Supply Chain Council of European Union |

In the hospital supply chain, too many choices can be costly

Not long ago, I did a small experiment at a hospital in Texas: I put out six different surgical trays representing the preferred set of instruments for six different surgeons, all of them performing the same laparoscopic procedure.

The trays were all a little different, as was the cost of their contents, which ranged from $1,800 up to $3,400. Yet the outcome of each operation was the same. Once the surgeons saw the instruments they and their colleagues used, they agreed that the least-expensive set was as good as any other.

The company I work for, Navigant, recently published its annual analysis of supply chain costs in more than 2,000 U.S. hospitals. As in past years, it showed that hospitals spent far more than they needed to on surgical supplies, implantable devices, pharmaceuticals, the maintenance needed to keep up buildings, and nearly everything else. So much more, in fact, that the average hospital spent $12.1 million more than it needed to, an increase of 22.6% from just two years ago.


Of note, top performers in hospital supply chain efficiency had slightly better scores across multiple Medicare quality programs, suggesting that lower spending on supplies need not harm quality care.

The supply chain has long been a prime cost-reduction target for hospital and health system leaders. It represents close to one-third of the average hospital’s overall operating expense, and is projected to surpass labor as its greatest expense by 2020. One recent study found that the second-largest cause of waste in health care spending comes from the opaque pricing of medical services, drugs, and medical devices, to the tune of some $240 billion per year. The focus on reducing these costs has only intensified as provider operating margins continue to dwindle.

Administrators understand that a solid portion of these increases are bound up in the rise of prescription drug costs. An analysis suggests that the average total hospital spend on prescription medicines per admission rose 18% in just three years.

But as my experiment with surgical trays shows, there are other cost overruns beyond pharmaceuticals to be tackled. From my previous life as a practicing physician for 18 years and a hospital CEO, I intimately understand why these stubborn budgeting issues don’t just persist, but grow larger every year.

The problems begin with a word doctors don’t like to talk about: standardization. That means reducing their choices of supplies while maintaining quality of care.

Executives tend to feel more comfortable when they are discussing price. It is unemotional, a data point, and does not interfere with the clinical decision-making of physicians, who view hospital executives as overly focused on cost reduction. The focus for practicing clinicians is on their patients’ health, as it should be. But that focus lets them avoid talking to executives about cost, which physicians can see as an impediment to their main goal.

There are, as always, exceptions to what doctors and executives are most comfortable talking about and why. Not all doctors choose instruments or medications based solely on what’s best for their patients. Some are influenced by other things, like the orthopedic surgeon who told me that the industry representative who sold him all of his orthopedic implants had been the best man at his wedding.

Many clinicians, perhaps most of them, do what they do and use what they use because they don’t have the data needed to embrace change. They’re flying blind, in part because sales reps are essential for helping them perfect some newer surgical procedures or learning about new medications, and in part because much of the data they receive is from the manufacturers of the supplies they have been using.

Like the Texas surgeons who saw the cost and setup of their colleagues’ trays, they want to do the right thing for their patients while also addressing the rising cost curve. Yet to do something about it, doctors need to be told how much the supplies they use actually cost, because that’s a giant blind spot for them. They may also require additional training on the use of different implants, devices, and medications.

Doctors are as frustrated as other stakeholders by the fact that there are massive cost differences for the same procedure, depending on where it’s done and by whom. You don’t even have to practice in separate geographic areas to see those differences — the same knee replacement surgery can cost an extra $40,000 depending on where you are in a certain city, let alone an extra $100,000 depending on where in the country you are having the procedure done.

Three other trends are intensifying frustration over the rise in cost overruns for medical supplies. First is the decline in providers’ margins and the downward effects that’s had on budgets. Second is the rise in high-deductible insurance plans, which trickles down to patients and makes them more cost-sensitive. Third is the emergence of comparison shopping tools like Castlight, which help patients accurately gauge where they’ll get a test or procedure at the lowest possible cost. Such comparison shopping means that doctors are now more accountable for the cost of the supplies they use, which is something they hadn’t had to consider before.

These factors make it all the more imperative that each hospital find within it at least one person to champion the cause of standardization. This message would preferably come from a physician leader — a chief medical officer, the chair of the department of surgery, or the head of some other influential department or program: anyone with the sort of reputation and hands-on experience who’ll be viewed favorably by people who might hear conversations about cost as potential threats to quality of care.

The sort of standardization embraced by progressive, value-focused hospitals is a boon to both quality of care and one other factor clinicians keep a close eye on: productivity. Using a standardized set of instruments, implants, or devices, or at least reducing the vast variety that are used, not only decreases costs but ensures that clinicians and their support staff can focus on eliminating care variation, decreasing errors and complications, and improving the quality of care they deliver.

Clinicians must come to this conclusion on their own. The conversation must start at a place no doctor can walk away from — quality of care — and must be broached by someone who has been in their shoes.

Decreasing variation and increasing consistency can save money. But just starting conversations about cost and quality can be valuable.

Navigant’s analysis shows that the real way to attack the ever-rising cost curve, and the continually rising supply chain expenses, comes in taking a hard look at utilization — which services, products, and procedures aren’t actually necessary and which are least efficient.

Hospital executives have long focused on reducing the price per unit of supplies, with only moderate success. Standardization of suppliers and products, which is starting to occur at health systems with progressive, clinically integrated supply chains, is another approach. The best way to bend the cost curve downwards, though, involves utilization.

But that conversation can’t happen until more health systems speak frankly with clinicians about what things cost and what that means for patient care. That kind of integration effort takes time.

To know where to start, first find something simple. Like a tray.

Chuck Peck, M.D., is a managing director at Navigant, a Guidehouse company.

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