The profitability picture for 2015 is pretty gloomy. Yet there is one area where savings shine—the healthcare supply chain. As the largest expense after labor, reducing medical-surgical supply and processing costs represents the single biggest opportunity for new savings and capital.
Financial Pressures and Reform Uncertainties Dim Outlook
Unfortunately, Moody’s predicts the outlook for the U.S. nonprofit healthcare industry will remain negative in 2015. [i] Key indicators will remain low:
- Weak growth in operating cash flow (Moody’s)[ii]
- Record low 3.8% health care spending growth and a dismal 2% rate of health care price inflation (AHA) [iii]
- Weakened operating margins as hospitals adjust to value-based, bundled payment and shared savings models
Modern Healthcare magazine points to the double trouble of holding down health spending while the number of insured Americans grows due to Obamacare coverage expansions: [iv]
- Recession in-patient numbers never recovered, and demand is now dampened by high-deductible health plans and price-sensitive purchasers and consumers [v]
- The newly insured are often sicker, with these higher acuity patients requiring more equipment and technology, raising hospital supply costs faster than volume [vi]
Reduced income and increased costs continue to squeeze profits:
- Falling government and private reimbursements
- Cost and time to transition to Meaningful Use (EHR, ICD-10, etc.)
- Rising procedure costs driven by expensive physician preference items (PPI)—accounting for 60% of med-surg spend [vii]
And a dark cloud of uncertainty hangs over the Affordable Care Act itself:
- The subsidies that have made coverage affordable to millions through federal exchanges are now under review by the Supreme Court
- The new Republican-controlled Congress is almost certain to challenge features of the law
Where can organizations look for savings? The healthcare supply chain.
Supply Chain Emerges as Savings Center
The hospital supply chain has stepped into the limelight. Organizations have already seen bottom-line improvements through product standardization, direct manufacturer contracts and more efficient medical utilization patterns. But more opportunities remain to cut costs. [viii]
In 2015, we’ll see hospitals take more control over their product pricing and selection, to not only drive down costs, but to also determine the best product and use. Organizations will:
- Contract directly with medical device manufacturers, with financial risk-sharing deals based on product performance
- Act as their own regional group purchasing organizations (GPOs)
- Hire more on-staff physicians who will help influence value analysis decisions that balance clinical and financial outcomes
McKinsey predicts hospitals will be more willing to invest in new types of supply chain technologies and services. [ix] Hospitals will turn to new cloud-based systems that harness artificial intelligence (AI) technologies to mimic the ease of a consumer buying experience. These systems are smarter, friendlier and offer quicker uptimes and returns than traditional on-premise systems.
What we’ll see in 2015:
- Predictive value analysis through better quality data and intuitive analytics—critical for managing high-cost, high-impact PPI
- Improved product standardization, contract compliance and price parity through eprocurement systems that define and enforce an organization’s product formulary
- Centralized purchasing across large multi-facility entities —identified as key in a recent survey of ACOs [x]
- Improved visibility to med-surg spend to reduce costs and increase leverage—as 48% of spend and 52% of items are purchased outside the item master [xi]
- Increased interoperability between disparate systems to improve results
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[iii] Health Care Spending Growth Hits Record Low; American Hospital Association; March 11, 2014.
[iv] Outlook 2015: Financial pressures, reform uncertainties; Melanie Evans; January 3, 2015; www.modernheatlhcare.com.
[v] Outlook 2015: Financial pressures, reform uncertainties; Melanie Evans; January 3, 2015; www.modernheatlhcare.com.
[vi] Hospitals’ supply costs rising faster than volume; Beth Kutscher; modernhealthcare.com; November 22, 2014;
[vii] Controlling Supply costs: Expense growth outpacing all others; The Advisory Board Company; website accessed Jan 3, 2013.
[viii] Outlook 2015: Supply chain; Jaimy Lee; January 3, 2015; www.modernhealthcare.com
[ix] Outlook 2015: Supply chain; Jaimy Lee; January 3, 2015; www.modernhealthcare.com
[x] American Hospital Association Survey of Care Systems and Payment; American Hospital Association, 2013.
[xi] McKesson/Meperia data based on the assessment of procurement data from over 125 healthcare facilities