In the days before supply-management automation at Montefiore Medical Center, a typical order placed within the Bronx, N.Y.-based healthcare system took 11 days just to get out the door to an authorized vendor. Today it takes two hours.
Once the ordered item was delivered and an invoice presented for payment, it used to take an average of 168 hours to work through a maze of paper-shuffling and cut a check for the vendor. But that was before a sophisticated resource-planning information system started changing the rules of the purchasing game at the end of 1996. The same accounts-payable process in 2002 averages one hour.
In all, the replenishment cycle in 1996--from initial order to the handling and stocking of the received item and approval of an invoice--averaged 492 hours spent in manual processing. That's 20 days, 12 hours, plus another three days or more to send forms back and forth. The same cycle today takes an average of 19 hours. And with electronic transfers, the three days' worth of mail or courier time is reduced to seconds.
You'd think that would be achievement enough for Montefiore, which agreed to pilot resource-planning information technology from Germany-based SAP in two hospitals and dozens of other care sites at a time when most providers--Montefiore included--didn't have much of a computer network in place yet.
The information system and related process improvement saved from $4 million to $6 million in supply-management costs in 1997, the first year of operation, says Charles Agins, vice president of finance with responsibilities for supply management. Although the true cost of the software and implementation is difficult to pin down--as it is for any developmental collaboration project with a vendor--the operational savings more than paid for the installation within the first few years, Agins says.
But taming the order and payment process was only the beginning. Armed with the information produced by a thorough accounting of every purchase and process, Montefiore has systematically subtracted millions of dollars from annual equipment and supply costs by standardizing contracts under one supplier for a given item and by renegotiating the terms of payment in return for the higher-volume business.
Then, using its firm handle on ordering activity by more than 500 authorized purchasers throughout the healthcare system, the acquisitions department has geared up to track, aggregate and produce periodic reports on all items for which Montefiore has money-saving agreements. The goal: 80% compliance with the preferred vendor and fulfillment of contract terms that translate into volume discounts.
"Making the technology work is only about a third of it," Agins says. Including gains from information-fueled contract management, Montefiore will reduce its nonsalary costs about $20 million in 2002, up from $17 million in 2001, he says.
About 80 separate standardization initiatives go into that total, covering high-volume and high-cost supply categories ranging from sutures and X-ray film to copying machines and cell phones. "It's the 20% of items that make up 80% of the costs," Agins says.
And there's much more opportunity to be found by analyzing the financial and operational reports that are continually being produced. "We're now into the `B' items," he says.
Removing excess cost
The supply-management and financial-reporting capabilities of the enterprise resource-planning system are crucial to Montefiore's efforts to be competitive on quality, pricing and service in the New York healthcare market, says Elaine Brennan, vice president of operations.
To keep from eroding quality under constant pressure to reduce expenses, Brennan works with Agins to identify opportunities for taking expense out of supply practices and agreements. Although such initiatives tread on longstanding personal preferences and vendor relationships, the alternative to accepting constraints on supply decisions is to suffer reductions totaling the same projected savings in other areas, such as payroll, Agins says.
"People clearly understand the consequences if they don't do it," he says about compliance with purchasing agreements. "We say to them, `Either take this million dollars (of supply-reduction opportunity) or start telling me the names of people you want to take out.' "
The healthcare industry's common response to cost pressures, for lack of alternatives, has been to order across-the-board reductions in salaries and expenses. But Montefiore now has the ability to zero in on specific areas instead of making less discriminate decisions on cost control. "We make surgical cuts," says Agins.
The healthcare system has been able to control purchasing and gain adherence to contracts through a combination of widespread information system integration, high levels of automation in the supply chain and a focus on electronically editing orders at the outset to minimize errors and delays, Agins says. The easiest and quickest way to get desired supplies is by sticking with the approved product list and ordering through Montefiore's computer network.
That's the opposite of the way it used to be. A requisition generally took three days to reach the purchasing department and another two days to be entered into a materials-management computer system. Then a buyer checked and verified prices before authorizing the order and sending it to the chosen vendor--a six-day process on average. Two or three days later, the shipped supplies would land at a receiving dock.
