When health systems merge, one of the goals is to gain economies of scale, lowering costs through the bargaining power that comes from being a bigger player. Yet despite a consolidation wave in hospitals, it appears that they are paying more for supplies than they did a year ago.
In the past three years, two-thirds of the country’s leading hospital systems saw declining operating income, resulting in nearly $7 billion in lost earnings. It’s a dire situation that looks even worse when you consider the relative strength of the overall economy. Supply chain costs are second only to labor and represent 30 percent of hospitals’ expenses. That cost could rise to the top of the list by 2020.
Common wisdom in the health care industry usually offers one solution to this kind of problem: Get bigger. Scale up to bring down costs. The larger you are, the greater your negotiating power when it comes to the supply chain, the companies that provide hospitals with everything from tongue depressors to CT scanners. The supply chain makes up a large chunk of most hospitals’ bottom lines.
The only problem with that supposed wisdom is that the data keep proving it wrong.
For example, despite a record 115 hospital merger and acquisition transactions last year, my company’s most recent survey of 2,300 hospitals found that they’re spending an average of 18 percent more in supply chain operations, processes, and product use than necessary. That’s a 10 percent rise from last year, representing up to $25 billion in cost savings opportunities, or about $11 million per hospital, a figure roughly equal to the salaries of 160 registered nurses or the cost of 5,900 defibrillators.
A recent working study of 1,200 hospitals by Wharton School researchers put an exact figure on the disappointing cost savings that result from consolidation. They found that the average estimated supply-chain savings for target hospitals in a merger-of-equals to be about $176,000, a fraction of what was likely expected. Not only that, supply-chain costs to acquiring hospitals actually increased in certain areas.