Logistics: The next target in the war on device costs

Hospitals—having spent the better part of the past decade working with their surgeons to narrow the variety of cardiovascular, orthopedic and other implants used in their operating rooms—are now looking for new ways to cut expenses related to these high-cost items.

The imperative to bring down the cost of physician preference items, or PPIs, has become particularly acute for orthopedic implants, as hospitals in 67 markets are now receiving bundled payments from Medicare for hip-and-knee replacement procedures. Under bundled payments, the hospital receives a flat fee for the operation. If the cost of the implant is particularly high, there's less left over for everything else used during the procedure.

So supply-chain executives are taking a fine-toothed comb to every aspect of the purchase of PPIs. Distribution, inventory management, sterilization—anything that happens to a device on its trip from manufacturer to patient undergoes scrutiny at hospitals desperate to hold down expenses.

The new initiatives come after years of arduous work with surgeons to limit the variety of devices used in operations. Standardization—enabled by software and data analytics that allow hospital officials to show surgeons that patient outcomes stay the same or improve—allows purchasing officials to buy in quantity and get a lower price.

So where to go next? Distribution is one area where hospitals are looking to cut costs. Device manufacturers are keenly invested in improving products and ensuring quality and safety, but they don't spend much time and resources on logistics.

“They're great at manufacturing novel technology to treat a disease, but their expertise is not in logistics,” said John Horne, chief supply officer at Peoria, Ill.-based OSF HealthCare.

Because devices and their associated instruments often come to a hospital overnight by courier or even in the trunk of a sales representative's car, shipping and handling fees associated with distribution can be exorbitant. And because that cost is ultimately passed on to the provider, reducing those expenses is not a priority for manufacturers.

So hospitals are working with manufacturers and distribution companies to find more cost-effective ways to distribute and store PPI inventory.

OSF is in talks with Medline, a Mundelein, Ill.-based medical-surgical distributor, about managing its PPI inventory and moving product between manufacturers and hospitals. Horne expects that working with Medline—which has more than 40 distribution centers throughout the country and a large fleet of vehicles—could shave 5% to 10% off the total cost of many products.

“Moving the burden of inventory management and inventory control from the manufacturer to the distributor is going to create some relief,” Horne said, noting that distributors like Medline simply have more expertise and better infrastructure for moving product than manufacturers.

Not only could this strategy help OSF reduce PPI shipping and handling costs, it could also allow the system to take advantage of discounts offered by manufacturers to providers that buy in bulk. Horne doesn't necessarily have the space or resources to hold significant amounts of product, but if he works with Medline, the company can store excess product in a warehouse near OSF's service area and bring it to providers when needed. That saves space in the hospital storeroom for more urgent supplies.

Even when a system isn't buying devices in bulk, implantable devices such as knees and hips take up significant storeroom space as hospitals must keep a wide variety of sizes in stock. Surgeons usually are unsure what size hip or knee they'll need until they begin operating on a patient.

Hospitals also have to stock the multiple instrument trays and associated items required for these procedures. Theoretically, Medline could offer hospitals just-in-time delivery of PPIs days before a procedure, usually at a lower cost because it's coming from a nearby warehouse with other regularly scheduled deliveries from Medline.

Michael Reeves, system executive for supply-chain services at Louisville-based Baptist Health Kentucky, is also discussing a deal with Medline to distribute and store products bought from a major cardiovascular device manufacturer, which he declined to name. Working with a distributor will allow him to more efficiently deliver PPIs across his seven-hospital health system, he said.

“You're always going to have to keep a variety of sizes, but we may be able to more efficiently stock a little more of the ones that are used and keep fewer of what you don't use,” Reeves said. Without a single, centralized storage location, Baptist Health is forced to keep large numbers of sizes of devices at each hospital instead of sharing them between facilities.

