By Robert B. Handfield, Ph.D.
Supply chain is an integral part of Northern Arizona Healthcare’s culture of accountability
As healthcare reform steadily moves to a pay-for-performance based model, healthcare providers need to re-align their systems for measuring performance, align accountability across diverse stakeholder groups and drive partnerships with third parties to provide a higher level of care that creates efficiencies and opportunities for standard work.
Leaders of a community-based hospital system in Northern Arizona sought to create an innovative approach to align incentives and collaborative behavior within their facilities and with their group purchasing partner. The following illustrates how establishing a hospital culture for shared accountability is the basis for profitable change in the face of impending threats to the current healthcare system in the United States.
Challenges at Northern Arizona Healthcare
Northern Arizona Health Care is the parent system of Flagstaff Medical Center (275 beds) and Verde Valley Medical Center (99 beds). Together they serve as a regional health system for most of Northern Arizona. Two years ago, Bill Bradel (Flagstaff Medical Center) and Dr. James Bleicher (VV Medical Center) took over the dual CEO roles at Northern Arizona Health Care. The two hospitals have a joint operating agreement whereby they share resources, such as IT and supply chain, but operate independently. Although the system had a solid cash position, margins were shrinking while supply cost per patient was increasing.
Cost management was among the most serious issues they faced. The CEOs decided to benchmark their supply expense per adjusted patient discharge, which measures how a provider’s supply costs comparatively rank against a market basket of appropriate products and services, relative to similar hospitals in that category. The current metric for NAH was at the 70th percentile. The healthcare systems’ respective boards of directors believed that if NAH could succeed in reducing supply expense per patient discharge to the 50th percentile level, the organization would be more competitive and in a good position to remain independent.
The ‘whole hospital’
Concerned about adding new revenue and improving margins, the boards asked leadership to develop new service lines. Bleicher was concerned about the request. “We can’t sustain service line changes until we build a solid foundation,” he told them. “Let me create a culture that is resilient enough to handle change, and then we can create and execute a strategic service line expansion plan.”
The major change was the creation of a culture of accountability – an approach that involved establishing goals for the organization, assigning responsibilities, and ensuring that everybody in the organization was held accountable for reaching these goals. Bleicher also refers to this approach as the “whole hospital,” in that all parties are one, with an aligned mission of creating a profitable, patient-focused environment that excels in all key dimensions of healthcare delivery. “We needed to think about the whole hospital as an entity that the patient sees,” Bleicher says. “They don’t perceive an operating room, or a nurses’ station, or a cafeteria independently – they experience the entire hospital as an integrated entity.”
The “culture of accountability” changes also drove an evolution in the relationship between NAH and Amerinet. In a sense, Amerinet would become an extension of the whole hospital and a shared partner in the outcomes and changes that occur within the four walls of the hospital.
First, the organization decided to take a calculated risk and asked Amerinet to share that risk. The target was to save $10.7 million over five years. To achieve this target, NAH needed Amerinet to identify opportunities and help the organization drive change. If the target was met, Amerinet would earn a percentage of verified savings that emerged. All savings – both price savings and utilization – had to be validated and results were tied to improvements in the CMS rating scale. Governance was ensured by tying results to the director of every department.
The second element of the relationship involved Amerinet anchor member Intermountain Healthcare, a recognized leader in innovative care delivery. “With Intermountain Healthcare, we had the possibility to develop a relationship with a much larger system,” says Bradel. “That in turn provided leverage to gain access to knowledge and benefits that we typically didn’t enjoy as a small, rural community provider.”
Getting people on board
One of the first actions of leadership was to train 300 to 500 staff in the application of Lean/Six Sigma, to enable them to use tools for problem-solving.
Given the focus on reducing supply cost per patient, supply chain was the logical place to begin the process of changing the culture. Steve Spravzoff, vice president, supply chain/process improvement and Mike O’Connor, director of supply chain management, recognized early on that support, coaching and stakeholder relationship management were foundational elements to success. Instead of the supply chain being the “traffic cop” to drive compliance, the role changed to one of a facilitator to help stakeholders achieve their respective cost-savings targets.
To do this, they needed to adopt a proactive, data-driven approach for identifying and acting on cost-savings opportunities. The system had engaged an on-site representative from Amerinet, Wayne Gosser, to explore alternative approaches to derive savings and drive demand management while coordinating Amerinet resources.
If people were to be held accountable for savings, solid data was a must, and a standard approach was needed to pull the same information from systems every month. To create a solid accountability metrics analysis, O’Connor engaged an information systems administrator whose sole responsibility was to build utilization and spending reports.
The data allows stakeholders to compare and contrast how much is being used of a given unit of product or service per patient and per DRG. The unit of measurement varies (some are patient days, or case usage, depending on the clinical area), but the outcome in each case is to have the data available and to review trends once a month. The top 100 opportunities are identified based on the data, and this drives ongoing cost initiatives. Value analysis teams can probe further into other options based on the reports.
With so many opportunities for savings being investigated, the team quickly identified a need to track these initiatives – and this resulted in the development of a software-based tool, the “Savings Tracker.” “The Savings Tracker was a tool to not only identify the origins of the savings opportunity, but a project management tool that allowed the team to identify and maintain accountability to ensure that opportunities were either implemented, set aside for a later date, or rejected, for a documented reason,” says Gosser.
