The healthcare provider world is facing tremendous strain as a result of the pandemic. I have some real context of this, living in NYC and having a family member that works at a hospital. While it is a difficult time, you have to also applaud the heroic efforts of this industry as a whole.
On the flip side, the pandemic has highlighted the long standing need for digital transformation within healthcare. With rising costs and declining margins, health systems must become more efficient and productive. We believe that a key pillar of this transformation is the supply chain.
Taking a step back, if we look at the bigger trends taking place in this industry, there are a few of note that may ultimately be a driving factor for improvements within healthcare supply chains:
- Healthcare spend is highest in the world: The US spends significantly more than most of the world on healthcare per capita. According to OECD and National Health Expenditure data, US healthcare spending per person was approx $10,224 in 2017. Most other developed countries are around 40-50% less than this. Now, of course the systems of healthcare differ but overall the level and growth is certainly a concern.
- Eroding margins and depleting cash reserves: Not only is spending going up, margins are going down and cash reserves are depleting, this was a trend that began pre-covid-19. Unfortunately, it just got worse.
- Continuing consolidation: M&A activity has been high over the last couple of years and this is expected to continue as health systems look to build scale. With such growth comes supply chain complexity.
- Shift towards self-contracting and self-distribution: With health systems gaining significant scale and wanting more control over their supply chain, this shift is accelerating. It is also helping to bridge the supply chain management gap that has traditionally existed between healthcare providers and other industries such as manufacturing.
Big Opportunity Ahead
Being a glass half full kind of person, there is a giant opportunity ahead to improve and optimize. According to 2019 Definitive Healthcare data, U.S. hospitals are overspending on supply chain products and related operations, processes, and procedures by $25.7 billion. This represents a lot of “opportunity”. The average hospital spends nearly 30% of its overall non-labor operating expenses on supply chain expenses. Buying supplies, equipment, low preference items and the latest innovations to support high-value care delivery is expensive and while it’s not an area where you want to skimp, there are certainly ways to reduce these expenses without impacting quality of care.
According to this same research, there is an opportunity to reduce total supply expense by average of 17-18% for a given hospital. For many it’s likely that the opportunity is much larger.
What is The Fundamental Challenge?
Supply chain interacts and has an impact on every department yet there still seems to be an overall misalignment between patient needs, physician needs and the supply chain. As is, the healthcare supply chain is complex with multiple players involved such as manufacturers, distributors and group purchasing organizations (GPOs) supporting and interacting with multiple departments and care delivery points. Add to this a set of complex and unique processes such as bill only transactions, which are often fairly resource intensive.
Across this supply chain there is typically a lack of visibility due to siloed information and data. This becomes even more complex due to the high amount of clinical variation which drives up costs and complexity. Often this variation is valid and leads to better quality of care but often it is not. The only way to really understand that is data. Data to better understand costs, utilization and, if possible, connect this to patient outcomes (easier said than done).
Quite often there can be a general lack of spend and vendor management and strategic sourcing activities. Due to informal supply chain practices and systems and a lack of direct relationship management of vendors, it is hard to truly have visibility into all spend and all vendors. However, leading health systems are changing this by building internal supply chain expertise and leadership and investing in fit for purpose technology to enable supply chain excellence.
The Path to Supply Chain Excellence
Make no mistake, there is a path to supply chain excellence and it is one well worth investing in. Take it from our customers that have gone down this road and achieved significant value. Baylor, Scott & White (BSW) presents a great example of achieving digital transformation powered by supply chain. With a very talented team, leadership and a powerful platform (Ivalua) they have been able to reduce the total cost of care, ultimately reducing the financial burden on patients while simultaneously freeing caregivers to spend less time on paperwork and more time with patients. BSW built up a leading supply chain function and established a self-distribution model, all of which helped to improve overall margins. Not to mention the automation of time consuming processes, tailored specifically for healthcare. For example, unique workflow and fields in a requisition to capture doctor, patient, product serial numbers & procedure details and route specific product types to specialized buyers/suppliers. Ultimately, BSW was able to improve a key metric (Supply Expense as a % of Net Patient Revenue) and generate millions in savings. Watch a BSW webinar here. Our other customers like Cleveland Clinic and Select Medical have also made significant strides forward in supply chain led transformations.
Depending on the maturity of the supply chain function within a health system the path to supply chain chain excellence can begin with the basics or evolve to go even beyond best-in-class. To paint a somewhat simple picture:
- The basics may involve simply building up internal sourcing expertise and addressing basic indirect spend. Establishing processes to identify and capture savings by category. In order to this effectively, a strategic sourcing solution is likely required as ERPs typically have limitations here, particularly in collaborating with vendors. Perhaps an increase in self-contracting activities to provide more visibility into and control of vendor relationships.
- The next phase would likely involve tackling some low and high preference items and therefore should involve more collaboration with clinicians. Connect key IT systems so that you can leverage data wherever possible to drive better decisions. Establish a supply chain risk and performance assessment, monitoring and mitigation plan. Perhaps explore a self-distribution model and more transactional automation with procure-to-pay solutions.
- When the time is right and you’ve been able to automate much of the source-to-pay process, then you can engage in more supplier collaboration and innovation activities. Explore more performance based contracts, be involved in more M&A discussions to take full advantage of scale. Establish a more advanced self-distribution model.
The above is a simplified view, of course. The approach would differ based on organizational goals and objectives. But one thing is clear – that an overly standardized and rigid solution will not work for healthcare. What is needed is a powerful and comprehensive platform that can offer the level of agility and flexibility that’s needed within the healthcare supply chain.
Ultimately, it is clear that change is coming in healthcare. Some have embraced this well before covid-19, others have been forced to as a result. From my perspective, supply chain has an important role to play in the much needed transformation of healthcare to ultimately improve the quality of care, patient outcomes and margins, so that we can have a more sustainable healthcare system for all.
VP Product Marketing
Vishal has spent the last 15 years in various roles within the Procurement and Supply Chain technology market. As an industry analyst, he researched and advised organizations in various industries on best and innovative practices, digitization and optimization. He brings a thorough understanding of market trends and digital technologies that can help enterprises be more effective with their Procurement and Supply Chain strategies. He works to ensure that organizations are empowered with technology platforms that enable flexibility, innovation, and agility.
You can connect with Vishal on Linkedin