When Indiana’s Goshen Health decided to de-affiliate from Indiana University Health in 2016, it knew its supply costs were going to increase for its 122-bed hospital, cancer center and 27 physician practice locations, according to chief financial officer Amy Floria. That meant waste in the supply chain had to be cut out—like the 80 percent of hospital supplies which had sat untouched on a shelf for two years.
At her presentation at HIMSS18 in Las Vegas, Floria cited Advisory Board Company data which showed the growing problem hospitals are facing with their supply chain costs. As of 2017, supplies and services had an average 3-year compound annual growth rate of 9.8 percent, twice the rate of labor costs. There was also significant variation between supply expenses per discharge, with the industry overall looking at $38 billion in potential savings if all hospitals could adopt the practices of top performers.
Even for a single-hospital system with $250 million in revenue like Goshen, Floria said the supply chain was “a hot mess,” made worse by keeping supply information in silos which can hide its true costs and the traditional approach of isolated, episodic initiatives to find savings.
“I still it find it very hard to believe, and I’ve been in healthcare almost 20 years, how little we know about our cost structure,” Floria said.
By collaborating with clinicians on reducing costs, rather than have the initiative been seen as driven by finance professionals, those silos could be broken down. Floria said they began this process by asking nurses and physicians why certain suppliers were being used. Nurses especially will know more about the vendors and those products because they use them every day, rather than seeing it as just a line item expense.
Much that Floria found was eye-opening, like the 80 percent of the hospital’s supplies found to have stayed "collecting dust" on shelves for two years. Even though supplies may have acquired through consignment, they still represented wasted space in their inventory, though clinicians resisted getting rid of the unused items. She also found boxes of surgical supplies for which the hospital paid extra for express shipment, only to have packages go unopened for more than a week.
The response from clinicians, Floria said, was, “Well, we’ve always done it that way,” but those findings alone were enough to get some staff members to rethink their approach to acquiring supplies and better understand the CFO’s point of view.
For physicians especially, it made an impact to focus on data and taking the emotion out of supply decisions made an impact. When the hospital decided to cut its stent suppliers from six vendors down to two or three, it collected information from the vendors like cost, volume and what kind of procedures their products would be suited. It then shared this information with the physician and the vendors themselves with the vendors’ name removed—which may lead to vendors trying to negotiate to keep the hospital’s business.
“You’re amazed at how quickly they start coming around and start being a little more flexible in their contracting,” Floria said. “So one way to meet your benchmark objective is just let the data lead you to the answer.”
That information sharing is a two-way street. Floria would ask why nurses and physicians favored certain expenses and why expenses she may wish to cut, like having a vendor representative on site several days a week, may add value.
Vendors, in turn, may take the opportunity to stand out once they fear they’ll be cut off. Floria said the existing food service vendor responded positively to Goshen’s initiative, committing to not only $300,000 in savings but also paying for capital investments in the cafeteria.
For all the effort, the initial savings have been small. Floria said Goshen has projected over five years, it will save $1.9 million on clinical equipment maintenance services and another $1.5 million by identified new opportunities through its group purchasing organization. It also avoided the 10 to 15 percent increase in supply costs it expected after leaving IU Health.
“It’s not going to save your facility, but we’d like to think we just scratched the surface,” Floria said. “And for Goshen, this is real money. This is capital we can reinvest back in the facility.”
Despite some resistance, Floria said she believes most physicians are willing and ready to discuss optimizing the hospital’s supply chain once they see some hard data. Taking that a step further, she said she would be interested in some arrangement where physicians are offered financial incentives when they help the hospital find savings on supplies.
John joined TriMed in 2016, focusing on healthcare policy and regulation. After graduating from Columbia College Chicago, he worked at FM News Chicago and Rivet News Radio, and worked on the state government and politics beat for the Illinois Radio Network. Outside of work, you may find him adding to his never-ending graphic novel collection.