A Guest Blog Post by Joe Walsh, VP of Supply Chain and Chief Purchasing Officer, Intermountain Healthcare
A consistent theme throughout Intalere’s blog posts and really in every communication they have with employees, members and suppliers, is the absolute vital role that supply chain plays in building a sustainable financial model for healthcare going forward. This week, I thought it would be beneficial to walk through a simple table to illustrate the point.
Let’s take a look at a healthcare provider with theoretical revenue of $500 million and a cost structure of approximately 95%, providing a $25 million profit, or 5% margin. This represents a somewhat typical structure for healthcare providers today.
The organization’s board decides that they would like to increase profitability by $25 million. We will review two possible initiatives by which they could possibly accomplish this goal. The second initiative would focus on cost management, shown in the middle column. Focusing on reducing costs and/or improving quality within the organization by 5%, and moving towards a 90-10 cost to margin structure, they could realize the additional $25 million in profit gain. Alternatively, the company could focus on growing its revenues as illustrated in the scenario highlighted in the third column. Based on the current cost structure (95% cost to 5% margin), the organization would have to double revenue, to $1 billion, in order to realize the $50 million profit. That’s an increase in revenue of 100%, an almost herculean task that would likely involve significant investment, addition of service lines, possible acquisitions, etc.
While reducing costs is no easy task, it is far easier than doubling existing revenues. As mentioned in Intalere’s previous post on transforming the perception on the importance of the supply chain, the low hanging fruit, or value, of supply chain is still easier to obtain than laying nurses off at bedsides or cutting clinical care or adding service lines. We have a great opportunity to help the industry navigate the future with success.
Contact Intalere to learn more about how we can help your organization thrive with its supply chain.