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Hospitals Supply Chain Inefficiencies Are Wasting Billions of Dollars, Study Finds

January 3, 2020

Hospitals across the United States are wasting money through poor supply chain management, with the total amount increasing by nearly 12 percent over the most recent year to $25.7 billion, a study by the consulting firm Navigant found.

Researchers analyzed data from 2,127 acute care hospitals and found an individual hospital can save on average $12.1 million per year by identifying which services, products, and procedures are truly necessary, efficient, and based on clinical evidence. Hospitals can also save money by increasing standardization, employing executives who are physicians and identifying services products and procedures that are most needed, efficient and effective, the study says.

The annual study breaks down the potential savings based on geographic region, urban or rural setting, ownership type, whether the hospital is academic-based, and size by bed capacity.

Perverse Incentives

The study is much-needed but could do more, says Marilyn Singleton, M.D., J.D., an anesthesiologist and president of the Association of American Physicians and Surgeons.

“It is heartening that the ‘thought leaders’ are addressing the facility supply chain as a source of cost savings in medical care,” said Singleton. “Missing from the conversation is a discussion of the role of group purchasing organizations (GPOs).”

GPOs negotiate contracts in the health care market. Hospitals depend on GPOs to act as cost-saving intermediaries with vendors, distributors, and other suppliers by making large purchases and providing better deals on products for medical facilities. Unfortunately, GPOs have an incentive to keep costs high, says Singleton.

“GPOs are supposed to reduce supply costs through volume purchasing, but the current system of payment encourages higher prices,” said Singleton. “The GPOs are paid by a percentage of the cost of the product, so the higher the cost, the higher the fee.

“This conflict of interest must be taken into consideration when looking for remedies for high supply chain costs,” said Singleton. GPOs do not always choose the products that are best for their customers, patients, or the taxpayers.”

Singleton says GPOs also pad their income by charging vendors “contract administration fees.”

Ripe for Disruption

Consolidation in recent years has given four GPOs—Intalere, HealthTrust, Premier, Vizient,—control over 90 percent of the market, says Singleton.

 Big tech companies have seen an opportunity to bring down costs. Services such as Amazon B2B, Amazon’s business to business marketplace, attempt to remove intermediaries from the purchasing process to allow venders to sell directly to buyers.

Singleton says the idea has been slow to catch on in the health care industry.

“It remains to be seen if Amazon’s B2B service will disrupt the status quo by providing price transparency and comparison shopping,” said Singleton.

 

Ashley Bateman (bateman.ae@googlemail.comwrites from Alexandria, Virginia.

Internet info:

“Study: Hospitals’ Annual Supply Chain Savings Opportunity Reaches $25.7 Billion,” Navigant, November 13, 2019: 

https://www.navigant.com/insights/healthcare/2019/study-hospitals-annual-supply-chain-savings

Article Tags
Health Care
Author
Ashley Bateman writes from Alexandria, Virginia.
bateman.ae@googlemail.com