Frustrated by the delays, physicians and unit secretaries often picked up the phone and ordered supplies directly from a vendor or distributor, bypassing the authorized purchasing process. The maverick ordering, which was not uncommon, reduced the delivery time to about three days but frequently caused payment problems and a credit hold by the vendor. Because the transaction took place outside the purchasing realm, there usually wasn't an authorized invoice, often not even a receipt, and sometimes no clue at the receiving department about who was supposed to get the delivered item, Agins says.
Getting a handle on the ordering process was an important goal, but just as important was getting facilities to work as a single organization, he says. The systems integration effort helped bring information together and furnished the ammunition to challenge multiple preferences for the same items from facility to facility and often within a department.
Besides Montefiore's two teaching hospitals, two adjacent medical pavilions and a children's hospital, there are 21 primary-care offices and a nursing home in the Bronx and neighboring Westchester County.
The haphazard ordering process spread out among independently operating hospitals and outpatient sites also made it difficult to negotiate or adhere to best prices--or to track the volume and get credit for discounts. "We may have had the information available, but there was no way to easily collapse the information" into a single staging area for monitoring and analysis, Brennan says.
Until the end of 1996, the purchasing department relied on vendors to provide information on purchase volume, pricing and other details that were important to business activities such as renegotiating contracts and determining compliance, says Joseph DiChiara, manager of contracts and vendor relations.
"After 1996, we were providing information to vendors, and they were amazed at the accuracy of the information," DiChiara says.
Making compliance a snap
Montefiore now had the ability to use business data to its advantage, but first it had to make sure the people creating and using the information saw the value of the new ways. Changing the supply-acquisition culture to routines based on "the power of clean, accurate, consistent information" rather than preferences and interpersonal relationships with suppliers was key to making the new system work, Agins says.
"We began with the end in mind. We sold this by improving (the process) and reducing the time it took for the doctors and nurses to get what they want," he says.
"If you type in five numbers, everything else is done for you," DiChiara says. There's no need for a requisition, and the average purchaser is authorized to buy up to $10,000 worth of supplies per day without initial approval, he says. Authorization levels for department managers are higher.
Terms of a contract are loaded and pre-approved for 70% of the routine items in the Montefiore purchasing list, up from 30% when the information system debuted. After clicking on an item and denoting a quantity, the system takes over: It peruses the agreement and automatically generates a purchase order at the negotiated price.
The person ordering the supplies can see the items confirmed, track their progress, know when they're received and verify that an invoice was presented and paid, DiChiara says.
Authorized employees have few obstacles to placing orders, but every purchase is charged against the responsibility of a manager. Detailed information on the type, dollar volume and contractual compliance of all supplies is continually fed back to someone whose job it is to monitor the activity, DiChiara says.
The computer system also keeps spending from going overboard: Even though purchasers have a latitude of $10,000 per day, for example, their orders are subject to the funds available in a departmental or facility budget.
The regular scrutiny of purchase activity required changes in job descriptions to reflect the responsibility for keeping track of ordering and a commitment to buying contracted items whenever possible, Agins says. A comprehensive chart of accounts identifies supplies in a category for which negotiators have wrung out the best prices and other terms affecting the total delivered cost, such as financing, transaction costs, handling costs, transportation and storage.
Increasingly in the healthcare industry, vendors and purchasing organizations are putting their prices on Web pages, encouraging buyers to go online to shop for the best deal. But Montefiore has dispensed with the buyer stage: The haggling is already done. "Over here, you can't order an item until we've negotiated a price," he says.
Compliance vigilance is a chief duty for Michael Levy, manager of acquisitions. Codes in the computer system mark standard items with a locked-in price and designated vendor, and all activity can be tracked by item number, item type, department and other variables. That allows Levy to run reports on commodities purchased during any period of time to determine higher-than-normal incidence of noncompliant purchases. He can then visit managers to find out why the purchases are outside the norm.
Exceptions are understandable in the complex field of medicine, DiChiara says. "We're never going to exclude an item that's necessary to a patient," he says. But the underpinning of efforts to standardize, streamline and save money in the supply chain is based on guaranteeing a supplier that 80% of total purchase volume, he adds.
Ready, aim, cut
Using computerized information that captured all uses of a product and the prices paid, supply managers were able to engineer volume-based contracts that benefited from the total buying leverage of the $1.5 billion organization, Agins says. Some examples:
Copiers and fax machines. By analyzing copier use and the annual cost of purchases, rentals and service agreements, managers came up with an innovative contract based on a cost per copy instead of annual fees. The information system was able to show that the traditional acquisition and service contracts, applied to a volume of 36 million copies per year systemwide, translated into a per-copy cost of 8 cents. The new contract pays a flat 2.8 cents per copied document, which covers all machines and maintenance. Because that's the only way the vendor gets paid, it's an incentive for the company to keep copiers well-serviced and employ the latest technology.
