How sourcing excellence can lower hospital costs

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Better procurement practices can help hospitals achieve rapid supply cost reductions of 20 percent or more and keep future cost escalations under control.

Around the world, existing models of health care are becoming economically unsustainable. New ways must be found to control costs— especially in hospitals, which account for almost half of all spending in most health systems. Better procurement practices are a particularly effective way to lower hospital costs rapidly. Supplies are second only to labor as a source of hospital spending, and the price of many materials has risen steeply in recent years—in many countries, at rates that are outpacing labor cost increases. Our calculations indicate that in most countries, annual growth in hospital spending is exceeding budget and revenue increases, largely because of the escalation in nonlabor costs. We have found, however, that better procurement practices can lower supply costs dramatically, especially when the sourcing effort is expanded to cover a range of nontraditional items, including capital equipment, capital construction projects (new hospital construction or major renovations), and high-preference clinical supplies (drugs, cardiac stents, and other things physicians typically hold strong opinions about).

The idea of tackling high-preference clinical items may surprise many hospital CEOs, who must daily balance the need to maintain staff satisfaction (especially among physicians) against the need to improve quality and increase efficiency. Often, these objectives are viewed as competing with each other, but this need not be the case. A sophisticated procurement approach allows hospitals to lower costs while improving quality and maintaining or even increasing staff satisfaction. And because this approach requires cross-functional teams staffed by both clinicians and procurement experts, it can open the door to greater clinical collaboration on other operational improvements.

In this article, we outline an evolutionary approach to better procurement that can be used by both individual hospitals and large hospital systems. The approach, called sourcing excellence, has three phases; procurement groups move from one phase to the next as they develop their skills and capabilities. The groups do not need to reach the final phase of evolution to achieve strong results—even those in the first phase are often able to lower supply costs by about 10 percent. But those groups that do reach the third phase frequently produce supply cost reductions in excess of 20 percent and “bend the trend” by lowering future cost escalations.

This originally appeared in Health International.

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