Retail giants such as Wal-Mart build their supply chains around moving hundreds of billions of dollars worth of merchandise quickly and efficiently to paying customers. Hospitals, with supply chains one-hundredth of the size but with arguably much more at stake, have begun to take notice.
"HCA knows how many drug-eluting stents they're buying, which doctors are using them and how much they cost," says Terry Cox, a former supply chain officer for HCA and now vice president of material and contract management at 16-hospital for-profit Abrazo Health Care in Phoenix, part of Vanguard Health Systems.
Cox regards HCA as a leader in hospital supply chain management. He says HCA's supply chain principles are ones the retail and automotive industries have been perfecting for years and now can allow hospitals to keep better tabs on inventory, reap better efficiencies and bolster patient care. More information is one of the keys to improvement.
He says he's been working to apply the same seamless techniques to Abrazo's materials management that he used for several"" years while he worked at Nashville-based HCA. Cox spent 20 years as a medical logis-tician in the U.S. military before joining HCA and now runs a tight supply chain for Abrazo. But he says it's a challenge, given that all of Abrazo's hospitals use different computer systems.
"The pot only has so much in it," Cox says. "So things to make (the supply chain) more efficient take a back seat to technology for patients."
Operations executives have been banking for years that management know-how in centralizing the supply chain, keeping inventory down, cutting billing cycle times and reducing duplication or variation in the process can wring profits from even low-margin businesses. But hospitals have been slow to follow. As industry leaders such as Wal-Mart build on the success of honing their supply chain by demanding further efficiencies from its suppliers, hospitals lag behind in implementing even basic retail tools such as bar codes.
In the retail industry, sizable companies, thanks to their clout, can command not only top prices for merchandise, but they also can mandate the latest supply chain standards, such as universal product codes, customer locator numbers and radio frequency identification, or RFID, tags.
Healthcare, which works on a unique economic model, has been slow to garner the same respect. At hospitals, RFID chips--along with its older cousin, the bar code--can be attached to drug dosages, medical devices and even patients so they can be tracked and monitored (July 12, p. 38). But very few hospitals can afford the costly new RFID technology, and hospitals haven't driven the industry consensus necessary to muscle suppliers into tagging healthcare products.
"Wal-Mart controls their vendors," Cox says. "In healthcare, vendors work the doctors, and then they come into your office and say, `Oh, by the way ... ' "
For any given hospital, the supply chain executive could be dealing with 200 to 500 vendors and between 10,000 and 30,000 product lines, says John Mateka, president of the Association for Healthcare Resource and Materials Management and southeastern vice president of supply chain management at Catholic Health East.
And doctors have long ruled the hospital supply chain, he says. For example, 30 doctors working at the same hospital can often demand 30 different products for the same procedure. Administrators have finally begun to ask why. They're questioning product differences, working more closely with clinicians and applying practices such as value analysis to try to determine the true value of a product and whether any distinctions merit a purchase, Mateka says.
Medical-surgical vendors use a lot of "smoke and mirrors" to woo physicians into using their products, Cox says. "So hospitals have to spend a fortune to sort it out."
To that end, Sisters of Mercy Health System, St. Louis, introduced an internal review process for high-cost, high-preference clinical items such as orthopedic implants that account for $75 million, or 14% of its annual $523 million purchasing volume.
Its aim? To "identify the best-use item and standardize where possible," says Mike McCurry, president of Sisters of Mercy's for-profit purchasing arm. And the benefit? Reducing the hospitals' tangle of products and vendors--and recouping about $17 million in yearly savings.
A couple of years ago, Stanford Hospitals & Clinics, Palo Alto, Calif., took more drastic measures by instituting a two-vendor policy, meaning it identifies no more than two vendors, for purchases costing more than $50,000, such as implantable devices and infusion pumps. The hospital makes exceptions for "clinically distinguishable" products and for sponsored research, says Nick Gaich, vice president of materials management.
But the real challenge lies in sticking to the plan once it's in play, Gaich says.
In most cases, Stanford has reduced the number of vendors from 50 to about three. The first year, Gaich says the hospitals recorded a 20% drop in cost-per-adjusted patient day. Before implementing the policy, the ratio of supply costs to net patient revenue was about 16.4%--about $116.7 million of Stanford's net patient revenue was spent on supplies. In 2003, the ratio fell to 14.9%, or $136.8 million.
Another set of hospitals, Memorial Hermann Healthcare System in Houston, has tapped into a different method of cutting inventory costs.
