By Connor Smith
The U.S healthcare system has undergone unprecedented levels of consolidation over the past decade. The largest health system (HCA Healthcare) now has 214 member hospitals and the 25 largest systems collectively manage almost 20% of all hospitals in the U.S. A recent study by Definitive Healthcare found that, in 2019 alone, there were 294 hospital mergers and acquisitions, a slight decrease from 330 the year prior. It goes without saying that such high levels of consolidation have a massive impact on medical supply chains. However, whether these changes result in a positive or negative financial impact remains a heatedly debated topic in the healthcare community. Some argue that consolidation allows providers to leverage economies of scale and reduce costs. Yet, some evidence suggests this may not be the case and that consolidation can actually increase cost of care by up to 40%. In this article, I aim to briefly explore the driving forces behind hospital consolidation, how it is affecting medical supply chains, and the role technology plays in managing these increasingly complex supply chains.
A Brief History of the Driving Forces Behind Hospital Consolidation
The passing of the Affordable Care Act (ACA) in 2010 was a momentous juncture in U.S history, and arguably the most sweeping change to the nation’s healthcare system since the institution of Medicare & Medicaid. While the goal of the plan may have been to make healthcare more affordable and accessible to U.S citizens, the bill incentivized large scale consolidation across the entire industry that permeates to this day. Providers became incentivized to shift care delivery to an outpatient setting and work towards a value-based care model. As a result, health systems began rapidly acquiring and investing in facilities like ambulatory surgery centers, clinics, and physicians groups. This vertical integration caused health systems to evolve from mere collections of hospitals into fully fledged Integrated Delivery Networks (IDNs) that provide and coordinate patient care across the continuum. Similarly, health systems began consolidating horizontally by merging with other IDNs to improve access to capital, increase market share, and improve efficiencies. Constant external pressures to reduce costs and lower the price of treatment have exacerbated this trend and caused consolidation to persist at an accelerated pace, since integrated provider networks can more easily share physicians across facilities to reduce overall headcount and negotiate bulk supplies discounts.
Impact of Consolidation on Medical Supply Chains
Theoretically, these new, ‘mega-systems’ should be able to use these economies of scale to procure supplies at a lower cost and coordinate care more efficiently, thereby reducing costs. Traditionally hospitals have relied on Group Purchasing Organizations (GPOs) to leverage the aggregated buying power of multiple facilities and negotiate lower costs for medical supplies from manufacturers, wholesalers, and other vendors. As IDNs acquire more hospitals and grow in size, they can often negotiate near equal prices with manufacturers without these middlemen and realize greater cost savings. However, savings from such mergers are, unfortunately, often negligible, and they oftentimes actually cause supply chain costs to increase.
A study of 1200 hospitals done by researchers at the Wharton School found that the average supply chain savings for a target hospital in a merger of equal sized systems was only about $176,000. Moreover, the acquirers are often left spending more on supply chain due to complexities that arise from an acquisition like managing physician preference items. The researchers found that, while an acquirer saved an average of 6.4% on inexpensive commodities in the supply chain, these savings were more than offset by a 1.1% increase in costs relating to physician preference items. As more and more hospitals are integrated into an IDN, it becomes increasingly difficult to standardize purchasing decisions across a growing number of physicians unless the system has a robust digital infrastructure and inventory tracking system. Unfortunately, 64% of providers lack dedicated supply chain management systems and 80% still rely on manual processes in some capacity to manage supplies. Consequently, consolidation oftentimes leads to less efficient supply chains that procure similar products from a myriad of suppliers, lack transparency as to where products are located in a system, and have excess supply stocks that are often wasted or expire.
How Technology Can Break the Cycle
Prior to the pandemic, consolidation was already among the top trends to watch in healthcare for 2020 and experts are speculating that the financial effects of COVID-19 are likely to accelerate this phenomena in the post-pandemic era. Pending any drastic regulatory or political actions, it is therefore unlikely that hospital consolidation is going to decelerate anytime in the near future. Hence, IDNs must leverage digital technologies if they want to properly manage their increasingly complex supply chains and control costs. One of the easiest solutions they can implement are supply chain management platforms. Manual systems are inefficient and error prone, whereas digital supply chain management systems enable automation, reduce error, and can be coupled with advanced analytics to drive further efficiencies.
Using supply chain analytics, IDN’s can track usage of supplies to help reduce sources of waste like purchasing physician preference items and maintaining expired products. The majority of healthcare executives and supply chain managers agree that supply chain analytics could positively impact hospital costs and even improve hospital margins by over one percent. Considering that hospitals, on average, realize net revenues in excess of $300 Million, a one percent improvement in operating margins can equate to millions of dollars saved. Moreover, these systems can be further integrated with technologies like RFID to enable real-time medical supply tracking within an IDN and help providers load balance supplies across the hospitals in their system based on demand to realize even greater cost savings.
I hope you enjoyed this article! If you are interested in ways healthcare supply chains are evolving, check out my series on the future of medical supply chains. Part one can be found here. Additionally, if you are looking for ways your medical supply chain can be improved, feel free to contact us at Consensus Networks, where our HealthNet technology is being used to reinvent medical supply chains for the post-pandemic era. Until next time!