Finding Our Way

The benefits of efficient supply chain data.
Despite occasional lapses in technology and will, some supply chain players are winning the battle to streamline the system.

An IDN pays the wrong price for a contracted item.

Talk about a smoking gun!

Follow just this one event through the supply chain and you’ll probably find much of what ails healthcare contracting today.

In a perfect world, of course, Manufacturer A works with the GPO or IDN to cut a mutually beneficial contract. Together, they roll it out to the members and distributors, who immediately begin purchasing according to the terms of the contract. The supplier gets increased market share, the providers get better pricing.

But we don’t live in a perfect world. Here’s what often happens instead:

Manufacturer A signs contract with GPO or IDN, but fails to notify distributors right away. And when it finally does, it faxes over the contract, and neglects to note its start and stop dates.

Prior to the distributor even being notified that a new contract has been signed, the IDN wants to start purchasing according to its terms. The distributor makes some phone calls to the manufacturer, but rather than alienate the customer, sells the product at the contract price, even though the distributor hasn’t had a chance to load the new price into its system.

Meanwhile, the GPO has lost a member or two and gained another couple, but fails to notify the manufacturer and distributor of the membership changes until the end of the month. And when it does, it fails to use an accepted industry-wide numbering system to identify the provider.

Eager to identify the potential savings of the new contract, the IDN materials office runs a report on how many of the covered items it has purchased over the last 120 days. But the number is suspiciously low, and the corporate director of materials suspects the reason is that the product is in the system under multiple numbers and descriptions. But who has the time to clean up the mess?

Then, somewhere down the line, a price change goes into effect, but the manufacturer and GPO fail to notify the members and distributors for a month or more. The IDN’s accounts payable department bounces back POs and invoices, hand-stamping them “Reconciliation needed.” Meanwhile, the distributor’s accounts receivable chief is nursing headaches.

In the midst of all this, the GPO and distributors are painstakingly trying to work out with manufacturers the amount of administrative fees and rebates owed them.

Still Mired in Inefficiency
Studies show that hospitals overpay as much as 7 percent for contracted medical-surgical products, according to Schaumburg, Ill.-based Consorta. And each incorrect invoice generates work and rework for all the supply chain players.

But this isn’t news to anyone. Seven years ago, the Efficient Healthcare Consumer Response (EHCR) project of the Health Industry Distributors Association, AHRMM and other supply chain groups identified huge savings opportunities through the implementation of automation and common numbering systems throughout the supply chain. Yet, despite all the good intentions, the industry is still mired in inefficiency.

Consider that the industry has failed to agree on a common numbering system for products.

Some buyers and sellers still operate with antiquated information systems – or no automated systems at all.

And despite the huge advances in electronic communication, thanks in large part to the Internet, many supply chain players remain out of the loop when it comes to sharing information.

Part of the problem is economics. Smaller buyers and sellers, for example, can’t afford the latest information technology or the manpower to clean up their data files. But there’s more than economics to blame. The fact is that many supply chain players simply aren’t committed to fixing the problem.

For example, manufacturers don’t like the idea of their products being lumped in with those of their competitors, and so they drag their feet on universal product numbers. What’s more, they’re fed up with being expected to foot the bill for the implementation of industry-wide standards. Distributors, meanwhile, persist in devising and using proprietary numbering systems for the products they sell, either because of inertia or a desire to keep up the barrier to entry for competitors in their key accounts. And IDNs and hospitals fail to commit the time and money needed to maintain clean item and vendor master files, hence generating mounds of costly work for their suppliers and their own accounting departments.

“Our customers have told us they need three things,” says Alison Campbell, marketing manager for Broadlane in San Francisco. “They need a contracting component, so they can store their contracts; an e-commerce component, so they can track their orders; and an item master component, so they can keep all their product information up to date. If these three are not connected, people start buying things off contract and don’t even realize it, or they order products using the wrong number, because they [weren’t notified] that the company had changed the product number.”

It’s not like this in other industries. For example, ask the purchasing director of an electronics firm how many of a particular component they buy, and chances are they can tell you not only how many they buy, but from whom and at what price, says Steve Wigginton, executive vice president at Neoforma. “But go to a hospital and ask them how much they spend on consumable laboratory products, and they probably can’t tell you,” he says. “That’s why there’s an opportunity – and a challenge. There is a price to not understanding this.”

Despite the obstacles and the industry’s dismal track record, the fact is that some IDNs, GPOs, manufacturers and distributors are gaining a better understanding of that price, and are making efforts to address the underlying problems.

Sisters of St. Francis
An example is the Sisters of St. Francis Health Services Inc. (SSFHS) in Mishawaka, Ind. A Consorta shareholder, SSFHS has centralized purchasing and accounts payable for 10 of its 12 campuses, says Matt Mayer, executive director of procurement services. The IDN conducts transactions with 60 vendors using electronic data interchange. In addition, SSFHS has two people in Mishawaka whose primary focus is on maintaining the IDN’s system-wide, standardized item and vendor databases.

