The amount of money that hospitals waste on avoidable supply chain spending is staggering.

Supply chains account for an estimated 25% of the cost of pharmaceuticals, and 40% of medical device budgets. And the money isn’t well spent: nearly a quarter of that amount is considered waste, to the tune of around $25.4 billion a year. The average hospital overspends on supply chain costs by around $12.1 million per year.

Much of that waste is the result of hidden or unanticipated costs that escape the notice of inexperienced or overworked financial managers, according to Armond Green, director of new business development with Triose. Determined to have the right stuff on hand when and where it’s needed, hospital staffers make purchases outside of approved supplier lists, or stock up on items that might be part of existing inventory. “Rogue” spend is endemic.

John McDonough, district manager of field operations with Triose, recalls his experience as supply chain manager of a health system in Rhode Island. Resources were stretched thin, he says, and there weren’t enough experts on staff to address easy opportunities for process improvement. Often departments within the hospital would be acquiring the same supplies from four different vendors.

In an environment where patient health is paramount, spending concerns tend to take a back seat. “The hospital supply chain’s one job is to deliver supplies that can be used to ensure the best patient care,” McDonough says. “That’s the number-one priority.

“With limited resources focusing on making sure that product is on the shelf for clinicians to use,” he adds, “everything else after that kind of falls by the wayside.”

The emergence of the group purchasing organization was supposed to eliminate those inefficiencies, by centralizing hospital purchases and realizing the benefits of bulk buying. That has happened to some extent, Green says. GPOs are estimated to have saved healthcare systems $55 billion a year.

“Now, supply chains have better visibility into suppliers to provide lower-cost options,” Green says. “But then you run into physician preferences for the key suppliers they want to use.”

What’s lacking in many instances is a way for hospital departments to understand the cost of their personal preferences when they deviate from approved supplier lists, and their impact on the larger supply chain. “It’s one of the missing gaps,” says Green.

The solution lies partly in a business process revamp, in particular creation of a value analysis program for sourcing. Some necessary steps, such as defining the need, analyzing relevant data and seeking third-party evaluation, might seem obvious to any purchasing organization. The important thing, says McDonough, is to put together a team consisting of experts from multiple departments, including physicians, supply chain managers and other corporate services. Together, they compile a list of product categories to focus on, then make group decisions that will be followed by all purchasers.

By failing to engage in value analysis, healthcare systems “are missing a key opportunity to bring together physicians with supply chain to create additional savings opportunities,” Green says.

Sometimes a “solution” to procurement inefficiencies ends up making them worse. That has been the case with certain just-in-time inventory strategies, where on-hand stock is kept to a minimum and buyers rely on access to critical items when they’re actually needed. Or inventories might be held further upstream, by a large distributor. In either case, healthcare staff might come to mistrust the promise of rapid fulfillment, and begin stockpiling items in storerooms throughout the hospital. Green says hoarding became a particular problem following the COVID-19 pandemic, when so many vital items, such as masks and gloves, were in short supply. 

Some larger health systems responded to the crisis by creating centralized service centers with their own warehouses, to acquire better control over inventories. But that strategy also led to some overbuying, especially when UPS workers were threatening to strike. 

Automation is key to scrapping the manual processes that slow down and obfuscate purchasing. Some vendors still only accept faxed confirmation of receipt, McDonough says, while the majority continue to receive orders via email or electronic data interchange. “Even email seems antiquated now,” he says.

But technology alone won’t solve the problem — and that’s where steps like a value analysis program come into the picture. “You can’t add automation to an already poor process,” Green says.

Five years ago, Green found U.S. healthcare supply chains to be lagging other industries in technology and process improvement by 15 to 20 years. Now, he says, the gap has narrowed to about 10 years, and is further shrinking with the application of artificial intelligence. 

When it comes to realizing the full value of AI in healthcare, “it’s early days,” he says, “but three to five years from now, it will be awesome to see.”