After a year of grappling with strained systems and putting outdated infrastructure to the test, healthcare organizations face yet another high hurdle due to the global Coronavirus disease (COVID-19) pandemic -- reducing costs to meet 2021’s budget demands.
Even with hospital beds over capacity for much of 2020, hospitals lost significant revenue last year as non-surgical and elective procedures were put on hold due to the crisis and patients’ desire to postpone care. The median U.S. hospital operating margin dropped 55.6% without federal relief aid, according to Kaufman Hall. Now the healthcare industry is tasked with making significant budget cuts with fewer resources while continuing to serve patients throughout the pandemic.
As a result, boards and executive leadership are reevaluating supply chain opportunities — a crucial component of the financial puzzle. The new attitude around financial survival in this next chapter is one that’s more aggressive and objective than prior years. After turning to non-traditional solutions (e.g., online procurement) to source scarce supplies during the pandemic, many healthcare organizations are discovering that digital supply chain and e-procurement can also play an important role with hard and soft dollar savings (i.e., concrete dollars saved and newfound efficiencies) in the peak pandemic aftermath.
Under revenue and over budget
In addition to extreme demands on capacity, staff and resources, the pandemic resulted in severe financial pressures for healthcare organizations across the U.S. After the virus broke out, many hospitals canceled non-urgent and elective medical procedures — typically major sources of revenue — in an effort to conserve personal protective equipment (PPE) and prevent unnecessary spread. At the same time, many Americans forewent necessary treatment, including chronic disease management and primary care, out of fear and caution. Now, organizations whose surgeries dropped an average of 35% due to the pandemic continue to face significant revenue gaps.
To make matters worse, treating patients with COVID-19 is costly. The Kaiser Family Foundation estimates the cost of treating a patient with COVID-19 to be around $20,000, and more than $88,000 for patients who need ventilator support. And, because of rising unemployment rates, many Americans have lost their employer health plans, increasing the amount of uncompensated treatment, debt and charity care. The confluence of these changes resulted in health systems losing around $50 billion per month, as estimated by the American Hospital Association (AHA).
Prior to the pandemic, healthcare organizations were already focusing on cost reduction given their thin operating margins. However, for most providers, the progress made toward cost reduction did not materially improve their financial health (i.e. 2% reduction). Now, consider that 55.6% operating margin decline in 2020 against their previous progress, which makes the financial cliff even more daunting.
A new chapter for supply chain cost reduction
Historically, healthcare organizations have been highly selective in their decisions around where to reduce costs. Some opportunities were deemed “too political,” “not worth the effort” or in need of “more hard dollar justification” to advance. But, with the current financial hardship — and the ensuing organizational attitude that all opportunities must be on the table — there is a newfound appreciation for what has been slowly gaining momentum in recent years: cost reduction with online supply chain management.
Online supply chain management can deliver both hard and soft dollar savings. Now that some of the most established healthcare brands are accessible through e-procurement, more and more healthcare organizations are leveraging this alternative to change the way they engage with staff on procurement, discover cost reduction opportunities and, most importantly, source trustworthy and quality products.
Online sources have a wider supply selection, real-time information and transparent prices for quick comparison, which translates to user-friendly purchasing and savings opportunities for buyers. As these channels have grown in popularity, organizations have gone from sourcing what was once a couple of items online to now awarding full categories to e-procurement. Healthcare providers, especially those that are rural or regional, are conducting product price comparisons and discovering savings on commodity categories such as office supplies, IT, maintenance, repair and operations, sanitation and breakroom.
While large healthcare organizations may not be ready to turn to online procurement to make purchases for an entire category, they are finding savings on specific high volume, bulk order supplies. This trend already occurs more regularly with medical supplies — in part a result of the pandemic, when organizations started buying bulk orders of supplies including nitrile gloves, N95 respirators and hand sanitizer online because they were on allocation. Their satisfactory experiences have opened the door for continued e-procurement of the same and other supplies.
Additionally, as healthcare organizations are tasked with managing more with less, online procurement has emerged as a critical way to achieve much-needed efficiencies, or soft cost savings. Some organizations say that their procurement teams must review hundreds of one-time new vendor requests a day from staff members in need of unique supplies, which adds up to many unnecessary hours away from core responsibilities.
Online solutions can streamline the procurement, payment and analytics for hundreds to thousands of suppliers.
Healthcare organizations that leverage online procurement can also optimize their options with parcel and bulk deliveries. By outsourcing high inventory items and the internal distribution of supplies, organizations can free up cash flow. Because many items aren’t considered “critical operational supplies,” which require self-storage and high inventory levels, organizations can benefit from just-in-time deliveries to their facilities to keep cash flow healthy, reduce the burden on current staff and maximize existing space.
E-procurement is creating more value for healthcare providers than they envisioned at the start of 2020. Online supply chain management continues to be a source for non-contracted supplies and backordered items, and is now evolving into more of a primary consideration to aid with cost reduction goals. Pandemic aside, e-procurement is an important step toward the digital adoption and technological innovation needed to modernize the healthcare industry and bring greater efficiency to sourcing, ordering, fulfillment and demand forecasting. Although this is just the beginning, it’s heartening to see how online procurement is already helping alleviate the high hurdle of cost reduction.