When health systems merge, one of the goals is to gain economies of scale, lowering costs through the bargaining power that comes from being a bigger player. Yet despite a consolidation wave in hospitals, it appears that they are paying more for supplies than they did a year ago.
In the past three years, two-thirds of the country’s leading hospital systems saw declining operating income, resulting in nearly $7 billion in lost earnings. It’s a dire situation that looks even worse when you consider the relative strength of the overall economy. Supply chain costs are second only to labor and represent 30 percent of hospitals’ expenses. That cost could rise to the top of the list by 2020.
Common wisdom in the health care industry usually offers one solution to this kind of problem: Get bigger. Scale up to bring down costs. The larger you are, the greater your negotiating power when it comes to the supply chain, the companies that provide hospitals with everything from tongue depressors to CT scanners. The supply chain makes up a large chunk of most hospitals’ bottom lines.
The only problem with that supposed wisdom is that the data keep proving it wrong.
For example, despite a record 115 hospital merger and acquisition transactions last year, my company’s most recent survey of 2,300 hospitals found that they’re spending an average of 18 percent more in supply chain operations, processes, and product use than necessary. That’s a 10 percent rise from last year, representing up to $25 billion in cost savings opportunities, or about $11 million per hospital, a figure roughly equal to the salaries of 160 registered nurses or the cost of 5,900 defibrillators.
A recent working study of 1,200 hospitals by Wharton School researchers put an exact figure on the disappointing cost savings that result from consolidation. They found that the average estimated supply-chain savings for target hospitals in a merger-of-equals to be about $176,000, a fraction of what was likely expected. Not only that, supply-chain costs to acquiring hospitals actually increased in certain areas.
The bad news is that the economies of scale that promised to drive down costs haven’t so far materialized. The good news is that there are ways to reduce costs in the supply chain. An added bonus is that those reductions have shown to have no effect on quality of care. What’s more, the opportunity to save money exists no matter the size or location of the hospital — urban or rural, for-profit or not, or system-based or standalone. All hospitals can benefit from a few data-driven improvements.
The health systems with the highest-performing supply chains have a few things in common. They pay attention to data analytics, they engage their clinicians in these analyses, and then they use both the soft conversations and hard numbers to find areas to improve. That includes reducing the number of suppliers, contracts, and unnecessary variation in clinical processes.
That was the approach Main Line Health took to an analysis of the antibiotic bone cement it was using in knee and hip replacements. The five-hospital health system outside of Philadelphia found it was using far more of the bone cement than needed, which then led to conversations with its physician partners to standardize appropriate use across the system. The result: an 80 percent drop in use, a 45 percent reduction in costs, and more than $100,000 in annual savings from this category alone, all without hurting the quality of patient care.
Amazon’s (AMZN) entry into the world of health care may scare some, but it’s also potentially adding new efficiencies. At a critical-access hospital in Washington state, for example, bins filled with gloves, syringes, and other high-use items now also feature Amazon Dash Buttons, so the process of making new orders can be completed with a simple tap. The Dash system isn’t yet available for larger hospitals or health systems, but like all things Amazon, it may just be a matter of time.
Some people who look at hospitals’ supply chain costs see an inevitable, sustained rise. Others who know how and where to look see opportunities.
Rob Austin is a director of health care consulting at Navigant, a global professional services firm. He is based in Chicago.