We are aware of healthcare organizations who have worked very hard one year to reduce their fiscal year supply expenses and then succeed to do so by 1%, 2% or 3%, only to discover that their next fiscal year’s supply expenses have ballooned by 2%, 3% or even 5%. How is this possible?
No Real Control Over Your Supply Expenses
Just thinking that you have control over your supply expenses isn’t enough. You must unceasingly measure, manage, and monitor your supply expenses to guarantee they are under control. Unfortunately, most supply chain managers don’t have a system to do so. It’s our experience that only an Activity-Based Costing System can truly provide you with the ultimate control your healthcare organization has been looking for.
Adding More Than You Subtract from Your Formulary
The preponderance of hospitals, systems, and IDNs in the country add more products, services, and technologies to their supply formularies than they subtract from their supply formularies in any given year. This can actually add millions of dollars to your supply expenses annually before you realize it. That’s why we recommend that supply chain managers report new purchases along with the money you have saved your healthcare organization each month to your senior management. This way you at least raise the consciousness of your senior management on what is being spent. Generally, this is all you need to do to quickly rein in these new expenses.
Hold Supply Expenses Below Annual Rate of Inflation
The next technique to rein in your supply expenses in any given year is to set a goal to hold your supply expenses below the annual rate of inflation for any given year. For instance, the projected inflation rate for 2016 is 1.49%. Therefore, your goal in 2016 should be to hold your supply chain inflation rate to let’s say 1%. By the way, it is rare that third parties will increase their rates to compensate dollar for dollar for the inflation your healthcare organization has experienced in any given year. If you are lucky, your healthcare organization will be compensated for some inflation, but it could be 12 to 18 months’ lag time before your organization sees it in their reimbursement checks.
Higher Supply Expenses Aren’t Sustainable
As you might imagine, your third-party payers are tightening their belts on reimbursement (value-based, bundled, capitated, etc.) so your hospital, system, or IDN will be getting less overall revenues in the very near future, if not already. With this said, higher supply expenses aren’t sustainable since your third-party payers aren’t going to reimburse you dollar-for-dollar for your supply expenses. Controlling your supply expenses is mission critical if your healthcare organization wants to survive and thrive in the new healthcare economy we live and work in.