New 'On-Demand' Offering To Help Hospitals Identify Supply Savings

Medical supplies make up 25% to 30% of hospital expenses. The Neoforma system spots overcharges and inefficient purchasing.
It's not unusual for prices to rise 15% annually on some medical supplies used at hospitals, especially those that are so-called "physician-preferred" products, such as a specific brand or type of stent or pacemaker doctors like to use on their patients.

It's also not uncommon for a hospital department to purchase supplies, such as bandages, at a higher price from a distributor because the department wasn't aware the same gloves could've been purchased for a lower price from another vendor under contract with the hospital.

Considering that supplies make up about 25% to 30% of many hospitals' operating budgets--the biggest operating expense after staff costs--these price hikes, product preferences, purchasing mistakes, and other assorted slip-ups cost big bucks each year in health care. Ultimately, supply expenses get passed on to consumers, who have seen health-care costs rise annually by double-digit rates in recent years.

Supply-chain-management software vendor Neoforma Inc. this week said it's piloting a new On-Demand Spend Intelligence product and service that can help hospitals get better visibility into what they buy, how much they pay, and where they can improve supply spending. The fully hosted On-Demand Spend Intelligence system is being piloted by several hospitals, but will be generally available later this year.

As part of the offering, Neoforma collects historical supply-purchase data from a hospital (or group of related hospitals) and their many departments, typically from the last 18 to 24 months. That data often comes from multiple, disparate systems within the hospital or hospital group, since many health-care companies are the result of acquisitions and mergers, says Dan Eckert, Neoforma's president and chief operating officer.

Neoforma runs the data through "cleansing systems" and analyzes for the customer how these purchases compare, for instance, to the prices and volume discounts the hospital should receive based on its various contracts with its suppliers. The analysis, accessible to authorized hospital staff though a Web browser, can also highlight where purchases of noncontracted items could benefit from volume or other cost-savings deals or changes.

The on-demand analysis reports--which can be run weekly, monthly, quarterly, or at a hospital's discretion--can provide hospital officials with better visibility into purchasing information to negotiate more strategically with suppliers, as well as educate staff and doctors on possible cost-saving changes in supplies.

Finding cost-saving opportunities where purchasing contracts are underutilized or where there are price discrepancies is "just the low-hanging fruit" and can translate into big savings for many hospitals, says Adam Lee, Neoforma's director of products. Hospitals typically order 10,000 to 30,000 products from hundreds of suppliers annually, he says.

Memorial Health System, which operates several hospitals in the Springfield, Ill., region, has been piloting Neoforma's On-Demand Spend Intelligence offering for about 30 days, says Kevin Voigt, Memorial's systems director of materials management. On a weekly basis, a Memorial supplies analyst goes onto the On-Demand Spend Intelligence Web site and generates reports about products purchased the week before. The report compares prices paid to prices indicated in vendor contracts and highlights discrepancies, he says. "Already, we've gone back to vendors and pointed out overcharges," resulting in refunds and price adjustments, he says.

Voigt estimates that the Neoforma price-verification reports alone will save Memorial between $20,000 and $80,000 annually, based on the overcharges found so far.

Neoforma's Eckert says the On-Demand Spend Intelligence offering provides "a rapid ROI" because it's less expensive than an overhaul or new deployment of hospital materials-management systems software, costing hundreds of thousands to millions of dollars. By comparison, he says Neoforma's On-Demand Spend Intelligence costs "in the thousands," depending on the size of a hospital and level of customization needed. He says the offering can be deployed in less than 90 days.