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Healthcare Inventory Management

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Understanding Medical Inventory Cost Accounting

[By DavidJ. Piasecki; CPIM]

[By Hope Hetico; RN, MHA]

Prof. Hetico

Inventory cost accounting methods are seldom used by medical practitioners. After all, doctors and healthcare organizations provide a service, and generally do not sell things. However, inventory is playing an increasingly important role in the financial viability of procedurally based medical practitioners, clinics, and hospitals.

Durable Medical Equipment

This occurs because hospitals and these healthcare entities maintain, dispense, and use durable medical equipment (DME) more abundantly than ever before. Voice systems, RFID, OCR, pick-to-light and laser scanners, CCD scanners, hand-held batch and RF terminals, vehicle-mounted computers, and wearable computers are now all part of the modern healthcare system inventory data-collection and management picture.

A Decade Old Challenge

Ironically, the financial challenge of hospital inventory management was first articulated in the Efficient Healthcare Consumer Response Report (EHCR) in 1996. The report identified $11.6 billion of cost saving opportunities in the American healthcare system directly due to inefficient product movement and ineffective inventory control and materials management. Now, more than ten years later, this situation has only grown worse. As material costs have increased, our overburdened health system cannot afford such inefficiency.

For example, DME stock-out emergencies are real and costly. And, inventory models such as economic order quantity (EOQ) costing have been in existence long before modern data capture inventory costing methods, just-in-time (JIT) inventory controls, total quality management protocols, and the other supply chain inventory management (SCIM) initiatives often used to prevent them.

Medical Supply Chain Inventory Management

Medical SCIM is a method of accounting that takes into consideration raw materials, the construction of useful products, and the distribution of those products. Physician proceduralists, medical dispensers, and hospitals must understand SCIM, because a healthcare entity’s profitability will suffer if it has too much, or too little DME inventory on hand. DME can be both a cost center or revenue driver, depending on its management.

Perpetual Inventory Management

A perpetual [periodic inventory] costing method is the traditional way to account for DME usage. With periodic costing, the cost of inventory is determined once, at the end of the period. With a perpetual costing inventory, a new unit price is recalculated with each order.

EOQ Methods

How can the healthcare entity determine the proper DME inventory level? One uncommonly used, but increasingly important, approach is the EOQ method. Some astute clinic and hospital administrators are just now using EOQ to manage their DME inventory. They are increasing their financial benefits by determining the most cost effective answers to the questions: 

· How much inventory should I order?

· When should I order the inventory?

· How can I increase efficiency and reduce channel costs?  


In other words, how can a hospital or healthcare organization optimize inventory levels, reduce expenses, and still improve patient care and safety?


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3 Responses

  1. Security Risks

    According to Jim Rapoza of e-Week [February 2009], RFID tagged credit cards and devices can be read and cloned from a distance [20-30 yards].

    To which I now add, and so can hospital pharmacy equipment, tagged drugs and narcotic cabinets; etc.

    The HIT Guy


  2. I agree, you wouldn’t normally link hospitals with selling products. Therefore, you wouldn’t need an inventory.

    Managing Automation recently posted a blog about improving Inventory Management. Take a look, I think you’ll find it interesting.

    Darin Guerrasio


  3. Darin

    You obviously don’t have a clue about hospitals or healthcare. Everything is about inventory management; from drugs, to injections, to DME, bandages, prosthetics and casts, etc. Read the above post once again; or for the first time.

    I always thought Thomas Publishing was sharper; sorry!



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