X-ray and other diagnostic film. After an extensive product investigation and consensus-building effort among physicians, the $2 million annual cost of diagnostic images among five medical divisions was reduced by 25% by consolidating purchasing down to one vendor from several and having one contract serve all sites.
Vascular stents and angioplasty balloons. By standardizing the purchase of these complex products through one vendor instead of the previous seven, and guaranteeing 80% compliance from physicians, the healthcare system reduced the $3 million annual cost by $600,000.
Catheters for interventional procedures. After a series of discussions with interventional radiologists, Montefiore standardized one set of sophisticated catheters and related devices. The new contract reduced the annual $1.5 million cost by $300,000. Among the savings: a 30% reduction in the price of filters guided into veins by catheters to stop blood clots from reaching the lungs. Those vena cava filters usually cost about $1,500 each.
Surgical sutures and mechanical stapling devices. In successive levels of consolidation, the acquisitions department worked with surgeons and operating room managers to narrow the number of suture suppliers down to one and then award the contract for stapling devices to the same supplier that won the sutures contract. The chosen vendor had been one of three suture suppliers and one of two sources for stapling devices. The reduction in suppliers to one in each category would have saved $400,000 a year; further consolidation to one vendor for both areas jacked up the annual savings to $800,000.
Cell phones and pagers. The healthcare system negotiated favorable rates with just two vendors instead of the many available in the New York area, and it's gradually converting an amalgam of small contracts into an institutional contract. The master contract covers 230 cell phones so far, and that total will rise as new requests are approved and existing contracts expire.
Other product categories that underwent similar consolidation include intravenous solutions, personal computers, express-mail deliveries and contrast media for radiology procedures.
Montefiore executives agreed to discuss the specifics of contract activity but declined to allow vendors to be identified because of business considerations.
Armed with the purchasing facts
The proliferation of cell-phone use typified how undisciplined ordering increased costs and hindered efforts to negotiate the best deal.
Until 1997, the healthcare system didn't know the volume or expense of cell phones. Supply managers didn't know their current costs when negotiating new contracts. Departments often bought phones at will and charged them to any number of accounts, which buried the expenses in miscellaneous or other nonspecific budget lines and made it impossible to tally use for a master contract, Agins says.
Instead of just receiving and paying bills for phones and service packages, "we needed to know how many we had, who had them and how much they cost," he says. A separate line item for cell phones was established and every purchase charged to that account.
That was part of a larger effort to establish a consistent chart of accounts for every supply item in the healthcare system for tracking and negotiating purposes. The chart of accounts brought discipline to recording purchase activity and enabled managers to produce reports telling them how many phones were in use every month by department.
With that information in hand, negotiators went to cell-phone vendors as the agent for new or renewed wireless business, offering high volume to two winning bidders in return for better rates and flexibility of service packages, Agins says. The arrangement sets up Montefiore to better control costs as the volume of cell-phone usage increases.
In another high-cost area--copiers and fax machines--supply managers benefited from the ability to track every piece of equipment and aggregate the expenses of budgetary cost centers. An analysis of total costs provided valuable information on how much they were paying for the high-overhead machines and how much profit vendors were making, DiChiara says.
Armed with the break-even points for vendors supplying and servicing 500 copiers throughout Montefiore, negotiators went beyond asking for bigger discounts and pushed instead for a whole new approach to paying for them. The incumbent vendor did not go for the new approach, and the healthcare system ended up giving all its business to a new vendor.
Under previous rental agreements, the healthcare system essentially was paying for copying machines even when they were in need of repair, and performance under service agreements wasn't always satisfactory, DiChiara says. But a switch to a per-copy metering system made it in the new vendor's interest to keep the copiers serviced and working.
Cutting-edge technology also was merging copiers with fax machines, and Montefiore decided to take advantage by scrapping old fax machines in favor of the copier-fax combinations. That added to the copies the vendor could charge to the account, but Montefiore procured both copying and faxing capabilities at a lower cost per copy--without paying separately for maintenance and supplies such as toner cartridges, DiChiara says.
