Is Hospital Consolidation Driving Any Supply Chain Savings?

One of the key tools US hospitals are using to increase margins in today’s healthcare environment is consolidation. By merging operations with other regional hospitals or systems, many executives are looking to pad their margins through economies of scale.

However, it appears that consolidation as a strategy to improve margins may not be working, at least when it comes to supply chain costs. A recent study by the Wharton School noted that supply chain savings from consolidation saved only about $176,000 per hospital. As this article from Rob Austin at Stat News reports:

“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.”

Read the article here: Consolidation is hurting hospitals’ supply costs, not helping them

As hospitals look to remove much of the waste from their supply chain, data analytics become the key to realizing significant savings. If your organization lacks the proper tools to provide powerful data around your supply chain spend, consider systems such as iRISupply which can collect real-time data around supply and implant usage using RFID technology and provide actionable insights to help with vendor negotiations, on-hand inventory levels and owned-consigned item mix. Powerful data analytics included with the software will give specific recommendations on which items to reduce or eliminate, and which items should be owned vs. consigned, leading to millions of dollars in cost-savings opportunities. These cost-savings opportunities can help hospitals increase their margins and provide valuable dollars straight to the bottom line.