Never before have hospital executives faced such tremendous cost pressures. At Neoforma, a leading supplier of supply chain management solutions for the healthcare industry, we meet with hospital executives every day, and are amazed to hear how consistent the financial pressures are that face our nation’s hospitals.

Hospital CEOs, COOs and CFOs have financial targets that are significantly above and beyond their current run rate. We hear things like: "We need to cut $50 million," and "We somehow need to find an incremental $60 million in revenue growth and at the same time do more with less and chop $25 million of operating expense from our budget."

The numbers are daunting, the urgency clear and the plea for help humbling. What’s causing it? Several things: declining volume and revenue with a shift to higher co-pays and deductibles; malpractice insurance rates and settlements are at record levels; physicians are competing with doctors by taking their business to alternate care settings; HIPPAA legislation and readiness is expensive; pharmaceutical prices and utilization continue to rise; scarce labor in skilled positions is driving up costs; the steep rise in uncollected bills from uninsured patients; Americans want the very best care for themselves and their loved ones...spare no expense. Neoforma believes the supply chain represents a key area that makes up, on average, 30 percent on a hospital’s operating expenses and one in which these executives are eager to go after. 

Hospitals have spent millions, even billions of dollars on information technology over the past couple of decades with little to show for it. Costs continue to rise; there is much data but little information, quality of care has shown little if any improvement, and there is a pervasive dissatisfaction with status quo amongst the purveyors of IT within healthcare. They feel they’ve been over-promised and under-delivered. We believe hospitals today would much rather acquire hosted solutions. First, it saves them a significant outlay of capital upon purchase, capital they don’t have in today’s tight financial environment. Second, hosted solutions, by their very design, get better every week as the IT solutions company can cost efficiently send out upgrades with new functionality with minimal effort on their part or their customers part. Hosted solutions also lower a hospital’s risk, as they can quickly and easily make a switch if they feel they’ve purchased the wrong solution.

If you’re a hospital executive and you have a choice to make concerning where you’ll go to save money, chances are you’ll focus on where the biggest opportunities exist, as well as where you have the best chance for success. The healthcare supply chain presents enormous opportunities for hospitals seeking to reduce costs and increase efficiencies. More than $11 billion was wasted this year on inefficiencies relating to hospital supply spend. Supply represents approximately 30 percent of a hospital’s cost structure and is rife with inefficiencies such as manual processes, lack of information, proliferation of SKUs, high fragmentation among providers and suppliers, complex and antiquated pricing schemes attempting to be managed and controlled by four disparate entities: GPOs, distributors, manufacturers and hospitals. Only 50 percent of all items are bought on a committed contract. There is no doubt, or debate, that significant savings are achievable for a hospital that gets after this opportunity. In fact we have examples where hospitals have saved 7 percent of their supply chain costs. Another hospital has saved $2.5 million. While these efforts are not easy, they are more straightforward than trying to change clinical pathways or laying off 50 clinicians who were making $50,000 a year (50 x $50,000= $2.5 million) in an already tight labor market, or negotiating with physicians or payers or insurers. It’s not glamorous, but the supply chain opportunity is a big one, savings can be realized quickly, and patient care not only won’t suffer, but can improve with better information throughout the supply chain.

Let’s face it, if GPOs went away tomorrow, prices would go up. There isn’t a participant in the industry who could tell you otherwise and keep a straight face. While suppliers have a love-hate relationship with the GPOs (they love them when they have the contract and hate them when they don’t), GPOs bring value to suppliers as well. Groups reduce selling costs, drive compliance, and offer clinical affinity groups which suppliers can plug into, etc.

With all the negative press coming out of the MDMA, a special interest group of small device manufacturers, one would think GPOs are really suffering. In fact, just the opposite is true; hospitals are voting with their feet, and their dollars, and are putting more volume than ever before through their GPOs of choice. And the reason they are doing so is they are providing incremental value to these hospitals.

There is a "natural order" out there...hospitals will contract on their own where they can negotiate winning contracts; they will use a GPO, or two, where the GPO can benefit them, and they will remain flexible to find what’s in their best interest. But GPOs will also flex, get more efficient and continue to get better. It’s this competitive dynamic and effort of continuous improvement that convinces me that not only aren’t GPOs going away, but they will continue to thrive. Despite the "sour grapes" coming from a handful of small manufacturers, GPOs and the hospitals that own them will continue to thrive.

It has often been said that healthcare is a local business. Not only is that true, but within the walls of a local hospital, or the walls of the buildings that make up an integrated health system, care is delivered not only locally, but in a distributed fashion. In other words, care is being delivered on a real-time basis in the OR, the clinical lab, the cath lab, in the respiratory department, and beyond. All day, all night, 24 x 7. Hospitals executives realize they need technology that follows this care path and thus, it must operate wirelessly, not tethered to a central system located somewhere in the basement. For Neoforma, a clinical activity or procedure is what creates demand for a supply and sets the supply chain in motion. We believe our Materials Management Solution must therefore be able to be administered near the supply usage: up on the nursing floors, in the OR, in the lab, etc. Wherever care is given.

We also believe that the use of RFID tags will proliferate in the healthcare supply chain as a cost-effective way to "tag" and identify products and track them as they flow through the supply chain from the original manufacturer to the hospital, thereby providing increased inventory management accuracy and reduced total inventory management costs. By putting these tools in place, we think hospitals will create actionable information where none existed before. Ultimately, this will result in better care through a more reliable supply chain where a needed supply is matched to a patient before the patient needs it and can be tracked effectively as it flows through the system to the patient.