New Centralized Procurement Process Cuts Costs

A more efficient and transparent purchasing system can generate savings of up to $50 million in first year

New YorkApril 24, 2014—The New York City Health and Hospitals Corporation (HHC) announced the creation of a new centralized procurement system for goods and pharmaceuticals that can make purchasing more efficient and transparent, and save HHC approximately $50 million in its first year.

HHC combined the purchasing power of its integrated network of 11 hospitals, five long-term care facilities and dozens of community health centers to leverage better pricing for its 58,000 cataloged items—from hospital socks and sutures to services like printing and snow removal—that range in price from under a dollar to tens of thousands of dollars. It also establishes a limited, standardized list of products available for purchase by HHC facilities to reduce waste and duplication, while maintaining the ability to purchase quality products preferred by clinicians.

HHC’s effort was recently recognized by the ECRI Institute in Pennsylvania with its 2014 Supply Chain Achievement Award, which honors healthcare organizations that demonstrate excellence in overall supply chain management.

“A centralized supply chain management system eliminates redundancies, ensures more purchasing controls and maximizes HHC’s vast bargaining power at a time HHC faces serious budget challenges,” said Antonio D. Martin, HHC’s executive vice president and chief operating officer. “By standardizing our methods of procurement, and establishing an organized and clinically based supply chain structure, we can support quality healthcare and control our costs.”

“Each product category, such as perioperative services, is guided by a value analysis committee of physicians, nurses and key administrative staff who evaluate product selections, focusing on quality, cost, service and outcomes,” said Martin. “These steps reduce waste and unnecessary variability in our purchasing practices, while ensuring that clinical staff has timely access to quality products and all the supplies they need to properly care for patients.”

HHC’s new centralized purchasing system was fully operational in December. HHC expects to have 90 percent of its overall purchasing under the new system. About 40 percent of purchasing was previously done locally, based on individual facility needs. HHC’s operating budget in fiscal year 2013 was $6.7 billion, with annual purchases of goods and pharmaceuticals of approximately $500 million.

“We are already seeing significant results,” Martin added. “The centralized procurement of all the products used to prevent and treat wounds and skin sores is an example of quality, safety and efficiency in one. An organized team of nurses working in wound care, infection control and staff education created a standardized, best-practice model of care that also includes the selection of quality skin products to be used across HHC. This results in $1.2 million in savings, but also improves patient care.”

HHC is currently projecting continued deficits that approach $1 billion as early as fiscal year 2016. Since 2008, repeated cuts to Medicaid reimbursement rates slashed HHC’s revenue base by more than $540 million a year. HHC is also affected by cuts in federal aid, including reductions in disproportionate share (DSH) payments designed to reimburse hospitals for treating low-income and uninsured patients, who often receive healthcare at HHC facilities. At the same time, HHC absorbed dramatic increases in pension and employee health insurance costs.

In fiscal year 2010, facing a projected $1.2 billion budget gap for fiscal year 2013, HHC created a plan that called for $600 million in cost containment and restructuring, and $600 million in additional revenue from the city and federal governments. The cost-containment and revenue initiatives included a 9 percent workforce reduction (3,739 full-time equivalent staff), outsourcing of certain services, consolidation of various HHC laboratories and improved billing collections. Supply chain and procurement reforms were also identified as areas that could be targeted to meet a revised financial plan.

As part of the procurement initiative, a new centralized procurement office of approximately 70 purchasing agents was established at HHC, with most staff relocating from other facilities. No employees were laid off.

HHC is the dominant care provider in New York City for people who lack health insurance. Last year, of the 1.4 million total patients served by HHC, over 475,000 of them were uninsured. HHC also cares for a large share of Medicare and Medicaid patients in New York City with over 75 percent of its patients last year receiving Medicare or Medicaid.