Why Surgical Supply Cost Containment is More Important than Ever - Part 2
Measured on a per minute utilization basis, operating rooms represent some of the most expensive real estate in the U.S.
In Part 1 of "Why Surgical Supply Cost Containment is More Important than Ever", we took a high-level look at the challenging issue of labor costs in healthcare environments, including BLS data-based forecasts of what is to come. In Part 2 we dive into the typical contribution supplies make to overall expenses for hospitals and hint at an ideal lever to pull that can help us reduce non-labor costs.
The largest category of non-labor expense – and the second-largest overall expense category in healthcare – is that of medical/surgical supplies. Depending upon whether one includes the contribution of supply-related labor expenses (think human resources required to procure, ship, store and manage materials) to supply expense, this category can make up as much as 40% of total expenses in hospitals with moderate-to-high surgical volumes. However, to keep it simple, let’s leave the supply-related labor expense out of it!
Without the contribution of supply-related labor expense, medical/surgical supplies make up, on average, 15+% of a hospital’s total expense bucket. Let’s take a look at publicly-available financial data from a well-run, highly-sophisticated, private-academic healthcare system that has leveraged technology to help optimize supply chain beyond that of the normal healthcare system (HCS), giving us an idea of the scope and scale of the problem. After all, it stands to reason that if a system like this struggles, then what hope does the average system have without a well-defined strategy?
Warning – numbers ahead – so feel free to skip to the punchline after the spreadsheet!
Considering the income statement data above, we can count 2020 as a wash given the curveball thrown by COVID-19, the CARES act and additional one-time adjustments from other COVID-19-related federal and state subsidies. As the ship gets back on course, however, we see and more likely than not will continue to see double-digit, year-over-year increases in expenses.
What if we could reduce supply costs by just 5%? What kind of difference would that make? Just 5%? It makes a big difference – to the tune of $63.5 million added to the operating margin of the system!
Now, how do we do this? How do we lower surgical supply cost?
According to a 2023 report from the Health Industry Distributors Association (HIDA) 93% of HCS supply-chain executives report they continue to fight widespread product shortages, creating further distortion in the supply-demand curve and making non-labor cost-containment that much more challenging. Nevertheless, before COVID-19 accelerated supply-chain friction, the top three objectives within this group to help lower supply cost were:
Standardize product use across the system – i.e. reduce clinical variation
Improve data collection
Post COVID-19, the primary priority has shifted to mitigation of supply chain risk…but, doing so is a classic Sisyphean task (roll the boulder up the hill with great effort…and it rolls back down, again and again and again) – just ask any supply chain executive!
It would seem, therefore, reasonable to target variables that we can influence, such as the aforementioned three, pre-COVID-19 priorities, and in that way mitigate the effect of supply chain friction.
What if there were a single lever we could pull that fit the following criteria? A lever that is:
Used in almost every hospital in the U.S.
Permits addressing – simultaneously – all three of the key priorities listed above
Provides a demand signal for supply use within the most resource-intensive area of the hospital – the operating room
Intimately involved in determining clinician supply use patterns
Predictably unreliable…wait huh? Well – in other words full of opportunity for optimization!
There is just such a lever: the doctor preference card! To learn more about this lever and the effects of different strategies for levering it to reduce surgical supply costs, look for my next series of blog posts. I mean, can you afford to miss them…?
Dr. McCarty is a practicing orthopedic surgeon in Minneapolis, MN, former team physician for the Minnesota Twins, Fuqua alum, healthcare leader and entrepreneur.