May 17

Three Game-Changing Approaches to Supply Expense Cost Management


By now you have heard the new healthcare vocabulary of population health, value-based contracting, and accountable care organizations, which will change the landscape of your healthcare organization’s reimbursement forevermore. For instance, hospitals are already reporting that they have a negative 9% margin with their Medicare patient population which is a shocking statistic. 

Chief Financial Officer, Paul McDowell, Mission Health, Asheville, NC., said recently that if his hospitals were running a Medicare margin of negative 9%, “We’d be dead.” That’s why Mission Health has drastically reduced their labor and non-labor costs over the last few years and are holding their Medicare losses down to 3.5%. This isn’t a pretty picture we have just painted, but it is the reality in healthcare today!

Supply Chain Needs to Be an Equal Partner in These Cost Reduction Efforts

Supply chain expenses represent 38% to 40% of most hospitals’ budgets; therefore, supply chain needs to become an equal partner in your healthcare organization’s cost-cutting survival strategies. Just as important, to be left out of this partnership at your hospital, system, or IDN could unfavorably affect your future.

It’s our opinion that this partnership can’t continue to be forged by supply chain managers with just GPO contracts, standardization, and value analysis savings (representing 2% to 3% of your total supply budget – annualized) because these combined savings aren’t robust enough to put a dent in your healthcare organization’s losses. Consequently, new supply chain expense reduction tactics must be encouraged, tested, and then promoted to generate double-digit supply chain expense savings just to keep pace with your healthcare organization’s reimbursement cuts.

Three Game-Changing Approaches to Supply Expense Management

Based on our empirical experience, this cost-cutting mission-critical challenge can be best accomplished with these three game-changing supply expense cost management approaches:

  • Supply Utilization Management: We have preached for years that every product, service, and technology has a beginning, middle, and end, which is called its lifecycle. If you are only controlling the beginning (i.e., value analysis justification) of your commodity’s lifecycle then 80% of your in-use cost is being flat-out ignored. That’s why 7% to 15% of your total supply expense budget is still being lost. Your real savings (utilization) reside in your supply streams, not in price or standardization.  
  • Purchase Services Management: If you are still ignoring the millions of dollars of savings in your healthcare organization’s purchase service portfolio, then you are missing an opportunity to save 11% to 18%. Why leave these huge savings go untouched?
  • Supply Compliance Management: We believe that after you save money on anything in your supply streams, you must then ensure that your hospital, system, or IDN’s staff doesn’t fall back to their old bad habits. For instance, to prevent sales representatives from upselling your GPO contracted products, without approval, you need to have a trigger to make your staff aware this is happening. Otherwise, your healthcare organization could be losing hundreds of thousands of dollars a year by falling for this sales tactic.

There could be a few other game-changing approaches you might want to consider, but we believe that these three should be the core foundation of your supply chain expense management reduction program over the next decade.

Are You on Change Boulevard or the Same Old Street?

From our perspective, the things that have gotten your supply chain expense management efforts to your destination in the past aren’t working well for you any longer. It’s now time to start down Change Boulevard to uncover new ways to save money. This isn’t just a nice idea we are promoting, but a mission-critical mandate for you and your hospital, system, or IDN’s financial survival. Good luck on your journey to protect your future!


accountable care, cost, cost reduction, healthcare, healthcare organization, hospitals, IDN, Medicare, population health, reimbursement, supply chain, supply chain expenses, supply expense management, supply utilization, value-based contracting

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