Eight Essential Strategies for Controlling Supply Costs

Eight Essential Strategies for Controlling Supply Costs
It’s 5 p.m. Do you know what you’ve bought today?

By Derril Reeves

Thanks to the stance of Medicare and private payors who peg their reimbursement rates to Medicare’s rates, today’s ambulatory surgery centers (ASCs) face a deflationary pricing environment. Managing your expenses by improving your operations is no longer an option; it’s imperative. At ASCs, there are several areas where you might achieve cost savings, including facility costs, labor, equipment, supplies, general and administrative costs, and debt service. This article will explore effective strategies for managing your supply costs.

Every healthcare operation deals with the challenge of controlling supply costs. But surgery center administrators, who must purchase a broad array of costly supplies for physicians whose needs and preferences vary, can find it especially difficult to rein in supply costs. In addition, many surgery centers find that the volume of supplies they purchase — while certainly high — does not afford access to the deep discounts full-service hospitals or large health systems can command.

However, administrators can get a handle on their supply costs and keep them under control going forward by using a few common-sense strategies. Just as a physician needs to understand your medical history before recommending the best treatment, you need to understand your purchasing history to gain control of your supply costs.

Starting with this essential first step, here are eight strategies for managing supply costs while making sure your physicians have access to the supplies they need and prefer.

Jeff Bogle, executive vice president of corporate services with Surgis, Inc., often says, “Knowledge is power.” To make sound decisions about future purchases, you must be able to generate accurate reports of your purchasing history. These reports should allow you to determine, at a glance:

• What your center has purchased over a specific time period
• The vendor from whom you purchased each item
• What you paid for each item
• When and how often you issued purchase orders

Most surgery centers have this information, but they may not have it in a format that allows the administration to look at a complete and comprehensive history of the center’s supply purchases. If not, Bogle recommends that you work with a financial professional to set up a system that enables your center to:

• Capture the data you need quickly and easily by allowing your staff to record purchasing activities as they occur, and
• Generate useful reports on demand.

These reports enable you to negotiate discounts and to discuss purchasing needs and practices with physicians.

Does every doctor require a different brand of the same product? If so, your center may not achieve the economies of bulk purchasing.

If you know the current supply preferences of each physician, you can work toward standardization of some supplies. You can also encourage physicians to evaluate alternatives that cost less to determine if they offer the same or better quality.

Some vendor contracts provide for greater discounts or rebates if you buy in higher volumes. Again, Bogle has some good advice: “Never count on vendors to provide complete and accurate information about your supply purchases.” Tracking your purchases against your contract agreements is the only sure way to ensure that your center receives all discounts and rebates to which you are entitled. Plus, you come to the next contract negotiation armed with accurate data about your purchases.

When you buy supplies from many different vendors and issue dozens of purchase orders, you increase your cost of doing business. Vendors that offer a wide array of products typically offer a volume discount on any supplies you purchase. A good way to reduce costs for supplies you don’t purchase in large quantities is to buy them from vendors from whom you purchase other supplies in bulk.

In addition, administrators often overlook the time and costs involved in issuing purchase orders. According to Bogle, this is one of most overlooked costs he sees at surgery centers across the country. Each time you issue a purchase order, someone must determine that there’s a need to buy an item, choose a vendor, determine or negotiate the price, issue a purchase order, receive and unpack the supplies, match them against the purchase order, match the invoice and the purchase order, create a check, sign it and mail it to the vendor.

Each of these steps involves two costly assets: people and time. “At Surgis, we estimate that, depending on the size of a center, issuing a single purchase order may cost $30 to $80,” Bogle says. The bottom line: You can achieve significant operational savings when you reduce the number of purchase orders you issue each month.

Group purchasing organizations leverage the buying power of several entities to obtain pricing discounts for their members. They make money by receiving an administrative fee from vendors for bringing them business. Your center saves money only if your cost for supplies from the GPO is lower than the cost you can negotiate directly from the vendor. However, GPOs can offer significant cost advantages. If you have a comprehensive history of your supply purchases and costs, you have the information you need to determine if a GPO can lower your costs.

Lens implants are a good example of a consignment arrangement that works for vendors and surgery centers. Companies typically provide an ample supply of lenses of all types. The center pays only for those actually used to complete lens implants. Negotiating similar arrangements with manufacturers of other surgical implants is the next logical step.

Every supply manager is caught between a rock and a hard place. Running out of an essential supply is a costly mistake, but so is maintaining too high an inventory — particularly when supplies have an expiration date. The best way to keep adequate supplies on hand is to implement a monitoring system tied to physician preferences, which ensures that the right supplies are available for the cases booked each day.

Anyone who has ever owned an inkjet printer for a home computer understands this simple principle. Over the course of its lifetime, the cost of the printer is far outweighed by the cost of the ink cartridges needed to operate it. If they cost a lot and don’t last long, you may find it more cost-effective to buy a new printer that uses cheaper, longer lasting cartridges.

Before you agree to a multi-year supply contract because you are also getting a piece of equipment at a negligible cost, compare the total cost of your purchasing commitment with the cost of paying for the equipment up front and negotiating separate purchasing contracts for your supplies. We see a lot of centers with high supply costs because of these agreements.

Supply costs are a moving target. New technologies and evolving surgical techniques ensure that your list of essential supplies and your costs will change over time. A system that allows you to track all purchases over time can help you identify purchasing trends and potential savings.

Derril Reeves is executive vice president of development at Surgis, Inc., which owns and operates more than 23 ASCs nationwide, and serves on the advisory panel of today’s surgicenter.