"We've learned to push the point of purchase as close to our customers as possible," says Frank Brown, vice president and chief executive officer of post-acute care, materials management and system pharmacy for Memorial Hermann. Brown has negotiated purchasing terms with Cardinal Health and another distributor, along with some small vendors, in which the hospital pays for supplies only once they've been scanned out of inventory and the product has been reordered.
Brown declined to disclose dollar figures but says the hospitals can measure savings in two ways: Less of the healthcare organization's cash is tied up in inventory; and cash flow is improved because the billing per-iod--from the moment the hospital actually buys the product to the time they collect on it through insurance payments and other payers--has been shortened.
You don't want the hospital's cash sitting on a shelf, administrators say.
In the latest fiscal year, Memorial Hermann spent $338.5 million on supplies, about 17.8% of its $1.9 billion in net patient revenue, according to a hospital spokeswoman.
Supplies routinely consume one-fifth of hospitals' net patient revenue, representing the second largest expense after labor. Adding business discipline to a historically fragmented process, exemplified by Stanford's two-vendor policy, can help lower costs and better control the supply chain, administrators say.
But limiting the number of vendors to help gain a pricing advantage isn't a new concept. It's been honed and polished by the industry's group purchasing organizations.
"There was a push 20 years ago to be able to buy better," Mateka says. "Back then there were no (integrated delivery networks), just a bunch of little hospitals buying supplies on their own."
GPOs called out to hospitals, he says: "Join us and we'll pool all your purchasing dollars."
And hospitals have. According to Modern Healthcare's 2004 Group Purchasing Survey, the survey's respondents, including the largest GPOs in the industry, reported nearly $70 billion in purchasing volume for 2003, up from about $61 billion in the previous year (Aug. 16, special pullout section).
In contrast, the country's 250 largest purchasing organizations for manufacturing spent $1.7 trillion on goods and services in 2000, according to consulting firm Accenture.
Stanford's Gaich says its two-vendor policy would not weed out smaller manufacturers, because academic medical centers often experiment with new technologies and products, and smaller vendors aren't necessarily more costly than their larger peers.
Gaich says Stanford also can use its stature as a premier teaching hospital to obtain better pricing from vendors. "We deliver a strong presence to the manufacturing and distribution markets," Gaich says. "We're going to look to leverage that."
Gaich focuses on the hospitals' core supply chain processes and outsources the logistics portion--or what he calls "picking out the secondary events"--to Owens & Minor, which specializes in logistics and medical-surgical distribution.
Distribution is an area where third-party logistics companies, called 3POs, have been trying to gain a foothold. These 3POs perform many of the functions of traditional distributors, but they don't buy the inventory. As drug distributors move away from the "forward-buying model," third-party administrators say they see a window.
Through forward buying--buying low, holding, then selling high--drug distributors could use fat profits to offer hospitals steep discounts on distribution services. As drug distributors move to a fee-for-service model that medical-surgical distributors typically use, those distribution fees are expected to rise substantially (Sept. 6, p. 4). In that case, 3POs say they could offer more competitive pricing, and companies such as UPS Supply Chain Solutions say they can offer better efficiency than drug distributors because their core competency is in transportation and storage logistics.
"They're just box shippers," counters Pat Rodemers, director of business development at group purchasing giant Novation, of 3POs. "They don't take title to the product." That is, they don't own the products so they can't request rebates from manufacturers or secure other perks that bulk purchases can buy. "They've taken healthcare backwards to before when the distributor got involved," she says. "It's not efficient."
She says hospitals look to get rid of the middlemen in cycles that appear every three to five years, but historically the 3POs have failed to secure a substantial following. If hospitals can find other ways to use the warehouse space, for instance by storing equipment and repairing instruments there, then it could boost efficiency in some ways. But "some of it is cost-shifting," Rodemers says. "It depends on how you do the math."
Streamlining through the Internet
At Stanford, employees take care of core supply chain functions: They're responsible for understanding the types of products intro-duced into the system and knowing the needs of the hospital's patient populations and caregivers.
The system channels some 98% of its 350,000 annual supply transactions through the Internet--what the industry commonly refers to as electronic data interchange, or EDI. Most providers are embracing some sort of EDI after some initial reluctance. "It's a more pure system of checks and balances," Mateka says.
Every step of the way, Stanford's supply chain process is seamless, Gaich says, tied together from beginning to end by technology and a streamlined management.
