Due to the growing maturity of group purchasing and custom contracting in the healthcare industry, hospitals, systems, and IDNs have already achieved a significant amount of savings in their pricing and standardization. However, these savings are starting to be constrained because of the law of diminishing returns. In fact, SVAH’s studies show that the overall annual savings from supply budget represents 1% to 2%*, which 10 years ago were 3% to 5% of supply chain budget savings. This indicates that healthcare group purchasing has achieved significant gains which healthcare organizations have benefited from. But now, healthcare organizations need new streams of savings beyond price and standardization to stay competitive.
The Future of Supply Chain Expense Management
For decades, supply chain cost optimization has been primarily focused on price and standardization with value analysis teams managing new product requests and evaluations for GPO contract conversions. Therefore, even with an average 1% to 2% annual price savings opportunities, and factoring in the cost of inflation, SVAH estimates a net savings annually for healthcare organizations of 0.7% to 1.5% of their supply savings.
However, there is another major source of savings opportunities available to healthcare organizations that has previously been invisible to them: Clinical supply utilization savings opportunities. This is because they have no systems to identify and report on these savings (i.e., which categories, how much, which department, which product, etc.). These utilization misalignments (i.e., the wasteful and inefficient consumption, misuse, misapplication, and value mismatches in a healthcare organization’s supply streams) can increase individual major and minor product category costs by as much as 7%, 22%, or 55% for each respective category of purchase, even with the best pricing in place.
Note that price can only affect up to 20% of the total supply costs of an individual product category, whereas utilization encompasses 80% of all costs of a product category. Therefore, in the future healthcare organizations need to put a significant dent in the 80% of savings beyond price which represents 7% to 15% overall supply budget.
The Devil Is In the Details
The answer to the price maturity dilemma for healthcare organizations is to implement a Clinical Supply Utilization Management System which entails a comprehensive supply, pharmacy, and purchased service utilization management tracking system, a savings validation system, reprocess tracking, and national best price cohort benchmarking system. These combined systems will report out using cohort, fiscal year to date, quarterly, and monthly data to create their own custom key performance indicators to triangulate utilization savings opportunities. Hence, you will prove that savings opportunities are real before a supply chain or value analysis team investigates them. This then will allow your VA teams to focus on proven/quantifiable savings opportunities instead of experiencing dry holes that waste clinician and supply chain staff’s time. This is how you ensure that your well never runs dry of supply chain expense savings.
*SVAH performed a study on a major GPO’s partnership with a regional GPO program’s published annual report which shows that they saved their hospital members 1.9% in overall contract spend. Note that 0.5% of the total savings reported was in rebates which realized savings for the GPO’s membership at 1.4% of contracted savings.
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