and can be solved with the proper implementation of GS1 Standards. Proprietary data systems are highly inefficient because their information is not easily understood by trading partners up and down the supply chain. The complexity and siloed nature of this model creates costly inaccuracies such as problems with inventory and supply chain disruptions, as well as serious risks in patient care.”
Greg Bylo, Vice President, Healthcare, GS1 US
“Multiple systems — both electronic and manual — that must be maintained with the ‘correct’ information are a cost driver throughout the entire healthcare supply chain. Price is just one of many details that can gunk up the works. Systems are rampant with packaging string, nomenclature and other item and vendor identifier issues. In addition, merger and acquisitions cause havoc on billing and ‘ship to’ addresses. Finally, it seems that most business partners build their systems to make themselves more efficient — not necessarily to make their business partners more efficient. Since these definitions of ‘efficient’ are different for each business partner, systems can tend to work against each other, causing operational cost increases and product not being delivered on time.
“Due to a lack of trust in these systems, human beings still need to interface into systems or between multiple systems. Human ‘middleware’ are left to make judgment calls on what needs to be done to make sure their customers have what they need to do their jobs. Not only is there additional costs associated with this work, the impact on data can be significant. Prices are changed on [purchase orders], but the reason for the need for the change never researched. Vendor representatives make changes on the fly, GPOs issue new contracts and prices but do not affirm that the vendor, distributor and customer all agree and have made the change before transactions go through. Multiple changes across multiple systems cause both data integrity issues and supplies to be delayed.”
Joe Colonna, Vice President, Supply Chain, Piedmont Healthcare
“Our customers have multiple data management systems in place, but it’s becoming increasingly challenging to leverage deep actionable insights when the data is not aggregated appropriately.”
Doug Golwas, Senior Vice President, Corporate Sales,
Medline Industries Inc.
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