Kaiser Permanente saved nearly $110 million over the past two years by switching to a consolidated national purchasing program, and officials expect to slash another $46 million in purchasing costs this year.
Negotiating supply contracts through a single national purchasing unit, instead of through local operating units, has resulted in "double-digit" savings, according to officials of the Oakland, Calif.-based managed-care company.
The organization spends approximately $1.4 billion annually on nonpharmaceutical supplies and nearly $1 billion more on drugs and related products, purchasing officials said. Kaiser's 2-year-old consolidated purchasing effort is designed to put it in the same company with other national healthcare organizations-such as Tenet Healthcare Corp., Columbia/HCA Healthcare Corp. and Intermountain Health Care-that are known for their systemwide purchasing programs (See story below).
"We have a great opportunity to take cost out of Kaiser Permanente's operating side," said William Hamilton, Kaiser's vice president for supply chain management-the new buzzword for the purchasing and distribution function.
Considering that Kaiser lost $270 million last year and posted an operating loss of $92 million for the first quarter of 1998, its recent cost-cutting successes couldn't come at a better time.
"Supply chain is going from an invisible activity to a strategic element of the business," Hamilton said.
Nearly 200 national contracts have been negotiated under the new system. Vendors that have agreed to national contracts with Kaiser-some of them single-source or exclusive deals, others dual- or multiple-source contracts that create competition within a broad product category-include MCI, Nortel, Cisco Systems, U.S. Surgical Corp., Baxter Healthcare Corp., IBM Corp., Picker International and Acuson Corp.
The supply chain management effort includes three segments: information technology, medical supplies and nonmedical items. Along with negotiating national contracts, the group is also responsible for functions such as materials management, logistics and distribution.
Officials stress that Permanente Medical Group physicians are intimately involved in selecting medical supplies before purchasing executives negotiate specific contracts.
Kaiser's national purchasing effort has been under way since February 1996 but has received little or no outside notice. And Hamilton, who joined Kaiser three months ago from Nestle U.S.A. in San Francisco, where he developed a similar corporatewide purchasing program, said he is wary of releasing detailed information about the program, for fear of tipping off vendors about how well Kaiser is faring.
The newly renamed supply chain management unit, known until recently as Kaiser's national purchasing organization, replaced a decentralized system in which each of the company's regional divisions was responsible for negotiating most of its own supply contracts. Everything from sutures to software was handled separately.
On the information technology side, that meant Kaiser units had contracts with virtually every major long-distance telephone company. In January, that was replaced by a standardized deal with MCI that should be fully implemented by year-end, according to Chuck Noland, Kaiser's director of operations for strategic sourcing and information technology team leader.
Approximately 40 national IT contracts have been signed since February 1996, resulting in savings of roughly $40 million to $50 million, he said. Some buying is still done at the regional level, especially in areas that don't provide broader synergy. But officials say the success of the consolidated approach is winning converts within Kaiser and that as much as 95% of the organization's purchasing may soon be done on a consolidated basis.
"There's a lot in the pipeline," said David McIntosh, who heads the purchasing unit's medical supply purchasing. "We've got a lot to look at."