Collaboration and Technology Provide Answers for Health Care’s Supply Chain Problem

Updated on March 23, 2023

Nearly three years since the start of the pandemic, labor and supply shortages remain a big issue for health care organizations. Costs continue to rise and the production of certain goods are still facing delays. Difficulties filling job vacancies and global trade obstacles persist. At the same time, according to a recent Health Affairs study, clinical waste is a critical driver of excess health spending in the U.S., accounting for 5.4% to 15.7% of national health spending, resulting in failures in care delivery, care coordination and overtreating.

Given these concerns, health care organizations will likely continue to struggle in 2023 and need to remain cognizant of their inventories through appropriate management, timely forecasting of orders and monitoring where supplies originate to determine the best course of action moving forward. 

How we got here

According to Health Catalyst, approximately 30% of all hospital spending in the U.S. is related to supply chain overspend, which amounts to $25.4 billion for the U.S. health care industry each year. This is an exorbitant amount of money that could be used otherwise to improve quality of care and further other organizational initiatives. 

According to the Bureau of Labor Statistics, the following chart shows the consumer price index annual percentage change of medical care commodities. Since 2021 the annual percentage change has nearly tripled (2021 roughly 0, 2.9% in 2022 and 3.4% in 2023). These are huge cost increases that have severely impacted health care organization budgets and margins to the point where they need to become more strategic with their product selection and how often they order supplies. 

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Supply challenges have many causes. The pandemic has displaced many workers and jobs to the point where there are still vacancies in the supply chain process that continue to slow production and distribution. While job vacancies are one piece of the puzzle, distributors and suppliers also face difficulties in receiving supplies from other countries that are navigating macro-economic and global challenges and/or remaining COVID-19-related protocols. 

However, while challenges persist, some health care organizations are finding solutions, too.

Addressing the supply problem with efficiencies and relationships

Over the past six months, elective procedures, surgeries and patient visits have increased and supplies are required to provide quality care to consumers. Recent supply shortages have exacerbated these challenges, making it more difficult for providers to procure the items they need for high-quality care at an affordable price. By promoting efficiency in the health care supply chain, hospitals and physician practices can create substantial cost-reducing opportunities across their organization. Some hospital supply chain leaders are pursuing initiatives that will consistently yield value, including standardization of manufacturers, suppliers and purchasing consolidation through a distributor to streamline processes and maximize contract savings. 

The relationship between distributors and health care organizations has also evolved over the last two years as communication of available products and when orders will arrive has improved, which is  key to both parties’ success. With the ability to connect with trading partners through a supply chain community, the frequency of accurate and efficient e-business transactions grows throughout the industry. Suppliers, partners and customers should form relationships with one another, with each party performing a role in the supply chain, contributing to the movement of products, data or information and funds. Strong relationships between health care organizations and their distributors are vital to getting the product to the end-user, the patient, and as a result, will keep costs down. 

Technology provides answers, too

Fragmentation, complexity and disruption are three of the most common health care supply chain management challenges. As health care organizations continue to face unprecedented price increases and certain volume growth, implementing strategies to make supply chain management more efficient is key to success. 

Health care organizations cannot control every component of the supply chain, but they can improve internal efficiency by adopting technology solutions that track inventory and place timely orders to limit service disruptions.

According to the Food and Drug Administration’s device shortage list, cardiovascular circulatory support, structural and vascular devices, cardiac diagnostic and monitoring products, dialysis-related products, and a handful of others are in very short supply due to supply chain and production disruptions. As more consumers seek out more services and are unable to receive them in a timely manner due to lack of supplies, the consumer will seek services at another organization or could see conditions worsen while waiting.

According to the American Hospital Association, supply chain represents on average 20% of an organization’s operating costs due to inflation, so it’s critical that dollars are spent wisely for this significant line item. Recent Gartner research indicates many providers can reduce supply chain costs by 5% to 15% by utilizing streamlined supply chain technology solutions. Health care organizations can effectively track and monitor inventory of products by having instant access to product, pricing and order information, as well as enhanced inventory visibility and tracking, therefore reducing costs, improving customer satisfaction and better meeting compliance and regulatory requirements. In addition, as positions for certain jobs remain vacant, hospitals and health care organizations can implement enterprise resource planning solutions and other ordering devices that can help fill the void of these vacant roles.

Modern technology is also bridging the gap between supply chain and the clinical side of health care by enabling greater data sharing. Automating the pricing synchronization process acknowledges and recognizes efficiencies by all participants in the contracting process, where all parties involved can share information electronically through robotic process automation. 

Eliminating waste and redundancy across the medical supply chain is just one example. Supply chain knowledge and data can also be employed across a health system to achieve price reductions, utilization optimization and standardization that drive value to the entire health system. 

The takeaway

Supply chain disruption can be detrimental to health care organizations across the board. Greater visibility into the supply chain is key to resiliency and efficiency. Effective inventory management solutions such as ERP, RPA and cost management tools enable supply chain leaders to pinpoint where certain supplies are located and what supplies have been used for patient care. Supply chain is also a key to creating better end-to-end visibility for any product recalls and managing expirations on equipment and medication.

As some patient care remains in a hybrid environment and more private organizations enter the health care space, consumers now have more options to seek out care. Improving an organization’s supply chain will help provide optimal care and attract and retain patients, as well as create cost savings, so funds can be allocated for critical initiatives for the entire organization and the communities they serve.

haas michael
Michael Haas
Health Care Senior Analyst at RSM US LLP

Michael Haas is a technology management consulting manager in RSM US LLP’s health care industry practice. In 2022, he was selected for the firm’s Industry Eminence Program as a senior analyst covering the health care industry, working alongside the firm’s chief economist and other program participants to analyze the trends and themes affecting the nonprofit and education industry and shaping middle market businesses. Michael is based out of RSM’s New York City office.