Healthcare Tightens Its Belt

As the economic downturn continues, hospitals turn to their supply chains as a way to cut costs while maintaining patient care

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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.

e-Procurement technology also provides benefits to group purchasing organizations (GPOs). Many hospitals turn to GPOs in an attempt to aggregate purchasing volume and use that leverage to negotiate discounts with manufacturers, distributors and other vendors. This concept is most often used for low-dollar, high-volume commodity spending. Where healthcare organizations can effectively use e-procurement with a GPO is to ensure that users are purchasing on-contract and, in turn, that the procurement department has visibility into the success or failure of the relationship as a whole.

Competitive Advantage from Automated Procurement

Healthcare organizations are gaining cost savings by putting more spend under management, whether through a GPO or not. In addition, they are investing more time in building better relationships with their suppliers. They are accomplishing these benefits with e-procurement solutions that provide a comprehensive catalog of contracted suppliers' goods and services enabled through an electronic shopping marketplace. With a decentralized, managed purchasing environment, clinicians and their staff gain the ability to see preferred or contracted products often not listed in today's traditional item master inventory (an older inventory management technology currently used by many hospitals). To ensure they are selecting the appropriate product, they also can review detailed comparisons of products via specific attributes to help them better understand product idiosyncrasies. Empowered with product, contract and pricing details, all purchasers are more likely to not engage in rogue buying and select the most affordable product from the e-procurement system.

With e-procurement, user adoption builds once clinicians and staff realize they have more variety and product information than is possible in an item master. As e-procurement delivers the ability to aggregate transactions in one place, purchasing professionals gain the spend insight they need to negotiate with suppliers for the best products and pricing.

Hosted e-procurement delivers a cost-effective approach to building more value into the healthcare supply chain. The purchasing automation gained through e-procurement also changes the landscape of the healthcare purchasing department. e-Procurement systems have the power to synchronize both item master data and supplier catalog content, thereby reducing the volume of special orders. This removes a burden placed on the time and resources of the procurement team, as well as increases spend under management. With procurement automation, healthcare organizations can more easily enforce purchasing policies and procedures.

With rules-based workflow and approvals, purchasing departments can become a strategic partner, focused on getting the most out of the supply chain. The benefits do not stop there. Purchasing departments can automate just-in-time inventory and their control over rogue purchasing. Through strategic negotiation of supplier contracts, they can ensure savings are realized, and they can gain greater price control to ensure that the same item purchased in different departments and locations is bought at the contracted price.

In real terms, what this all means is that e-procurement has definable value in healthcare. For example, when one of the world's premier cancer centers deployed e-procurement, the organization:

  • Reduced supplier enablement time from one year to one month;
  • Reduced inventory holding from $1 million to $300,000 by outsourcing warehousing;
  • Reduced stock-keeping units by 70 percent, from 3,000 to 900; and,
  • Placed more than 90 percent of spend under management.

Significant savings can be realized from the supply chain, but many healthcare organizations do not view supply chain performance as an essential part of their overall operating strategy. With the continuing rapid increase of all healthcare costs, there is an acute need to examine and improve supply chain processes. Those healthcare entities that do not take action will continue to struggle in the current economic environment.

About the Author: Gamble Heffernan is vice president of marketing at SciQuest, a provider of procurement automation and supplier enablement solutions. Her experience includes management positions at Misys Healthcare Systems, Cardinal Healthcare and GE Medical Systems. More information on SciQuest at