To function seamlessly and provide a high level of patient care, healthcare organizations must carefully monitor spending. They also need to implement quality healthcare supply chain strategies that are flexible enough to endure unexpected challenges—a given in today’s healthcare environment. But many provider and payer organizations rely on outdated tools, unreliable vendor compliance protocols, and manual tracking processes.
In honor of National Health Care Supply Chain Week (October 3-9), we examine the importance of healthcare spending and supply chain strategies, and celebrate the supply chain professionals who support every area of their healthcare organization every day.
What is a healthcare supply chain?
In its broadest terms, a healthcare supply chain is a system of organizations, people, activities, data analytics, and resources working together to supply a product or service (e.g., patient care, medical products or devices, supplies, software, consulting, etc.) to a consumer—in this case a patient, a provider, or a facility or health system. Supply chain does not typically refer to labor procurement.
Unlike supply chains in the consumer goods space, healthcare industry supply chains tend to be more fragmented because hospitals and health systems have a history of using numerous and varied processes that involve managing supplies and services from multiple manufacturers, shippers, consultants, and other market providers based on local preferences, for example, an individual physician’s preferred product. However, this is rapidly changing as all healthcare organizations seek a clear path to better value and spend management for all non-labor procurement.
During the healthcare supply chain process, both physical products and information are exchanged through a complex network of stakeholders. These may include:
- Regulatory agencies
- Insurance providers
- Shipping companies
Where does the healthcare supply chain begin?
The healthcare supply chain begins with the manufacturer or service provider. Manufacturers and market suppliers set prices for products and are often capable of offering providers with volume-based discounts. Healthcare providers, distribution centers, and vendors can all purchase products from manufacturers. However, unless an organization is very large, individual providers will usually utilize a vendor or distributor, or purchase directly from the manufacturer of the good or service.
How does a healthcare supply chain work for tangible products?
On the supplier side, the functions that support a supply chain include product development, marketing, operations, distribution, finance, and customer service. Once physical goods are created by the manufacturer, they are sent to centralized distribution centers. Organizations can purchase finished products straight from the manufacturer, from the distributor, or through a vendor. Most providers rely on group purchasing organizations (GPOs) to negotiate terms and conditions on their behalf. A GPO is an entity that facilitates purchases by multiple healthcare providers in exchange for a small fee.
A small provider such as a nursing home or mid-sized hospital may not be able to place a large enough order to qualify for a discount, but a GPO aggregates the orders of multiple clients so that they can gain access to bulk discounts. For instance, a GPO may combine the order volume of ten clients that need to purchase insulin syringes so that each client can get the items at a discounted price.
Regardless of how a provider makes their purchases, the seller is responsible for arranging shipping. Distribution centers will either have their own transportation resources or will rely on a contract with a national carrier or medical distributor. The order will then be delivered to the provider.
Why is supply chain management important in healthcare?
A robust supply chain management strategy will ensure that a healthcare organization has the resources required to care for patients and remain resilient against disruptions, surges in demand for care, and other unexpected issues that might otherwise affect the normal flow of medical goods and services. Shortcomings in supply chain management can negatively impact profitability and leave a facility unable to care for patients in the event of a severe disruption.
What are prevalent challenges to healthcare supply chains?
The inherent challenges associated with healthcare supply chains include:
Hidden costs after product price: Hidden costs associated with product purchases can derail an organization’s budget and consume valuable resources earmarked for other obligations. A few examples of hidden expenses in the supply chain process, after product price, may include shipping, training costs (when implementing a new product), claims that are denied by insurers, and vendor fees.
Physician preference items: Physicians and other clinicians often express preferences for certain items or brands used when providing care, known as physician preference items (PPIs). To eliminate the added cost of PPIs, healthcare supply chain managers should standardize the vendors and equipment purchased across all facilities.
Lack of supply chain IT: Managing supply chain spending is further complicated as a result of outdated technologies and manual processes that are inefficient and negatively impact a provider’s profit margins. Use of subpar supply chain software and resources can also result in errors that affect care and costs, and fails to support strategic sourcing decisions. Optimized healthcare supply chains leverage innovative information technology solutions that streamline the management process.
Can providers overcome common challenges in healthcare supply chain management?
Fortunately, healthcare provider organizations can overcome the prevalent challenges within healthcare supply chain management, and the most effective and cost efficient way to do so is to upgrade IT resources. Modern spend management software gives supply chain managers enhanced control over the purchasing process. These platforms provide valuable insights by analyzing transactions and monitoring current inventory.
In addition to upgrading technological resources, healthcare providers should standardize vendors and equipment. They can consult with stakeholders, physicians, and other clinical staff so that they can purchase PPIs more effectively. Software can also mitigate the risk of disruptions to supply chains while simultaneously addressing unique internal challenges.
What are common healthcare supply chain strategies?
