To Cut Hospital Costs, Look At The Supply Chain

As deliberations over how to make healthcare more cost-effective continue to play out in forums across the country — from the U.S. Congress to state governments to health systems and hospitals — it strikes me that we are paying insufficient attention to what should be an obvious consideration – the cost of supplies.

Supplies run the gamut — from operating tables, artificial knees, intravenous solutions, and wound dressings to bed linens, medication carts, cleaning supplies, and cafeteria food.

By some estimates, the “supply chain” represents as much as 40% to 50% of a hospital’s or health system’s operating cost, amounts that are exceeded only by the cost of labor.

This will not come as a surprise to anyone who has looked closely at an itemized hospital bill and discovered a $10 charge for an aspirin tablet.

Clearly, as they seek new ways to cut costs and increase effectiveness, hospitals must take into account the supplies and related processes used by their organizations.

Researchers at the W. P. Carey School of Business at Arizona State University have been looking strategically at purchasing, distribution, and other related areas that offer opportunities to impact efficiency and improve care.

Whether cardiac stents, biologic drugs, or knee replacements, hospitals have typically purchased whatever products their clinicians requested without a discussion of the costs and benefits.

There are misaligned incentives between the physicians who determine the devices used and the hospitals that pay for them, particularly in the areas of medicine that have the highest supply costs (i.e., cardiology and orthopedics).

Recognizing this as an issue, Medicare has authorized the practice of “gainsharing” – a system whereby hospitals reward physicians when efficiencies lower the overall costs of care — on an experimental basis.

Using the 2001 and 2006 Healthcare Cost and Utilization Project State Inpatient Databases and Medicare Cost Reports for community, nonrehabilitation hospitals in nine states, a study reported in Health Services Research (August 2012) found that the largest hospital expense may be from supplies including medical devices, such as stents and artificial joints.

A cost analysis on more than 10.2 million patient discharges for various conditions revealed that, at 24.2% of costs, “supplies and devices” were the leading contributors to the increase in average cost per discharge — surpassing intensive care unit charges, imaging, and other advanced technological services.

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