5 Ways Supply Chain Can Reduce Rising Healthcare Costs

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Bruce Johnson, CEO of GHX discusses five ways that healthcare organizations can utilize supply chain management to save more money and still be efficient.

As reform continues to force hospitals to find new ways to cut costs and increase effectiveness, many organizations forget about the processes and supplies needed to keep the business moving. An estimated “$5 billion is lost annually in the implantable device supply chain as a result of waste, inefficiency and lack of visibility” states Bruce Johnson, CEO of GHX, a leading healthcare supply chain management software/services company. Getting a better grip on managing a healthcare organization’s supply and demand will save tons of money to the organization while also increasing positive patient care.

5 Ways Supply Chain Can Reduce Rising Healthcare Costs

Bruce Johnson, CEO of GHX

“The supply chain is the second largest and fastest growing expense for healthcare providers; with only labor costing most providers more”.

Supply chain is also a key to creating better end-to-end visibility about all of the products, devices and supplies used in healthcare – critical to running businesses better. Logistics companies can help save time and provide better visibility within the supply chain.
Johnson says, “In order to avoid the many error-prone points along the way, providers must seek to automate and streamline the supply chain process to find savings – which can reach up to 12 percent of supply chain costs”.

Johnson notes that supply chain management in healthcare is not only about medical-surgical supplies anymore, but complex in nature involving more technology, consolidation and partnerships within the supply chain community. With supply chain management being the second most expensive cost under labor, hospital CFOs are looking for a better way to save more money and still be efficient at the same time. Johnson discusses five ways that healthcare organizations can utilize supply chain management to reduce the rising costs and run efficiently in light of all the constant healthcare reform changes.

1. Automating Manual Processes

By automating requisitions, purchase orders and invoices, providers and suppliers are able to remove manual, error-prone processes from the supply chain – these often lead to higher cost. Healthcare organizations, whether supplier or provider, looking to recoup these missing costs should consider e-commerce solutions for automating manual processes. E-commerce solutions like expense management software save both time and money when implemented correctly. These solutions would create critical connections across organizations and functions, providing visibility to data and enabling better management of data that are misentered daily.  Accurately capturing data at the beginning is key to reducing costs; these include accurate charge capture, inventory management, demand forecasting, recall management and comparative effectiveness research.

According to The Case for Global Standards in the Healthcare Supply Chain, there has been significant interest in developing standardized information that leverages automatic identification (Auto-ID) technologies to convey the information up and down the chain. These technologies can provide system benefits that are maximized when standardized and interoperable. Hospitals can then reinvest the savings earned into equipment and personnel that further enhance patient care.

2. Establishing Efficient Trading Partner Relationships

With the ability to connect with trading partners through a supply chain community, the frequency of accurate and efficient e-business transactions grows throughout the industry. Suppliers, partners and customers should form relationships with one another with each party performing a role in the supply chain, contributing to the movement of products, data or information and funds.  Relationships are vital with distributors and getting the product to the end-user, the patient. Having these great alliances with major players will keep cost down and profits up. Flexibility in contracts will allow for movement amongst these key players to continuously look for better options or a lower cost solution to high-ticketed or needed items. Changes required to create efficient healthcare supply chain can’t be the result of one single person or entity, it must be a collaborative effort for everything to work.

It seems that the healthcare supply chain can look to retail supply chain models to get a head start on how to effectively foster these relationships. According to a study dedicated to supply chain best practices by the Center for Innovation in Healthcare Logistics at the University of Arkansas, researchers found that the retail supply chain has done a better job in the critical area of collaborative planning, forecasting and replenishment, which involves suppliers and retailers – or healthcare providers – working together to adopt order forecasting and inventory planning to create an integrated supply-chain network. There is much to be done at this level to move in the right direction of having a more effective healthcare supply chain model.

3. Reducing Waste/Excess product

By taking supply chain data and turning it into information on supply levels and use, providers and suppliers can get a better handle on how much product is needed and when, leading to a decrease in loss due to wasted, lost or expired supplies. That’s money going down the drain. Healthcare organizations cannot afford to waste or not use all supplies or products needed.