"This is an easy opportunity," Agins says. "Who's going to yell at you for changing copiers?" With integrated information at hand, consolidation of such purely business-oriented purchasing involved no more than "the fortitude to do it," he says.
Clinical consensus and limits
Consolidating product options in clinical areas, on the other hand, was a much more delicate matter.
Supply managers had to bargain with physicians and other clinical professionals before they could go out and bargain with vendors, says Susan Green, Montefiore's director of surgical business systems.
"Physicians are trained on a particular product, so they tend to be married to the products they've used throughout their career," she says.
The only way to consolidate the number of diagnostic-film suppliers, for example, was to first evaluate the products for a level of clinical quality that was acceptable to all physicians using the film for decisionmaking, says Richard Alaimo, administrator of the radiology department.
The evaluation committee included the physician chairman of radiology as well as division chiefs of subspecialties: body imaging, mammography, neuroradiology and musculoskeletal radiology. Only vendors of the products certified as clinically acceptable were given the chance to bid on Montefiore's business.
The 25% cost reduction gained from consolidating diagnostic film supplies covers five medical divisions that encompass the two hospitals, two outpatient centers, an MRI center and three centers for hip replacement surgery, Alaimo says.
With business picking up, the savings from the contract will grow as use increases, he adds.
In clinical areas, assumptions about the degree of compliance that can be expected from physicians are an integral aspect of contracting, Agins says.
For example, Montefiore could have saved $750,000 per year on stents and cardiovascular balloons by insisting on 100% compliance, but it chose to aim for 80% compliance at a savings of $600,000. The opportunity to save an extra $150,000 by getting all physicians to abide by the contract was judged not appropriate or advisable, Agins says.
In another innovative arrangement, hospital managers combined objective information about costs with an opportunity to turn savings into funding for a wish list of new equipment and facilities. The equation helped gain physician cooperation on consolidation of suppliers for sutures and endomechanical stapling devices, which were costing the healthcare system $4 million per year.
The high-volume supply category was further stressed by strong physician preferences in the operating rooms, Green says. The multiple preferences, in addition to diluting purchasing power, also required managing several separate inventories and dealing with several sales representatives instead of one, she says.
A phased move to consolidate all such purchases with one vendor three years ago served as a proving ground for dealing with surgeons and getting their buy-in, DiChiara says. The preparatory work included encouraging physicians to practice with alternative products in a lab and air their concerns: misfiring staple guns, for example, or complaints that a product couldn't hold a suture line, Green says.
"ORs are traditionally least responsive to what we're trying to do," Agins says. "They give you a run for your money."
Money entered into the persuasion. Agreement on one supplier for each of the two products could save 10% to 15%, or as much as $400,000. But by seizing an opportunity to consolidate both lines under one vendor, Montefiore could save nearly 30%, or $800,000. The healthcare system offered the extra $400,000 in savings to the surgeons for investment in new projects, Green says.
The doctors took the offer, and the money served as part of the startup funding for a new center equipped with technology to perform minimally invasive surgery, a growing surgical discipline.
A handle on financials
The supply-management capabilities of the resource-planning information system have provided the most payback and ongoing opportunity to save on operational costs. But by folding supply information into financial reporting, the system also has enabled gathering of data in an organized manner to provide early warning on operational trends requiring attention.
"This system has so much data available to the average user, it's incredible," Levy says. The system keeps track of all dollars spent in the healthcare system, including volume and cost of specific procedures. "If there's a trend in the wrong direction, you can catch it right away," he says.
The radiology department monitors the cost per procedure on a regular basis, Alaimo says. If the numbers go up, he can find out immediately the reason for the trend--too much X-ray film being used, for example--and fix it instead of waiting to flip through a monthly report many weeks later. "Before, we didn't know about the situation until the damage was done," Alaimo says.
With 360,000 radiology examinations per year in all Montefiore divisions, "a small percentage could equal large dollar savings," Levy says.
Managers can gauge cost increases for supplies such as stents to determine if the upsurge is a positive result of more volume or the problematic result of more utilization, Brennan says.
If doctors were using three stents per patient and now they're using more, there may be good reasons for the increase, she says: Procedures might be getting more complicated, or the standard of care could be changing. But by feeding the information back to department managers, doctors can answer questions based on objective and accurate information instead of being put on the defensive, she says.