Medline will be able to find efficiencies in moving PPIs through the same supply channel as routine medical-surgical products such as gloves and syringes that are regularly shipped to health systems, as well as by storing all of the products at a single location, said Peter Saviola, vice president of operations for Medline's corporate sales division.

Manufacturers have traditionally preferred to have control over a product's chain of custody, sometimes using that handling process as an additional revenue stream, Reeves said. But in today's reimbursement environment, manufacturers seem open to change. “They understand there is a value in not holding it, and a value to reduce their expenditures and outbound premium freight” costs, Reeves said.

A few systems handle PPIs through in-house distribution channels. The UPMC system in Pittsburgh receives various PPIs in addition to other medical-surgical items at a centralized warehouse north of the city, and moves them out to its 13 hospitals and various facilities as needed. Pharmaceuticals are handled at another location.

By handling distribution in-house, UPMC can share products across hospitals and better predict what may be needed, Chief Supply Chain Officer Jim Szilagy said. Moving product that's anticipated to be needed can help limit costs related to rush-shipping devices for many providers when it comes to PPIs, especially for spine or orthopedic surgeries.

It also can eliminate the need for hospitals to accept products on consignment, where manufacturers stock products in hospital storerooms and get paid only after they're used. While consignment allows hospitals to keep devices close at hand without paying for them, it takes inventory control away from the hospital and can include additional fees or less attractive pricing—not to mention taking up valuable space with infrequently used products.

“We carry as an industry way more inventory than we should,” Szilagy said. “We've historically acted like we don't know what we're going to need in the OR until we go into the OR. All of this stuff is sitting there in these trays and we only use a fraction of it.”

UPMC closely monitors its PPI-related logistical costs by tracking freight expenses and limiting the number of costly rush orders that are placed, Szilagy said. The system does this through cost-management software that was developed in-house and has since been licensed by Health Catalyst, a Salt Lake City-based data warehousing company, for commercialization.

Horne of OSF recently signed a five-year agreement with a PPI supplier in which both parties promised to pay attention to these mutual inefficiencies. The two parties have already discovered that if OSF could share patient data with the vendor at least five days before a procedure, the supplier could move product through its supply chain in anticipation of the order, thereby reducing costs associated with expedited shipping.

The agreement recognizes that hospital inefficiencies are a big part of the problem and that “there's a lot of risk on the side of the supplier to ensure that everything is there for the surgeon to do their case,” Horne said.

Regardless of how products get to providers, experts note that if they don't come in sterile or aren't sterilized while on consignment, that can put a burden on a hospital's sterile processing department. With implants, for example, technicians must sterilize multiple sizes of the device and all instrument trays associated with those products. That can cost significant money and time and create bottlenecks in the sterile processing workflow if products need to be rushed.

Similar to the power of patient data in aiding the shipping process, Horne noted, providing more specifics about patients to manufacturers before a procedure will allow them to consolidate the amount of devices and instrument trays, offering some relief to the sterile processing department. He said the demand for urgent PPI sterile processing is a “huge issue” for OSF's hospitals.

But even if vendors say they're sending an item sterile, that's not necessarily something providers should take for granted, Reeves, the supply-chain executive at Baptist Health Kentucky, said.

Vendors “say they've got to maintain control over shipping to make sure it gets sterilized, but I can't tell you how many times I've been out by a dumpster, and they're sitting out waiting” nearby on the loading dock, he said.

Health systems need to start negotiating with manufacturers about taking sterilization costs off the price of PPIs, said Lori Pilla, vice president of supply-chain consulting solutions and custom contracting at Intalere, a St. Louis-based group purchasing organization formerly known as Amerinet. High-cost physician preference items such as orthopedic and spinal devices aren't often a part of the contracts managed by GPOs, but rather are managed directly by hospitals.

“If (the vendor) won't budge, you go to the physician and ask them to stand with us to help (the vendor) understand the impact of the price,” Pilla said. “Ask them to put their foot down and say they need to conform, or we need to consider a change.”