Supply chain – facilitator of change
O’Connor makes a point of reviewing the cost data every month with each respective department management team, to identify why costs are exceeding targets and exploring the underlying root causes for cost deviations, or more often, validating savings as they occur. The process for attacking a savings opportunity begins by Amerinet working with the internal IS coordinator to compare spend analytics, external pricing data and engaging with value analysis teams.
Once identified, Gosser then enters the project idea into Savings Tracker, where it proceeds through a “cost savings project” lifecycle:
- Introduction of the idea (either by a stakeholder or Amerinet).
- Approval by the stakeholder (or non-approval, in which case it is no longer pursued).
- Implementation: Approved to move forward with the change.
- Completed: The change is implemented.
Getting doctors involved
“We recognized early on that patients are the top priority, and that we couldn’t get better pricing without including physicians,” says O’Connor. “We started meeting regularly and went line by line through vendor-specific and contract-specific clinical supplies. What evolved was a contract calendar for OR supplies that we have scheduled our re-negotiation efforts around.”
One of the key drivers of change, especially in physician preference items, is the ability of physicians to benchmark and learn from peers with similar experiences. This was accomplished through a partnership between NAH and Intermountain Healthcare, which has a reputation in the industry of driving healthcare innovation, especially in its supply chain management processes.
Bradel recalls, “As I was seeking to drive change, I recognized as a sole community provider that it is harder to push change with the medical community, especially since we are in good shape financially. People were asking ‘Why should I change?’ But with the Intermountain Healthcare relationship, I could get my spine doctors to talk to their spine doctors. They understand why change is required when they hear it from someone in their own field.”
One of the first major projects involved spinal implants and a discussion around the patient value relative to price differentials. Spravzoff and O’Connor also looked at whether the additional cost impacted the length of stay – and this allowed them to start talking about standards of practice.
“For example, we might find a physician who is ordering a certain procedure pack, taking three out, and tossing the rest. This allowed for a discussion not just on pricing, but also on utilization,” says Spravzoff. “On the spine negotiations, we drove the ability to change practice on a dime once physicians saw good data. One of our top spine surgeons, who oversees the most cases in northern Arizona, looked at the differences for five minutes and concluded that he could change his practice and adopt a less expensive approach for his patients starting tomorrow morning.”
The big impact was on length of stay and use of orthopedic implants for older patients. Orthopedic surgeons now use a checklist around risk, predicted outcomes and clinical presentations to reach a conclusion on what is the most cost-effective implant for this type of patient that drives the best outcome. This is moving the organization not only toward standardization in product selection, but also in clinical practice with improved patient outcomes.
Similar results were achieved in the category of joints.
“At NAH, this was groundbreaking,” says O’Connor. “For the first time, we were limiting the ability of vendors to ‘back door’ sell to physicians, which allowed supply chain to be the focal point, since we could bring the data on costs and clinical outcomes and render more informed decisions with our vendors and our physicians.”
Amerinet’s five-year agreement with NAH, begun in July 2011, established a first-year savings goal of $1,657,000. Within six months, $2,970,000 in savings had been achieved. The Savings Tracker tool proved to be so successful that it is now in use by 10 other IDNs across the country with plans to expand further. Among the initial completed projects were a spine initiative, medical and surgical supply conversions, and diagnostic imaging capital purchases.
At the beginning of the project, NAH identified its Medical Supply Expense per Adjusted Discharge at $1,686 (monthly average, which ranked above the 75th percentile against their hospital peer comparison group). Medical Supply Expense per Adjusted Discharge for FMC is now in the mid $1,300s, and the low $1,000s for VVMC. This represents 12 percent under approved budget for the medical supplies for NAH. The impact of cost reduction efforts have resulted in an average 4.7 percent reduction in system supply spend for the past fiscal year and a 12 percent volume-adjusted reduction fiscal year to date. Medical Supply Expense per CMI Weighted Adjusted Discharge has seen a reduction of 11 percent systemwide.
This translates to driving the Thomson Reuter performance index from the 75th percentile to the 29th in the last quarter. To further create motivation for change, portions of the system have adopted a short-term incentive program, whereby every employee receives a percentage bonus if the enterprise meets financial targets. The supply chain savings fund is a big part of that. Every employee is receiving that bonus.
According to Chief Nursing Officer Jen Brewer, “We have learned so much on how a supply savings dollar is a tangible element that hits our bottom line every time. And now we want to be involved. We have come to realize that one of the biggest parts of supply chain savings is about not wasting supplies that we don’t need. And Supply Chain is happy to give us the data we need to tell the story, and in many cases it’s a story that has shock value to our nursing staff.”
The NAH story points out some important lessons for other providers and GPOs to consider. First, it is important to emphasize that this aligned relationship framework NOT be about size of the hospital or complex IT systems. It’s about listening to the customer and tracking opportunities and project management on a case-by-case basis. Nor is it about price savings and compliance, but rather stakeholder value, demand management, and patient care, while creating knowledge and metric-based accountability.
“We can authentically tell the community that every penny saved is passed back to patients,” says O’Connor. “Our charge model is based on actual acquisition costs.”
Smaller community-based providers can benefit by the leveraging of knowledge across networks, so that physicians and other clinicians and executives can exploit knowledge from people who have “been there, done that.” It’s an important lesson for the future of community-based providers, as they prepare for the complex healthcare environment that lies ahead.
Robert Handfield, PhD, is Bank of America University Distinguished Professor of Supply Chain Management, co-director, Supply Chain Resource Cooperative, Poole College of Management, North Carolina State University.