How Consolidation Impacts the Healthcare Supply Chain

May 16, 2023 by Medigroup

According to a 2021 article in the Harvard Business Review, the pandemic has fueled consolidations, mergers, and acquisitions all over the healthcare industry. Recent healthcare reforms and public policies have created big changes in how many of us do business.

Perhaps the most notable change has been the rapid consolidation in the healthcare supply chain. New cost-cutting pressures are driving smaller practices to seek out ways to stay in the game. Many vendors and suppliers have merged or been acquired by larger players.

We’ve seen the consolidation of some industry-leading distributors and healthcare GPO (group purchasing organizations). For example, Medical Action is now part of Owens & Minor. VHA and UHC merged to form VHA-UHC Alliance, which then bought MedAssets. Big fish are now consolidating to become even bigger fish. These consolidations are supposed to increase size, buying power, and clout in their respective areas. However, the true impact of these changes is yet to be determined.

Studies so far tend to show that consolidation increases prices and fails to improve the quality of care. For example, hospital acquisitions of physicians’ practices in California have been linked to higher prices for primary care and specialist services and increases in insurance premiums.

Pushing Cost Out of The Healthcare Supply Chain

The goal continues to be eliminating costs from the supply chain. The question is how your business will stay relevant as you remain proactive and look for ways to capitalize on industry consolidations and changes.

In 2021, there were 314 healthcare mergers and acquisitions. All this activity brought the total number of health systems down to just 1,093—compared to the 8,310 active hospitals in the United States.

Consolidations on this scale create huge health systems with significant market share and buying power. They can leverage their influence to negotiate lower healthcare supply costs on behalf of their members. Though consolidation and price negotiation should result in lower supply chain spending, recent reports show hospital supply costs have increased.

Supply chain costs on average make up about 30% of total hospital expenses and average total supply costs of $30 million per hospital. In May 2020, the American Hospital Association (AHA) estimated that U.S. hospitals and health systems spent over $2.4 billion in combined additional supply costs during the first four months of the Covid pandemic. These were associated with purchasing personal protective equipment (PPE) and other supplies to help fight COVID-19. AHA also reported that supply expenses increased by 15.9% between 2019 and December 2021.

The COVID-19 pandemic certainly warranted this temporary increase in supply chain spending. But a long-term trend of rising supply chain costs can damage hospital and health system finances and stability.

How Can U.S. Healthcare Systems Control Supply Chain Spending?

Unlike labor costs and other operating expenses, health providers can minimize supply costs without sacrificing efficiency or quality of patient care. Since supply costs are more discretionary than other expenses, they are much easier to impact within the health system budget.

There’s more to reducing supply costs than merely securing the lowest prices. The best way healthcare facilities can control supply chain spending is by addressing their spending patterns. They can do this through physician awareness, financial management technology, and partnering with integrated delivery networks (IDNs) and group purchasing organizations (healthcare GPOs).

Two Ways to Directly Impact Your Supply Chain Spending

1. Physician Preference Items

PPIs are medical supplies that healthcare providers use in treatments and procedures. They include medical devices, implants, pharmaceuticals, and non-clinical items like disinfectants and disposable examination gloves.

Health providers can lower their supply chain costs by reducing PPI spending. PPI costs are much easier to impact in costly specialties like cardiology, orthopedics, and surgical subspecialties that rely heavily on implants and prosthetics. Medical specialties like family medicine have more standardized costs and typically report much lower annual PPI spending.

PPIs ensure that healthcare providers can use their preferred supplies if these items are most suitable for a specific patient or medical procedure. However, these preferred items can be more expensive than alternatives with similar clinical outcomes. Thus, PPI spending can lead to unnecessary increases in supply costs. PPIs often account for 40% to 60% of total supply costs.

Hospitals and health systems can reduce their overall supply chain spending by finding comparable, lower-cost PPIs.

2. Supply Chain Management in Healthcare Technologies

Another way to control supply chain spending is by using electronic supply chain management applications. According to a 2019 survey, about 97% of healthcare executives and supply chain leaders agreed that supply chain analytics could positively impact costs.

Despite overwhelming support, 64% of survey respondents reported that they do not use a dedicated supply chain management system. Of those survey respondents who reported using this technology, about 75% said they were primarily using their supply chain management systems to track inventory and consolidate suppliers.

However, only 42% of survey respondents reported that they could use their supply chain management system for more advanced functions like tracking costs per surgeon or anticipating expiration dates—which could eliminate or significantly reduce excess spending for PPIs and other medical supplies.

Even though consolidation has not produced the anticipated or hoped-for supply chain cost savings, there are a couple of steps healthcare providers can take to ease their supply costs now. They can take a closer look at their PPIs and they can optimize their supply chain management in healthcare technologies to gain maximum cost savings benefits.

If you are interested in learning more about consolidations, supply chains, and saving money for your healthcare organization or practice, contact MediGroup today.