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Three Ways to Drive Margin Improvement via Supply Chain


Today’s reimbursement climate isn’t just about expense trimming. Health systems should aim to drive long-term margin improvement by leveraging their supply chains. After all, supply expenses are estimated to comprise 15 percent of total hospital expenses on average – although they can be as high as 30 to 40 percent in hospitals.

Isolated initiatives to improve finances often yield, at best, incremental improvements. To recognize sustainable progress, it’s important to think strategically about supply chain’s role in managing spend and contributing to the entire organization’s financial health.

Supply chain is uniquely positioned to help improve margin through implementation of robust value analysis, purchased services, capital equipment planning and procurement processes. Organizations we’ve worked with have taken advantage of significant opportunities in these areas:

1. Embrace value analysis to enable standardization and reduced supply chain costs.

Value analysis injects perspectives from both medical and purchasing professionals, incorporating evidence-based, data-driven decisions to ensure clinicians have access to quality products at the right time and at the right price. The value analysis decision-making process accounts for issues related to quality, patient and staff safety, preference items, revenue enhancement and charge optimization across the continuum of care. In short, it enables standardization and reduce supply chain costs.

Must-haves for an effective value analysis process include:

  • Clinician engagement: Build multidisciplinary value analysis teams by incorporating clinical, quality, supply chain and financial perspectives. This will ensure the analysis of products consider price point without sacrificing quality.
  • Conversation tracking: Consider a solution that tracks the team’s conversations around specific products, and easily aggregates and pulls in third-party research to help with product analysis. This documentation allows for information to be shared back to end users as to how decisions were made.
  • A willingness to say no: The value analysis team is often approached with requests to use new, more expensive products. While the shiny toy may seem appealing, the value analysis process should aim to consider products, services and practices that meet – but do not necessarily exceed – the end user’s specifications while providing safety and quality care to patients. There will be times when an expensive item is the answer, but only when it truly provides an enhanced patient outcome that is not achieved by a comparable product.
2. Master purchased services to yield 30 percent or more in savings.

Data shows that tackling purchased services can yield five to 15 percent in savings, with some categories yielding 30 percent or more. Yet for many providers, purchased services spend is highly fragmented, with owners and contracts spread across the organization. Centralized oversight of these contracts may exist – or be wishful thinking.

Achieving success in these areas requires both a cultural and operational shift. Start with these strategies:

  • Organize the data: While data transparency is key to success, many providers fail to grasp where it lives in their organization. To truly understand purchased services spend across the entity, consider a spend management platform that can identify the scale of services spend, pinpoint all services that are on contract, source competitive contracts among a large majority of service providers, and track and measure spend by category, supplier and facility.
  • Start small and build: Something as straightforward as mapping out contract expirations for review is an easy early step. Consolidating spend with a smaller number of vendors is low-hanging fruit that often yields significant savings. As part of a detailed data analysis, group purchasing organizations can share spend in the numerous categories that comprise purchased services and identify where multiple vendors are providing the same service.
  • Think outside the box: Don’t be afraid to get creative when sourcing for vendors. For example, some quick wins can be obtained with a simple incumbent negotiation instead of a full-blown request for proposal (RFP), while transitioning to women- or minority-owned business can fulfill compliance objectives. Switching to a regional provider or even a local vendor outside the healthcare space could also result in a more competitive cost structure and hyper-personalized services.
  • Engage executives: Obtain buy-in from the C-suite and executive sponsors from the start, as they should help provide clear direction to the organization about which areas are open for contract negotiation or services consolidation.
3. Evaluate capital equipment planning and procurement to ensure strategies are aligned.

New capital projects, renovations, expansion and maintenance require strategic investments, especially in periods of expense reduction. Evaluating the capital equipment life cycle in the organization is critical.

  • Think big picture: Understand which equipment is in use, how it is covered by service or maintenance agreements and its expected lifecycle. Also consider any ancillary components like monitors, cords or batteries that are required for the capital to function properly. Keeping track of these items helps to appropriately budget for funds to support or replace capital when needed.
  • Bulk up: Take advantage of opportunities to aggregate spend within a facility or across the organization (the purchase of 10 MRI machines will yield a better price than a single purchase).
  • Broaden the capital planning team: Supply chain staff and equipment planners can identify product alternatives and opportunities to maximize savings and should be included at the start of construction and facility renovations. This guarantees operations proceed efficiently and avoid costly change orders down the road.

Leave no stone unturned for savings at your organization. Premier can help you identify them.

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