The most common healthcare supply chain strategy is known as the on-demand or “just-in-time” approach. When stock of a certain supply drops below predetermined levels, the provider will order a new shipment that should arrive just before they exhaust current resources.
Another tactic is the use of GPOs, a healthcare supply chain strategy that merges the contractual obligations of multiple smaller providers so that they can receive discounts from manufacturers.
Some providers and hospitals rely on smaller, more frequent shipments. Instead of waiting until they are nearly out of supplies, they place orders on a regular basis. The frequency of their order is determined by average supply usage rates. If they have an excess of a certain supply, such as surgical gloves, they may cancel a scheduled shipment to avoid storage issues.
How does healthcare spending affect supply chain strategies?
Healthcare organizations must find the ideal balance between product quality, per-unit price, safety, and service to maximize supply chain spending. If a provider has stringent spending regulations or a budget with little leeway, then they may implement an on-demand supply chain strategy. This means that they will only reorder supplies when their on-site stock dwindles below a certain percentage.
While this approach will work most of the time, maintaining a small inventory means that disruptions to the healthcare supply chain can be detrimental to the provider, as was evidenced by shortages of personal protective equipment and ventilators in the early months of COVID-19. Ideally, providers should have contingencies in place to mitigate the effects of supply chain disruptions. These strategies are discussed in greater detail below.
Are disruptions costly for the healthcare supply chain?
Disruptions can be incredibly costly for the healthcare supply chain. While healthcare supply chains have recently encountered disruptions due to the digitization of many businesses, the events of 2020-2021 have placed further strain on many organizations.
When faced with disruptions to the normal flow of critical supplies, chains are forced to become reactive to recalls and backorders. This increases the costs associated with providing healthcare to patients.
To overcome disruptions, healthcare supply chains must commit to long-term solutions that allow providers to maintain profit margins while simultaneously facilitating continuity of normal operations.
Healthcare supply chain strategies to consider
Due to the nature of the medical industry, healthcare supply chain disruptions are inevitable. Fortunately, organizations can prepare for disruptions through a variety of strategies, including the following:
Identify alternate suppliers: Manufacturers are the first link in the healthcare supply chain. To better prepare for potential disruptions, healthcare organizations should identify alternate suppliers before their services are needed. While they will still rely on vendors for most efforts, hospitals and other providers must have fail-safes in place.
Simulate disruptions via preparedness drills: Traditional disaster drills test healthcare providers on their preparedness in dealing with events such as hurricanes, blizzards, and mass casualty incidents. However, few facilities include their healthcare supply chains in these drills. By implementing such strategies, healthcare providers will be able to assess their ability to withstand a substantial supply chain disruption.
Implement spend management software: The average healthcare organization’s payment practices are extremely rigid, which makes it difficult to pivot when a disruption occurs. Due to this innate inflexibility, it can take healthcare supply chain leaders days or even weeks to adjust when medical resources become scarce. To overcome this all-too-common barrier to dealing with supply chain issues, healthcare providers should implement modern spend management technologies. Spend management software offers many benefits to healthcare providers, including:
- Generating savings and value across the spend ecosystem using evidence-based decision making that delivers holistic value.
- Improving vendor and service contract management using automation to manage the value analysis process and to negotiate for favorable terms.
- Incorporating clinical evidence into decision making to make defensible decisions that have a bigger impact on margins by understanding a product or technology’s effects on utilization, reimbursement, and care delivery.
Quality spend management software will provide organizations with unbiased insights into the allocation of financial resources for non-labor procurement and enable providers to align clinical priorities with the realities of capital planning. In short, spend management software provides supply chain leaders the flexibility necessary to pivot during disruptions.
Healthcare supply chain FAQs
Q: What is a GPO?
A group purchasing organization (GPO) is a valuable resource to healthcare providers. These entities assist nursing homes, surgical centers, clinics, home health agencies, and hospitals to efficiently acquire medical supplies. A GPO aggregates purchasing volume for multiple providers, which allows it to negotiate favorably with manufacturers and distributors to cut costs.
How is “best value” determined?
In the healthcare supply chain industry, best value is determined by assessing a variety of factors. Instead of simply analyzing per-unit price, best value also accounts for patient safety, quality, and service. An optimized supply chain will balance these four factors in a manner that aligns with a provider’s needs.
What are external risks to healthcare supply chains?
External risks to healthcare supply chains include natural disasters, geopolitical crises, epidemics or pandemics, and material shortages—all of which are difficult to predict and mitigate.
How can organizations protect supply chains?
Organizations can mitigate internal threats to healthcare supply chains by implementing quality IT solutions and accounting for hidden costs or incorporating a margin of error in financial calculations. Protecting the supply chain from external threats requires extensive planning, preparedness drilling, and a list of alternative suppliers. Despite these efforts, organizations may still encounter some healthcare supply chain disruptions when faced with severe or prolonged external incidents.