Every hospital and health system supply chain department around the country is continually tasked with increasing savings year over year. The typical method these departments use to reduce expenses is targeting spend categories—med-surg, physician preference items, purchased services, facilities—and negotiating with suppliers to drive down the price of supplies, equipment and services. They use techniques such as direct negotiations, supplier consolidation, supplier conversions and requests for proposals. Over time, however, they will have driven down the price of most categories and have limited opportunities to further reduce costs.
There’s a Swedish proverb that says, “He who buys what he doesn't need steals from himself.” This applies to hospitals and health systems, too. One additional strategy supply chain leaders can use to reduce expenses is not to spend it where you don’t have to. Here are three areas where examining utilization can drive savings and reduce operating and capital expenses with services, supplies and equipment.
Utilization of services
While reviewing agreements in the services category, hospitals will have conversations with suppliers around the pricing of the agreements. Consider also having conversations around the service levels and/or scope of the agreements. While it’s great to obtain the best pricing on a premium service level, but if your organization only needs a basic service level, you will end up overpaying.
For example, while working with a medium-sized integrated delivery network (IDN) in the Midwest, our team was tasked with reviewing their elevator maintenance agreement. The organization did not want to move away from its current supplier so we began to review the service coverage levels, knowing that a direct price negotiation would produce limited results.
We noticed that one hospital had 24x7 overtime coverage on every elevator, resulting in a significant cost of roughly $100,000 per year. As we asked the supplier for more details around actual calls placed outside of the 8 a.m.–5 p.m. workday, we learned that the system rarely placed calls after hours and did not need 24x7 overtime coverage. We worked with the IDN to reduce the scope/utilization of their agreement and still maintain optimal coverage, yielding an 8.5% reduction from their previous annual price.
The lesson here is that when you are negotiating a coverage-based services agreement, work with the requesting end-user to understand the appropriate level of service coverage and scope. Request that the supplier provides objective, historical service data to help you make informed decisions on your needs for service levels and/or scope of agreements.
Utilization of supplies
Early in my career, I worked at a small, independent hospital on the East Coast that had a niche in the orthopedics and trauma space. The supply chain team worked diligently on driving down the cost of supplies for physician preference items as well as with the preferred supplier for trauma procedures to secure the best pricing in that category.
Due to the nature of trauma surgeries, the hospital had to keep a significant amount of stock on hand to ensure supplies were available when needed. Unfortunately, the supply chain team overbought many of the trauma supplies because they did not have proper insight into the volume of procedures and inventory levels were not properly monitored. As a result, this hospital accumulated over $2 million worth of excess supplies it would most likely not use before expiration dates.
I share this example because it shows the importance of digging into the data to understand how your facility is utilizing supplies so you can reduce operating expenses by not spending.
When you can tie the utilization of supplies to the appropriate correlating volume, you help ensure more informed procurement decisions. Be sure to evaluate and readjust periodic automatic replenishment levels to ensure that the organization is not accumulating unnecessary inventory that may become obsolete.
Utilization of equipment
Each piece of medical equipment in a health system most likely has an attached agreement for servicing that equipment. The attached service agreement will be an operating expense the hospital has to absorb until the equipment is replaced or retired. Due to the upfront capital expenditure and the associated service agreement expense, it is imperative that organizations use objective utilization data to understand if optimizing the use of existing equipment would negate the need to purchase new equipment.
For example, while working with a small hospital system in the southeast, we reviewed a request to purchase two new ultrasounds. Each ultrasound was roughly $150,000 and the associated service agreement would cost about $10,000 a year post-warranty. After reviewing the utilization of the existing ultrasounds with the requesting department and the incumbent supplier, we determined the department could avoid the capital expenditure by utilizing its existing ultrasound fleet more efficiently. This saved the health system an estimated $300,000 in capital expenditures and $180,000 in associated operational expenses.
As supply chain departments work diligently to drive savings for their organizations, know that after price reductions, utilization is the next place to look for sustainable savings opportunities. By reviewing the scope of service agreements, understanding the usage of purchased supplies and tracking and understanding the data on the utilization of existing capital equipment before purchasing new equipment, hospital supply chain departments can reach a new frontier for saving opportunities.
About the author: Kevin Groarke brings more than six years of experience in the health care industry. Kevin works as a consulting director on the Facilities, Capital and Construction Advisory Solutions team where he leads engagements focused on driving standardization, reducing costs and optimizing spend in the Facilities and Construction Space. Prior to this role, Kevin served as a portfolio executive and helped to expand the breadth and depth of Vizient’s facilities and construction portfolio. Before joining Vizient, Kevin spent four years in various roles in supply chain and purchasing in the health care industry.