Is it Y2K All Over Again?

By John Freund

It could be a tough road for hospitals as we look toward 2016.

In 2013, the Center of Medicare and Medicaid Services reported 27 percent of hospitals were at negative margins and they expect that number will grow to 30 percent by 2019. They predict by 2040, over half the hospitals in the U.S. will be losing money. As the Affordable Care Act increases pressure on hospitals, and reimbursements decline even further, the need grows for more significant cost reductions.

So what are the barriers to change? I believe progress is difficult because hospitals remain burdened by legacy technology and poor business processes. ERP system vendors haven’t made the investments in their systems needed to meet today’s emerging requirements, and when they do, upgrades are expensive and labor-intensive. There are some big challenges with these systems, including the lack of actionable, accurate data, the lack of continual transactional data, and the lack of adoption due to difficulty of use.

For healthcare organizations, the demand to upgrade supply chain software will be similar to the demand to upgrade ERP systems created by Y2K, as the teeth of the Affordable Care Act sink in. It’s predicted that changes in Medicare reimbursement will drive hospitals to cut as much as 20 percent of their budgets over the next two years1. With labor and supply chain as the first and second largest expense for hospitals, respectively, it will be exceptionally difficult to achieve these budget cuts without impacting patient-facing services.

Historically, a major challenge for healthcare supply chain leaders was not being ‘at the table’ for technology decisions. ERP systems have been selected for the financial and human resource functionality, and supply chain has been left to use the supply chain modules that came with these systems, whether or not they met the needs of the organization. Yet with impending budget cuts, supply chain will be asked to bear much of the burden of cost-reductions. It begs the question – how will supply chain leaders make significant cost reductions with current tools and processes?

I predict that in 2016, supply chain leaders will take action to overcome the limitations of their ERP systems and seek technology solutions that drive rapid return on investment. There are immediate savings available through improved supply management – by reducing on-hand inventory, reducing labor costs of managing inventory, and reducing high costs of off-contract spending. Related business processes can be optimized; implementing true inventory management can reduce the problems hospitals experience with current replenishment methods, even eliminate overstocking, stock-outs, waste, and associated costs.

I see hospital supply chain leaders turning to cloud-based mobile technology, which can provide huge benefits including affordability, scalability, security and continually updated functionality. Hardware investments, multi-month or multi-year implementations and enormous consulting fees are eliminated with cloud-based systems. Today’s smarter solutions minimize impact on hospital IT teams, and deliver new functionality through standardized user interfaces that help ensure adoption of new business processes for consistent use – a building block of accurate data needed for better planning.

This is the year to make change that delivers substantial savings – by challenging preconceived ideas about systems, processes and methodologies. To delay means losing opportunities to improve business processes and capture savings sooner.