Today’s value-based care models emphasize the importance of delivering high-quality care at a reasonable cost, rather than paying for treatment based solely on the volume of services provided. By measuring and managing the total cost of care, healthcare organizations can work toward achieving more sustainable healthcare spending and improving health outcomes for patient populations.
Many factors contribute to the total cost of care. But here’s what’s sometimes overlooked: Improving the efficiency of procurement processes can play a significant role in cutting costs.
When assessing procurement efficiency, healthcare organizations must consider not just big-ticket purchases, such as capital equipment or expensive medical device disposables, but also smaller, high-volume purchases, from bandages to office supplies. By getting the best possible prices for all supply purchases, healthcare providers can better manage their costs.
With healthcare organizations continuing to grow and mergers or acquisitions up this past year (18 mergers or acquisitions in Q3 2023), they can lose control of smaller purchases if each facility buys supplies directly in its own way. By centralizing, simplifying and tracking purchasing, the entire organization can benefit from volume discounts and more efficient procurement processes.
Total Cost of Care
Healthcare organizations must calculate the total cost of care to better understand all of the components that drive healthcare costs. This helps them to implement strategies to reduce expenses while maintaining or enhancing the quality of services.
Understanding the total cost of care requires organizations to consider various types of products and services that impact healthcare expenses, including direct medical costs and indirect costs associated with managing health conditions.
Among those expenses are healthcare services spending, including doctor visits and hospital stays; pharmacy costs; care management and coordination; administrative expenses; and premiums and out-of-pocket expenses.
Optimizing supply chain efficiency and managing operational expenses, such as the purchasing of sanitary and cleaning supplies, are important components of any cost-control effort.
Supply Chain Management
Because the supply chain function oversees most of a health system’s external spend, which accounts for up to 40% of total costs, it is a clear choice for investment aimed at optimizing performance, according to a recent report from the management consulting firm McKinsey & Co.
“A high-performing supply chain function can boost resilience, enhance care, increase satisfaction among physicians, reduce supply spend by up to 10% and better position health systems to achieve their growth ambitions,” the report states.
A McKinsey survey of U.S. health system executives and supply chain executives determined the elements they viewed as critical to a high-performing supply chain function are clinical engagement, goal setting and data and analytics.
“The pandemic has forced health system supply chains to become more resilient and proactive, stretching their limits while elevating their strategic position in the organization,” the report notes. “Engagement from health system executives and clinical leaders in targeted, critical areas will be imperative to continue to improve supply chain performance. Coupled with investments in analytical capabilities, health systems have an opportunity to ensure that the supplies they need for effective patient care are being provided in the most fiscally responsible way.”
Managing Procurement
Shrewd procurement strategies can significantly reduce the total cost of care by ensuring that operations are efficient and cost-effective. Implementing smarter procurement strategies requires a comprehensive approach that addresses all aspects of purchasing and supply chain management.
Key strategies to consider include:
- Investing in innovative procurement solutions, including technologies and platforms that can streamline procurement processes;
- Emphasizing value in procurement decisions, acquiring goods and services that contribute to long-term efficiency and effectiveness;
- Implementing strategic supply chain management to optimize how resources are acquired, stored and used;
- Enforcing formulary control and centralizing purchasing;
- Streamlining procurement activities to reduce inefficiencies and ensure that procurement decisions are data-driven and aligned with overall cost-saving goals;
- Implementing specific cost-saving initiatives, such as assessing annual expenditures by vendor and category and defining business cases for cost-saving opportunities;
- Leveraging group purchasing organizations to take advantage of collective buying power.
Improving Efficiency, Saving Money
Two real-world examples illustrate the benefits of streamlining procurement for thousands of purchases.
Like many hospitals, Seattle Children’s makes most of its purchases through medical or surgical distribution channels. But until recently, procurement for a long list of smaller items that keep the hospital running smoothly was inefficient.
Staff spent a tremendous amount of time to source, price check and order these lower-cost supplies. This labor-intensive manual process required multiple approvals within departments before purchase requests even reached the procurement team, which then had to approve each one.
“I have six requesters who order an absolute ton of low-dollar and low-risk items, many under $10,” said James LeRoy, the hospital’s director of strategic sourcing and value analysis. “It would have caused my team an incredible amount of extra work to circle back and approve each transaction. However, Amazon Business offered a solution.”
By using Amazon Business, Seattle Children’s has been able to streamline the process for purchasing hundreds of smaller items.
“The main benefit of Amazon Business for us is the ability to shift costly, labor-intensive approval processes for these items, so users can order directly with a simpler review and approval process,” LeRoy said. “It’s saved us so much time, to the tune of 500 requests a year. Adding Amazon Business has had a significant positive impact for us.”
Similarly, Pacifica Senior Living, which serves over 10,000 residents at 96 communities across 13 states, has been able to realize procurement cost efficiencies through supplier consolidation, improved workflow approvals and spend controls. “Amazon Business helped us replace about 95% of our vendors across the organization by centralizing them. This has also allowed us the ability to scale when we acquire new properties and has brought a significant efficiency to our purchasing program,” said Jack McCarty, Senior VP of Sales and Marketing for Pacifica Senior Living.
An Amazon Business supplier analysis found that each Pacifica community was utilizing a high number of different suppliers. In addition, Pacifica communities routinely bulk purchase specific products such as maintenance and janitorial supplies, nursing and other care items. Yet further analysis revealed that Pacifica was not leveraging its buying power, despite its routine purchasing of bulk items. For example, the ordering of 50,000 surgical gloves per month was a cost saving opportunity; they could have agreed on lower bulk pricing with their suppliers. This wasn’t happening until Amazon Business stepped in to reduce the number of suppliers and negotiate prices based on spend.
Consolidating and streamlining suppliers has also made the accounting side of things much easier. Pacifica’s accounting team is now only processing invoices from a handful of vendors, which has eliminated some of the wasteful time spent on tracking down documents for the thousands of other vendors previously supplying Pacifica’s communities. Processing their 30,000 invoices, like they did in 2022, was handled in far less time.
Important Steps
To wring-out costs from the procurement process for lower-cost, high-volume items, healthcare organizations of all sizes should consider taking several steps, including:
- Earn volume discounts by buying items from a comprehensive online store that offers a wide range of products, from durable medical equipment to IT, janitorial supplies and even pens and paper.
- Use workflows to maintain control by enforcing spending limits and category restrictions.
- Implement guided buying policies to direct buyers to preferred products or suppliers.
- Use analytics to improve visibility into purchasing and generate reports to view spending by individuals and groups.
- Integrate purchasing for less expensive items with existing purchasing systems for big-ticket items to maintain compliance management and control.
Taking these steps can not only cut costs but also contribute to improved patient care outcomes by ensuring that all necessary supplies and services are always readily available.
Learn how Amazon Business can help healthcare organizations simplify sourcing to reduce costs and enhance efficiency.