Improvements to Supply and Drug Costs

Editor's note: This is Part 11 of a 12-part series focused on optimizing medical group financial performance. Each brief in this series takes 2 to 3 minutes to read and identifies specific actions medical groups can take to achieve sustainable financial improvements.

Assessment

Supply and drug costs vary significantly by specialty, requiring a specialty-specific approach to assessment. In addition, these costs can be categorized into consumables and goods sold, with different methods to evaluate savings opportunities in each category.

For consumable supplies, the financial opportunity is calculated by comparing the current cost-to-revenue ratio for consumables against an industry benchmark or target. Setting a target typically involves identifying the total cost-to-revenue benchmark and determining the portion attributable to consumable supply costs. 

For goods sold, direct revenues and costs must be separated from other supply expenses. The opportunity is determined by establishing a target margin between direct revenue and direct costs, based on industry benchmarks. Because both costs and revenue fluctuate over time, optimizing margins requires a recurring review to prevent potential losses.