By Gamble Heffernan
Healthcare organizations are under assault. According to Modern Healthcare, 61 percent of hospitals are either losing money or just breaking even. Two November 2008 reports from the American Hospital Association (AHA) state that hospitals racked up $34 billion in uncompensated care costs in 2007 and were underpaid $31.9 billion for Medicare and Medicaid. And healthcare organizations are seeing declines in reimbursements from all payers. But in this economic turbulence, best-in-class hospitals are finding financial stability in the form of supply chain and procurement efficiencies that include putting 90 percent or more of their spend under management. It's these efficiencies that enable the organizations to adjust for the industry-wide decline in revenue.
Healthcare and the Power of the Supply Chain
There is a misperception outside of the healthcare industry that normal daily operations are a primary revenue generator for hospitals. Profitability comes in the form of high-end services, primarily consisting of elective surgery and imaging. However, according to the AHA, 31 percent of hospitals reported a moderate to significant decline in elective procedures in the three months leading up to November 2008 — marking a sharp drop in revenue for these organizations.
With revenue fading, healthcare organizations must cut costs in order to survive, but in such a way that protects the essential requirement of quality patient care. One option is to reduce revenue leakage by improving revenue cycle management. The other is to increase supply chain cost efficiencies. According to the AHA's August 2008 update on “The Costs of Caring,” rising costs to hospitals for the goods and services purchased to provide care accounted for 62 percent of overall growth in spending in hospital care from 2001 to 2006. This makes optimizing the supply chain the clear winner in terms of delivering the most value to the healthcare organization.
Defining e-Procurement's Value to the Supply Chain
The supply chain has historically represented 25-30 percent of a hospital's total operating expenses. Recent information shows that supplies are not just a growing component of operating expense, but are outpacing labor. This equates to millions of dollars spent through thousands of transactions. Best-in-class healthcare organizations are taking a hard look at every dollar spent while also turning to automation of all procurement areas, from sourcing to settlement, and inventory and distribution management. It's here that hospitals discover the ability to control costs and gain the financial results they're seeking.
Gaining efficiency from the supply chain begins with spend visibility. It's not unusual for many departments throughout a hospital to be ordering the same type of supply, but from different vendors and at different prices. If these transactions aren't taking place through a centralized, automated requisition process, the likelihood is that they are not being purchased against a contract. A lack of spend visibility also impedes the standardization of supplies and consolidation of purchasing power required to pre-negotiate volume and price discounts as well as other more favorable terms and conditions that can bring large sums to the hospital.
Aggregating an entire healthcare organization's spend data requires technology that accounts for the unique needs and purchasing processes of each facility. For example, just-in-time inventory takes on a whole new meaning in emergency departments (EDs) when timely care is essential — yet it can't be anticipated exactly what each patient is going to need the minute they enter the ED.
Another unique challenge to healthcare comes in the form of physician preferences for specific items used to treat patients. These items must be readily accessible to maintain care levels and physician satisfaction, further complicating the purchasing department's efforts to standardize prices and consolidate suppliers. By using comprehensive e-procurement solutions, standardization should still provide doctors with choice while adding significant savings.