  • Supply chain represents 40 to 45 percent of hospital or healthcare system operating cost.
  • Using a calculator developed by the Strategic Marketplace Initiative, a number of leading healthcare organizations project that supply costs will supersede labor costs as early as 2022.
  • The good news, according to Gartner Research, is that many providers can reduce supply chain costs by 5 to 15 percent if they better analyze, plan and control the purchase and use of goods and services. That can translate into a profit increase of 2 to 7 percent. The challenge, Gartner adds, is that few organizations have the level of supply chain talent and leadership necessary to make this possible.

By utilizing streamlined supply chain programs, healthcare organizations and players can effectively track and monitor inventory of products by having instant access to product, pricing and order information, as well as enhanced inventory visibility and tracking, therefore reducing costs, improving customer satisfaction and better meeting compliance and regulatory requirements.

4. Capturing Data for Business Requirements

In the future, the supply chain will serve a growing role as a key component of the technology infrastructure to help capture and share much-needed data to drive greater efficiency and compliance. “As provider organizations stride toward new business requirements, they can consider the supply chain as a backbone – a key component of technology infrastructure – that can help capture and share the data they need. For example, an organization that’s capturing data about all of the medical devices and products used during a patient procedure can then use this data to populate the same information in other locations, such as the electronic health record. In the future, a one-time data capture for a multitude of uses can drive much greater efficiency and compliance,” states Johnson.

This can be achieved by identifying products a provider is frequently purchasing and at what prices; what products are being purchased off-contract; identifying like-products and determine whether they can be grouped onto contracts for future purchases; and assimilating those items onto group purchasing organization (GPO) or supplier contracts. With correct data capture, healthcare organizations can achieve significant savings from reduced errors, lower costs from better contract alignment and improved revenues through the use of more accurate, up-to-date data helping the business run much more smoothly.

5. Enabling Automation Amongst Regional Care Networks

Regional hospitals and sub-acute care networks are underserviced by healthcare technology. There is an opportunity for scalable solutions, like supply chain automation tools, to serve these networks and allow them the efficiencies, data visibility and cost savings they need to survive.

According to a Supply Chain Best Practices study, 270 hospitals were observed over a 4-year period where there were a number of problems associated with limited investments surrounding not having enough funds invested in automation and IT services and solutions were found. It also provided a strong business case for reversing that trend, noting that “healthcare providers that make greater investments in back-office automation and process improvement enjoy operating cost ratios that are 2 to 4 percent better than those of their peers.” Specifically, the study called on providers to increase investments in tools to enable electronic order exchange with suppliers (including the use of order acknowledgements and advanced ship notices) and automate processes around procurement, invoicing and catalog price updates.

An e-commerce infrastructure, for example, creates connectivity and linkages that enable supply chain partners to share data with one another, building both trust and visibility to drive many of the improvements in supply chain management.

Automating the pricing synchronization process acknowledges and recognizes efficiencies by all participants in the contracting process, where all parties involved can share information electronically. GHX recommends investing in solutions that automates the pricing synchronization process with a collaborative platform that enables all parties to a contract to agree on key terms and conditions. This would allow all parties to a contract generate an electronic letter in real time and can then have the contract integrated with a distributor on the same day it is executed, in turn activating new pricing with all parties in less than a week. Without the platform, it can take up to 60 days to synchronize contract data. This makes it easier for trading partners to share accurate information related to factors such as tier pricing and commitments, customer eligibility and price activation dates.

With the increasing number in costs and supplies, healthcare organizations would definitely benefit from taking a look at their current supply chain…and making some of these changes.  Johnson agrees. “With healthcare spending consuming almost 18 percent of the GDP today, it is predicted to jump more than seven percent in 2014 alone, according to the Centers for Medicare and Medicaid. Healthcare has two choices: dig in or embrace change. With the additional pressures placed upon the industry due to the Affordable Care Act, providers and suppliers must join together this year to accelerate change, or risk falling off the fiscal cliff”.

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