The future of healthcare: Supply chain

For most people involved with healthcare delivery, the assortment of supply chain processes that brings the needed materials from manufacturers to the point of patient care is a barely familiar activity tucked away in back rooms and basements. Some clinicians and most patients would be hard-pressed to say what goes on there, or even where to find it. Too often, supply chain barely registers among the priorities of institutional executives, let alone competing seriously for scarce resources and investment capital.

With such invisibility, it can hardly be a surprise that healthcare supply chain processes have lagged for decades and remain mired in confusion, duplication, waste and inadequate technology. But for the heroic efforts of thousands of dedicated and long-serving healthcare supply chain professionals, the system would collapse entirely.

It's not as if healthcare supply chains are a small target. A recent study by the Sisters of Mercy Health System's Resource Optimization & Innovation supply chain division found that materials costs consume 30% to 40% of operating expense in hospitals—second only to labor and growing twice as fast. Moreover, opportunities can be found everywhere to gain efficiency, save cost, and enhance quality and patient safety. As important, coming reforms in how healthcare is organized and paid for will soon elevate supply chains to critical roles in shaping, tracking and validating the care delivered.

Innovation is finally beginning to accelerate. A growing number of focused enhancements are under way with the spread of Lean-Six Sigma methods for process re-engineering. These tools are ideal for small-scale projects targeting incremental change in particular settings. Significant and sustained progress can be achieved on many issues. Still, results are limited by design to the target environment. Systemwide solutions are unlikely to be spawned.

Transformative innovation in healthcare logistics requires change across its vast and long-fragmented network of manufacturers, technology suppliers, distributors, group purchasing organizations and care providers. Retail and similar fields adopted global standard product and business partner identifiers more than 35 years ago to great advantage. Studies relating to the retail industry's adoption of UPCs (universal product codes) show $8.1 billion or 2.76% of revenue in hard savings.

By contrast, healthcare, which is the nation's largest industry, still lacks uniform and unambiguous identifiers (except on pharmaceuticals). Allowing players to invent their own numbering leads to confusion, duplication and waste at every level. It also presents major hurdles to computerization and electronic data interchanges, which thrive on unique record keys that can be readily shared among business partners.

Through the efforts of hundreds of supply chain professionals (and academics such as the Center for Innovation in Healthcare Logistics), a solution is at hand. The GS1 standards organization, which manages UPCs in retail, has developed global standard identifiers for healthcare products (GTINs) and locations (GLNs), along with the registries needed to facilitate interchange and maintain single sources of truth. A recent CIHL survey reported that 76% of supply chain organizations are in the process of adopting GLNs. Computer-readable GTINs on products come next, with a target of December 2012 for widespread use.

Adoption of standard identifiers may also open the door at last to widespread implementation of the automation and IT solutions that have energized other industries for decades. Automation and data synchronization efforts in the retail industry have resulted in efficient replenishment, new product introductions, category management and increased focus on customers.

Unfortunately, an American Hospital Association survey on hospital use of IT showed that only 16% of healthcare materials processes currently use bar codes, and 10% have fully or partially implemented radio frequency identification systems.

Opportunities abound for gains from healthcare automation. In the simplest cases, bar-coding of GS1-labeled merchandise can enrich routine replenishment decisions, avoid time lost to misplacement of goods, and keep track of outdated material. More sophisticated RFID approaches can track the inventory of valuable medical implants by sensors in storage areas, or record materials used in surgery by sensors on waste disposal containers.

Finding investment funds for such solutions has been a continuing barrier, despite studies showing that auto-identification project costs are more than offset by process savings and gains in patient safety. Worse, recent surveys of CEOs by the American College of Healthcare Executives show hospital revenue squeezed by the current economic environment.

The latest developments in healthcare reform are making such advances easier to justify. Widespread adoption of electronic health records and interchanges made possible by recent federal incentives demand accurate input about materials used in treatment procedures. Much of the advantage is lost if medical staff must record those manually. But bar-coding or RFID of standard identifiers can make tracking efficient, accurate and interoperable.

There are even greater emerging roles for supply chain tracking with coming transformations to accountable care organizations and bundled payments for medical procedures. The required negotiations among payers and providers needed to agree on remuneration will certainly depend in part on precise records of the materials consumed, including their sourcing, pricing and effectiveness.

Healthcare supply chains truly are emerging from the basement, and in the process, empowering significant advances at the frontier of healthcare delivery innovation.

Ron Rardin is director of the Center for Innovation in Healthcare Logistics at the University of Arkansas at Fayetteville.

CIHL postdoctoral fellow Raja Jayaraman contributed to this article.