Based on our review of healthcare organization financials in 2019, we see that most hospitals, systems, and IDNs are generating operating margins averaging 3.4% which are declining each year. This statistic supports a study by Kaufman Hall that determined that hospitals’ operating margins have declined by 21% in 2019, with smaller hospitals experiencing the worst performance overall. That’s why the supply expense management function is mission critical for all healthcare organizations to boost their margins. With this said, here are three high-impact savings areas that supply chain managers can employ to increase their healthcare organization’s bottom line:
1. Supply Utilization Management (SUM): If you are still a non-believer that there are 7% to 15% in new supply expense savings in waste and inefficiency in your healthcare organization’s supply streams, then you are a dying breed. As all of the believers know, SUM savings are real, obtainable, and scalable if you decide to target your SUM savings rather than let those savings emerge organically.
2. Purchased Services Management (PSM): It is my estimate that only one-third of the nation’s hospitals, systems, and IDNs have a formal PSM program. This is a dilemma since well-orchestrated PSM can easily shave 11% to 18% off a healthcare organization’s purchased services expenses. Remember this important fact: Your purchased services expenses are equal to or greater than your supply chain expenses for any given year.
3. Savings Compliance Management (SCM): We have documented that 23% to 46% of reported supply expense savings never hit a healthcare organization’s bottom line because of changes (people, policies, practices, census, etc.) over the term of a contract or estimated savings. Therefore, every projected savings needs to be validated by supply chain if you want to really contribute to your healthcare organization’s bottom line.
We all know that every dollar saved goes right to our healthcare organization’s bottom line. At the same time, your organization’s revenues are siphoned away by all of your operating expenses, labor costs, and overhead costs before any profit hits your bottom line. In most cases, the profits are only a few pennies on the dollar or a few percentage points overall. This is the most important reason why supply chain management is so important to your healthcare organization’s success. Don’t forget this fact as you plan your saving goals this fiscal year.
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