CommonSpirit Health consolidated its group purchasing organization service provider, selecting Premier to help integrate the 137-hospital system's supply chain, the organizations announced Tuesday.
Before the not-for-profit health systems merged, Dignity Health primarily used Premier and Catholic Health Initiatives used HealthTrust. But the large institutions used various services from both companies, executives noted.
"Supply chain being the second-largest cost that healthcare organizations are involved with—employees being the first—this is obviously a big piece of the puzzle," Daniel Morissette, chief financial officer of CommonSpirit, told Modern Healthcare. The company aims to reduce its spending by renegotiating vendor contracts, bundling physician-preference items and limiting clinical variation, among other endeavors, he said.
Premier, a group purchasing and consulting organization, said it will integrate CommonSpirit's supply, pharmacy and purchased services expenses with clinical utilization data to boost finances and quality.
"Change is necessary to enable the mission via growth, especially in the context of merging organizations leveraging scale, efficiencies and strategy to drive and sustain financial and operational success," Michael Alkire, president of Premier, said in prepared remarks.
Purchased services and supply chain synergies are often a sizable part of the rationale driving mergers and acquisitions. Executives claim that their bigger footprint will lead to greater leverage in supplier negotiations, clinical standardization and other benefits.
While hospital executives have argued that scale is necessary to lower costs, economists have doubted the "efficiencies" play, pointing to research that indicates that the savings are less than expected. A recent study reinforced research concluding that mergers don't improve care quality.
Dignity and CHI use separate revenue-cycle companies—Conifer Health Solutions and UnitedHealth Group's Optum360. Currently, there aren't plans to change that arrangement, nor will CommonSpirit look to unify its disparate electronic health records, Morissette said. It uses Epic, Cerner and Meditech. This has prompted criticism from analysts.
Half of the projected $2 billion would come from eliminating redundancies, growing in key markets and renegotiating contracts. The other half would come from improving length of stay and boosting revenue-cycle management, among other goals many other systems are pursuing, Morissette explained.
Multidisciplinary teams involving clinicians, executives and others in their respective departments meet monthly to discuss their progress from a financial and quality perspective. They log process improvement ideas and how they would work to determine if they are feasible and identify any unintended consequences.
But when it comes to changing daily work flows, there is a delicate balance between eliminating inefficiencies and not overloading employees, Morissette said.
"That is one of the reasons why this is not as easy as someone sitting down with a pen and scratching new numbers. This is about every interaction we have," he said. "We try to pause long enough to know what we are doing and train people so they know what is going on."
The health system has been losing money since the merger closed about a year ago. CommonSpirit recorded a year-over-year operating loss of $227 million on $7.2 billion in operating revenue in the first quarter of fiscal 2020, which ended Sept. 30, 2019, according to Modern Healthcare's financial database.
On a pro-forma basis, CommonSpirit's operating loss was $582 million on $28.9 billion in revenue in fiscal 2019, compared with a $244 million operating gain on $29.2 billion in revenue in fiscal 2018. Its network spans 21 states.
The deal with Premier, financial details of which were not disclosed, is not expected to materially impact fiscal 2020 financial results.
Tara Bannow contributed to this report.