That kind of integration can amount to big savings. Hospitals routinely lose about 3% of their charges that are never billed to patients, because the charge process isn't tied to the rest of the supply chain, says Elizabeth Guyton, a vice president at consulting firm Capgemini.
"That's what they call charge leakage," she says.
At Integris Health in Oklahoma City, which boasts that its hospitals are among the "most-wired" in the country, new software in the nursing units led to a 40% improvement in capturing the number of charges for equipment and supplies billed to patients. That translates into a boost of about $500,000 per month in gross revenue, says David Strong, director of logistics services.
"Inventory is the price you pay for lack of information," Strong says.
The software system implemented at 50 nursing units for the system's two metropolitan hospitals cost about $375,000. But as a result of the improved efficiency, the materials management department also needed five fewer full-time employees.
Integris, Abrazo and Stanford are among a growing number of healthcare organizations looking to trim their supply chain excesses and gain a competitive advantage through leaner materials management.
Stanford's two-vendor policy was "an aggressive goal," says another Capgemini vice president, Lydon Neumann. "Most hospitals would be thrilled to get under six (vendors). One is unrealistic." The typical hospital could have hundreds for various products.
One possible risk hospitals are inheriting along with improved supply chain flow: Cutting the number of vendors exposes the hospital to possible shortages caused by manufacturing glitches or transportation problems, although administrators say there are often backup solutions.
"It is very, very fragile," Cox says of the supply chain. "One of the things that people feared about just-in-time (inventory), was that you'd run out of supplies." And it's why the "just-in-case" reasoning has prevailed at so many facilities, with hospitals overstocking on costly medical devices that could be funding more urgent needs elsewhere. Cox says his hospitals have only experienced minor shortages for IV fluids and such but adds that the recent flu vaccine breakdown accentuates the potential for more serious glitches.
Today, hospitals are looking for more flexibility from suppliers, doctors and GPOs. Bigger systems and those with brand names or other prestigious credentials are in a better position to demand options from suppliers.
Sisters of Mercy, with 18 acute-care hospitals, has begun contracting directly with its suppliers, eliminating its GPO and distributors. The three-pronged self-contracting approach to set up an information system, distribution center and its for-profit purchasing entity cost about $12 million, McCurry says.
By getting rid of the middlemen, to date, the hospitals have seen $13 million in annual savings, which breaks down to $8 million in purchasing costs and $5 million in retained service fees. Those savings are expected to grow to $20 million annually. More than the money, McCurry says the changes reflected the system's desire to gain control over the supply chain.
Lou Fierens, vice president of supply chain management at Trinity Health, Novi, Mich., says the 45 hospitals his system owns or manages and $4.2 billion in net patient revenue can sufficiently muscle suppliers into better contract deals.
"If we can drive a better price, we'll do our own agreement independent of the GPO," he says. When the GPO contracts with two vendors, and Fierens believes he can get a sweeter deal using one, he'll split with the GPO. Conversely, Trinity reserves the right to go with two vendors when the GPO only contracts with one.
In 2001, Fierens was plucked from among the rising talent at General Motors Corp., where he spent 15 years in supply chain management, as Trinity looked to shore up its supply chain. The move has paid off so far: Fierens, a Modern Healthcare Up & Comer young executive (Sept. 15, 2003, p. 24), says he helped shave about $96 million in costs over the roughly three-year period.
Trinity is working to implement a centralized computer system that, Fierens says, will cost about $20 million. But he expects to recoup the cost in one year as the system achieves more consistency in the supply chain.
The system buys $800 million to $900 million worth of medical-surgical supplies annually, or about 20% of the system's $4.2 billion net patient revenue. Three-quarters of supplies are procured through GPOs. Altogether the system spends about $2 billion annually on nonlabor capital costs. "It's worth paying attention to," Fierens says. But even as one of the largest healthcare systems in the country, he says Trinity only represents one-tenth of 1% of a typical vendor's total sales.
Despite the size of the overall healthcare market, the industry remains highly fragmented. Hospitals lack the clout of a Wal-Mart.
That's why healthcare supply manufacturers can resist implementing standards such as product coding, Mateka says, because they'd lose their marketing advantage if, for instance, all bandages are branded under the same code.
"Our clinicians prefer brand names and some of that is lost through bar codes," Mateka says. If supplies were grouped, purchasing departments would pick one generic product and move away from brand names.
Says Abrazo's Cox: Vendors "want to keep you in the information dark."
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