Healthcare Business News
Steve Kehrberg
Steve Kehrberg

The future of healthcare: Outsourcing

Insource for success: Looking within, leveraging economies of scale can cut need for outside services

By Steve Kehrberg
Posted: July 25, 2011 - 12:01 am ET

A sour economy and the grim prospect of continued cuts in reimbursements under the Patient Protection and Affordable Care Act have combined to put more financial pressure than ever before on the U.S. healthcare industry.

This double dose of bad news has led to difficult conversations among hospital executives forced to cut costs wherever possible. As the Patient Protection and Accountable Care Act rolls out over the next several years, the situation isn't likely to improve.

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Inevitably, those C-suite conversations have focused on major cost centers including the supply chain, which typically accounts for the second-largest overall expense category for most hospitals, trailing only labor costs.

At Englewood, Colo.-based Catholic Health Initiatives, which spends more than $2 billion annually on supply chain initiatives, the discussion has been going on for some time now about long-term strategies to reduce unnecessary costs by becoming more streamlined, centralized and efficient.

As the nation's third-largest not-for-profit health system, CHI is using its size and geographic breadth wherever possible, managing an enterprise-wide supply chain effort that is based on “insourcing” rather than outsourcing.

Leveraging economies of scale, the system has created a national supply chain structure with management oversight from the national office, where leaders provide direction, metrics, benchmarks and sophisticated data analysis. This helps us make the right decisions and move in the right direction.

In the past few years, CHI has developed a national infrastructure that handles all but a small portion of supply chain expenses. Internally, we ask this question: “Can we do this better than an outsourced firm?” In most cases, the answer is, “Yes.” Even with 72 hospitals and dozens of other affiliated facilities in 19 states, CHI does not outsource any significant supply chain function at the local level.

By effectively nationalizing the program, CHI has taken far more ownership of those pieces related to contracting. And with local functions going national, the organization has developed a greater sense of unity that underscores its vision to be an organization focused on consistent practices and standards for clinical and operational excellence.

This applies specifically to high-cost products subject to physician preference, including items used in cardiac catheterization laboratories. Through what is known as the Catheterization Laboratories' Value Analysis Team, managed by the national office but includes representatives at each hospital, CHI has achieved savings percentages in the double digits and maintained physician choice by establishing standardized pricing across the entire system in conjunction with its group purchasing partner.

The foundation for this integrated program was established several years ago, when the national office created a far more structured, strategic alignment with supply chain and clinical engineering leaders at all facilities.

This close connection was fostered by the development of a common information and technology infrastructure, which standardized many business functions, including supply chain, allowing for a rapid collection and analysis of data from all facilities. Centralized ordering and payment, along with single-item master list for all supplies, helps coordinate the supply chain function.

Implementation of this integrated function accelerated during fiscal 2010, when the supply chain structure was aligned into nine regions. Regional directors in each division oversee all operations, working closely with the national office. These regional directors, all part of the national office, also oversee the work of each division's materials management operation, a significant cost center that is often outsourced by hospitals and health systems.

Supported by national value-analysis and data-analysis managers in each region, we can tackle important utilization issues aligned with local and national goals. Value-analysis teams coordinate purchasing efforts, leveraging prices with our vendors while educating and working with our physicians and clinical teams in a well-coordinated way that reduces costs.

Supply-chain leaders also serve as key members of a multidisciplinary team focused on becoming far more efficient and cost-effective within the limits of Medicare reimbursements. This has included a systemwide effort to reduce expenses for purchased services by more than $50 million. Over the past 18 months, CHI has reduced costs by almost $27 million by focusing not only on price reduction but also on waste and overutilization of implants and many other physician-preference items.

This “insourcing” model, which more closely resembles the for-profit environment in terms of centralization and structure, relies heavily on a “group process” approach to supply chain, service and equipment selection.

By aligning local facilities with national leaders, CHI can leverage its size, scope and expertise. Asset management accountability has been shifted to national leaders. In other words, the traditional local contracting model has essentially been insourced to CHI's national office.

Of course, the transformation was not without challenges. In some ways, the insourcing model demands that local leaders relinquish some of their authority and autonomy. Yet those same leaders are now asking what they can do to foster an ever-closer relationship, especially as they face the pressure from lower Medicare reimbursements.

CHI has demonstrated some significant value through this insourcing program.

In fiscal 2011, supply chain expenses have been reduced by about $82 million at a time when labor costs have increased and the organization added several affiliated organizations and hundreds of additional physician employees.

The value of what we do on a national level, working with our hospitals, nursing homes and residential facilities, is more effective—and cost-efficient—than any supply chain outsourcing program we have yet to come across.

Steve Kehrberg is senior vice president of supply chain at Catholic Health Initiatives.

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