Hospitals Spinning Wheels on Purchasing

Edition: October 2001 - Vol 9 Number 10
Article#: 1072
Author: Repertoire

Hospitals spend a lot more time and money procuring and handling products than they think, according to a newly published study. What's more, if they coordinated their materials processes with those of their distributors, they probably could save a bunch of money.

The study, ''Hospital Procurement Processes,'' suggests that the average hospital materials management budget accounts for only 15 percent of the labor and overhead cost of a hospital's procurement process. In fact, personnel in nearly every hospital department, including higher-paid nurses and other clinicians, spend a significant amount of time buying and managing supplies.

The study was conducted by Integrated Cost Management Systems Inc., Arlington, TX, on behalf of the Health Industry Distributors Association, Alexandria, VA. It uses the principles of activity-based management to examine the costs of materials management processes regardless of where they are performed. In this case, ICMS studied four non-profit hospitals, ranging in size from 347 to 650 beds. In all four hospitals, each of the following departments were studied: materials management, accounts payable, emergency medicine, radiology and surgery. Employees in each department were interviewed and asked to estimate how much time they spent on procurement-related and non-procurement-related activities. Here are some of the study's findings.

FTE Count Is Misleading. The headcount of the materials management department in each of the four hospitals represented only a small portion of the total full time equivalents (FTEs) actually performing materials-related activities. For example, in one 347-bed hospital, a total of 77 FTEs performed procurement-process-related activities, but only 12 of them were in materials management.

The study urges hospitals to redeploy the procurement process work currently performed outside materials management to a lower-cost employee or outside resource (such as a distributor). Many of the procurement activities found in the study were being done by over-qualified, highly paid employees, including registered nurses.

Hospitals Often Duplicate Their Distributors' Activities. Over a six-month period, the amount of money the four hospitals spent on procurement process activities varied widely, ranging from $1.2 million to $2.5 million. What's more, by simplifying these processes and synchronizing activities with suppliers, hospitals could chop from 10 percent to 50 percent of these costs, according to ICMS. With that in mind, the study recommends that hospitals and distributors use activity-based management and flow-charting to synchronize their materials-related activities, ending duplication and cutting overall costs.

Radiology Is a Different Animal. In all four hospitals studied, the radiology department's procurement activities and procedures differed from those of the rest of the hospital. In other words, each hospital had a med/surg procurement process as well as a radiology procurement process. ''But having two procurement processes in each hospital creates waste in the form of duplication of activities and excess capacity in administrative clerk positions, as well as opportunity for errors,'' concluded the study's authors.

ERs Bogged Down With Supplies. The study found that only 50 percent of the emergency room staff time and budget is spent on patient care.

Paper Leads to Trouble. Each of the four hospitals studied used a traditional paper-based process to pay for med/surg supplies. In other words, each matched a purchase order, receiving document and supplier invoice to create a check. Paperwork-laden systems invite mistakes, says the study's author. In fact, the amount of money spent by each of the hospitals' accounts payable departments on what was categorized as ''Resolve Problems'' was significant, ranging from a low of $29,000 to a high of $241,000.

Hospitals' Costs Vary Widely. ICMS says that its activity-based-management study uncovered wide differences in how much money hospitals spend on similar activities, in this case, procurement. For example, one of the hospitals that was studied spent just $122 per count on inventorying supplies, while the others spent $307, $465 and $826 for the same activity. Not only do such studies allow hospitals to benchmark themselves against other facilities, they also should prompt the materials manager to ask some fundamental questions, such as, ''Do I really want to do this activity?'' and ''Should I discuss outsourcing this activity with my distributor?''

Self-Distribution Doesn't Pay. Given the fact that HIDA sponsored the study, it is perhaps not surprising that ''Hospital Procurement Processes'' shows that self-distribution by a hospital may be less cost-effective than contracting with a primary med/surg distributor. The procurement process cost for one of the four hospitals, which operated its own warehouse, was $6,492 per bed, but those for the other facilities (which relied on med/surg distributors) was $4,644, $4,850 and $4,866. Again, says the study, if hospitals and distributors can dissect and price each of their activities, they can compare notes and see which of the two is more efficient at which activity – and then let that party do the task.

The moral of the story for hospitals: Pay attention to total cost, not purchase price.

For more information on the study, contact ICMS at (817)483-6511, or visit the company website at

Hospitals studied:        

 Number of BedsNumber of Employees
Hospital 16502,641
Hospital 26102,500
Hospital 35172,250
Hospital 43471,687

Full-Time-Equivalent Headcount        

 Non-Materials-Management FTEsPerforming Procurement ActivitiesMaterials Management FTEs
Hospital 13017
Hospital 23261
Hospital 33541
Hospital 46512

Annual Procurement Process Costs        

Hospital 1$4,866 per bed
Hospital 2$6,492 per bed
Hospital 3$4,644 per bed
Hospital 4$4,850 per bed

Source for all: ''Hospital Procurement Processes: An Activity-Based Management Analysis, HIDA.