Attacking Costs in Healthcare: Tactical Procurement Can Address Up to 40% of a Total Operating Budget

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There’s often a mistaken viewpoint that says labor costs form the dominant and often hard to address costs of healthcare service delivery in the United States (for example, the physicians, nurses, administrative staff). Granted, labor costs are a significant and core component of healthcare. But so are capital expenditures as well as overall procurement.

Free Research Report: What it Takes to Implement Cost Saving Measures

In fact, a recent article, “7 Reasons to Merge Revenue Cycle and Supply Chain Management,” cites research from the Health Sector Supply Chain Research Consortium at Arizona State University (HSRC-ASU) that suggests the potential impact better procurement can have. Specifically, “Supplies [alone] cover 15% of the average hospital operating budget … [and] this number can reach up to 40% of a total operating budget, according to Materials Management in Health Care,” the article stated.

Given the strategic category size of what is essential hospital-specific “MRO” focused on both operating overhead and patient outcomes, why have so many healthcare providers, ranging from small hospitals to larger integrated delivery networks (IDNs), essentially punted on many aspects of procurement operations to group purchasing organizations (GPOs) as well as technology vendors that also sell data to suppliers (which can then optimize how they charge their customers)?

The short answer is that procurement has gotten short shrift within healthcare organizations given the existing sway of the incumbent ecosystem. But the longer answer is much more complicated, and one that our sister site Healthcare Matters is tackling everyday, with lessons for those outside the healthcare ecosystem as well.

Regardless of one’s political perspective, it will take much more than “ObamaCare” to fix US healthcare costs. Starting with a new approach to procurement, perhaps one more closely modeled on the health trusts in the UK (with pooled spending not by external for-profit groups, but hospitals and IDNs themselves – or potentially a government intermediary) could be a sensible place to start, provided the many layers of special interests do not get in the way.

What do you think?

First Voice

  1. Lieke van Kerkhoven:

    Imagine the possibilities if focus would shift from ownership to access: healthcare organisations can benefit from the sharing economy as well. They can actually earn money by renting out or selling the the assets already in their possession, or save costs renting or buying what they need from other organisations. This adds a whole new dimension to procurement: from just saving costs to actually generating revenue!

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