Why Aren’t We Jumping On These Juicy Low Hanging Savings Opportunities?
Most healthcare organizations are still operating on a VA model that is strictly focused on group purchasing (GPO) for price savings. Most value analysis teams are caught up in making these GPO savings happen along with evaluating their new product requests for their healthcare organization. Now don’t get me wrong, there is still savings to be generated from working with your GPO on price and standardization savings opportunities. But, the savings is not the big juicy low hanging fruit that it once was 5-7 years ago. The healthcare market has matured to the point where we are not getting the savings out of our supply chain that we once achieved.
The systems that you employ for price and standardization compliance are doing their jobs and driving out the price savings but they are not built for managing utilization (the new low hanging fruit) based on your hospital’s departmental volume fluctuations. So you have the best price and best standardization but your costs still seem to rise because you are not addressing the supply utilization aspect of your supply chain organization. This is all about the consumption, in-use methods, and waste and feature rich/poor selections your departments create on a daily basis that now consume the majority of the cost increases in our supply chain expenses today.
For example, a hospital thought they had their surgical gloves under control, based on our utilization dashboard system reports, and was one of the best performers in our benchmark database. They were doing very well on surgical gloves until their group purchasing organization contracted with a different manufacturer than their incumbent vendor and the hospital was required to switch to the new vendor. It happens every day.
The good news was that there would be a 10% price savings so their hospital’s value analysis team went about their normal evaluation to finalize and implement this new contract. From a usage standpoint, the hospital knew from their reports that they utilized 3-6 pairs of gloves per surgical service procedure so they were able to calculate their savings based on the annual usage.
After the contract had been implemented the hospital continued to track after their cost per surgery procedure in their dashboard to validate that the expected 10% price savings was achieved. They were shocked to discover that not only were they not saving the 10%, but their surgical glove cost had shot up by over 28% per procedure or a net loss of 38% of their total surgical glove spend.
Upon further investigation, the supply chain department found that their pricing and standardization was still in place per the new group purchasing contract. The problem was that the hospital was simply now using more surgical gloves on the new contract (5-8 pairs of gloves per surgical procedure) as compared to the previous annual usage of 3-6 pairs per procedure over the previous year.
The new contract was implemented faultlessly but something was causing their surgical glove utilization to go up 38% more than expected. After an investigation, it was uncovered that the surgeons and OR staff began double gloving more often than they had done in the past because the new glove did not feel as durable as the previously contracted glove.
This was an unintended consequence of this change, but because they were tracking the utilization before and after this change, they were able to address this lack of confidence issue with a little help from their new vendor to bring the utilization back in line to the previous year’s utilization standards.
What would have happened if this hospital’s value analysis team did not track after their surgical glove utilization? You guessed it, they would have increased their surgical glove spend dramatically, yet believed that they saved 10% over the next 2 years when in reality their new contract ended up costing them an additional 28% at a combined loss of 38%.
Don’t go down this road. Always, as this hospital did, validate –by tracking, trending and measuring — your savings on all of your value analysis projects (e.g., price, standardization, and utilization) since the unintended consequences of not doing so can be catastrophic.
New low hanging fruit
As this case study suggests, while price savings are still possible at your healthcare organization the new and better savings opportunities (7% to 15%) are in your supply utilization misalignments. Therefore, you need to be particularly vigilant when you make any change in the products, services or technologies you are buying at your hospital, system or IDN.