This top ranked academic medical center strives to set the standard of excellence in healthcare; from their exceptional patient care to their internal operations. Like other healthcare providers throughout the nation, declines in revenues and reimbursements are placing significant pressure on their financial margins. They are an $8 billion enterprise that includes a network of five hospitals in Baltimore and one in Florida with multiple affiliations in the U.S.
To help improve its cost structure, the hospital system’s leaders embarked on a bold strategy to restructure its supply chain delivery model. Instead of buying supplies primarily through group purchasing organizations and distributors, our client would create and manage its own consolidated service center (CSC) to buy directly from manufacturers.
This enormous strategic shift in supply chain management would have an impact on the purchase of supplies ranging from cotton swabs to medical devices and pharmaceuticals. Ultimately, this game-changing strategy would help the hospital system bend its cost curve and in turn strengthen its long commitment to delivering excellent patient care.
The new consolidated supply center will give the hospital system the ability to more directly control the majority of its medical, surgical, and pharmaceutical supply chain. Planned for opening in 2018, the new center will distribute supplies to all five of the system’s area hospitals and provide at least eight additional services, such as: the production of non-sterile kits for procedures, pharmacy shared services, and contract logistics. The delivery model will also:
Healthcare supply chains are intended to support clinical services. The traditional model—which relies on group purchasing organizations and distributors that can lack incentives to streamline the process—adds complexity and cost that ultimately are borne by the healthcare providers.
Our client decided to transform the model. The hospital system’s leaders asked us to evaluate and propose options for implementing a new supply chain strategy, including the creation of a new consolidated service center.
Most costs for healthcare providers fall into two large categories: about 50 percent of costs are labor-related and about 40 percent are related to products and services. Organizations for years have pushed on med-surgical costs through work with the group purchasing organization (GPO) or through custom contracting mechanisms. These mechanisms have delivered significant savings or at a minimum have help curb product driven medical inflation.
A CSC allows providers to seek opportunities to reduce costs in addition to addressing the costs of supplies through GPO contracting and standard value analysis. The traditional distribution model contains significant complexity of product and information flows, resulting in layered costs, margins, and fees between manufacturers, GPO administration, distribution, and transportation that are ultimately paid for by the provider.
The CSC offers levers to not only reduce costs, but also to change the paradigm from a narrow span of control to a platform for strategic importance that will change the organization’s performance culture and enable sustainable value chain success. The value drivers and levers for this client include:
A comprehensive assessment that evaluates the scale, market density, geography, and risk will provide necessary insight into whether a consolidated service center makes business sense for an organization. A CSC might not be the right solution for every healthcare provider, but for an organization with this scale and geographic location, it becomes a game-changer.
Get top-to-bottom perspectives when undertaking a major transformation. Understanding the challenges faced from the hospital leaders through to the individual contributors stocking supply closets will help develop a solution that incorporates a breadth of insights and in turn builds support for the transformation come time for implementation.