So when Schaumburg, Ill.-based Consorta issues a new contract, SSFHS’s central office can quickly review its database and either add the items or update the pricing (if the items already reside in the database), says Mayer.

Using the Contract Module of McKesson’s Pathways Materials Management information system, buyers at SSFHS’s central purchasing office can quickly see whether an item they want to purchase is on contract or not. If a price discrepancy arises with the supplier, they can immediately begin some productive investigative work using the Pathways system and Consorta’s WINGS web-based system. Questions such as whether the facility signed the necessary letter of commitment or whether it bought the item at the contract price last time can easily be resolved, says Mayer. “[The system] advances us that much further along than if we first had to determine if the item was on contract,” he says.

Integrating Consorta’s online contract management tools with SSFHS’s internal system capabilities enhances the effectiveness and efficiency of its follow-up resolution processes, says Mayer. Only a handful of Consorta contracts have been added to the Path-ways system so far, as SSFHS concentrates on adding the final two hospital campuses to its central purchasing/accounts payable operation, he says. “But the [Pathways] Contract Module enhancement looks promising as a tool to improve GPO pricing integrity across the health system.”

Because it continually monitors and cleans its standardized vendor and item master files for all its facilities, the SSFHS central office has enhanced its ability to do such things as check compliance and measure the potential impact by facility or system-wide of standardizing on a contract item.

Still, the IDN faces challenges. For example, the lack of an industry-wide product numbering system and nomenclature throws a wrench into EDI and conversion efforts, says Mayer. Simple issues, such as differences in how vendors abbreviate the word “case,” can lead to hours of work for the IDN. In addition, the complexities of some contracts, particularly those for physician-sensitive items with multiple pricing tiers – make it difficult for SSFHS to easily and seamlessly pull Consorta contract pricing into its automated purchasing system.

What’s more, there is no easy way for SSFHS to pass its purchasing data to Consorta. “If we could link our purchasing system to [Consorta], so they have our purchasing data at their fingertips, they could do more analytics for me as a shareholder,” says Mayer. “It would make them in effect another set of eyes, a virtual expansion of my contract administration staff.” Mayer believes that Consorta’s new agreement with Neoforma, San Jose, Calif., could potentially facilitate a better flow of data between SSFHS and Consorta.

Consorta’s Multiyear Strategy
That agreement, signed in February 2004, calls for Neoforma to provide Consorta with content- and data-cleansing services.

Through Neoforma’s Data Management Solution offering, Consorta is working to increase the accuracy of the vendor and product information contained in its contract catalog. It is part of Consorta’s multiyear strategy to bring increased value to its shareholders and members through procurement analytics.

“It’s an evolutionary process, which involves enhancing our current databases to track and monitor increasing levels of data,” says Anna Fox, vice president, contract operations and data management. The bottom line is this: If Consorta can help its members identify savings through its contracts, it can bring about increased contract compliance and strengthen Consorta’s own competitive stance in the market.

Already Consorta compares shareholder procurement data to its contracts to help the shareholder identify potential savings opportunities, either through product conversion or through greater participation in the contract. “Some of these analytics are done here, and some are done by the shareholder through tools we provide online,” says Fox.

“Our IT department has had to work with the contracting staff to understand all the complexities and conditions that need to be met in order for specific rebates or price points to occur, and to design the platform around the management of those conditions,” says Fox. “But once you design that platform, the system allows you to be very, very granular.”

But Consorta and its shareholders can work together to identify savings opportunities only if they’re speaking the same language. That is, only if they refer to the same products the same way. That’s where Neoforma’s Data Management Solution comes in.

In many cases, Consorta’s shareholders use their distributors’ product numbers – not the manufacturers’ numbers – to report their purchases. Neoforma can cross-reference distributors’ and manufacturers’ numbers, so that Consorta can compare its shareholders’ purchases with contracted products. In addition, Neoforma “scrubs” Consorta’s contract catalog so that product descriptions and categories follow a certain logic.

The benefits to Consorta and its shareholders can be profound, says Fox. For example, two facilities in an IDN may be buying the same product, but because they use different descriptions, might not be aware they are doing so. Facility A might be buying the item at one price, while Facility B is buying it at another. Aside from the issue of pricing discrepancies, this significantly impedes effective standardization and appropriate utilization efforts, says Fox. “And this is just one small example.” “Standardized, cleansed data allows our shareholders to find products in their own catalogs much easier, and it allows us to compare and contrast products in a much more intelligent fashion,” says Fox.

UHC and Neoforma
Oak Brook, Ill.-based University HealthSystem Consortium has also enlisted the support of Neoforma to help cleanse and maintain its data. The two have an existing relationship through Marketplace@Novation, the online supply exchange offered by Irving, Texas-based Novation for members of UHC and VHA.

The new agreement – for Neoforma’s Data Management Solution – is intended to help UHC’s 90 academic health centers match their line-item files to the Novation Contract Catalog (although Neoforma’s data-cleansing efforts may be employed independent of Novation contracts). The end result, it is hoped, will be that UHC members can easily identify contract and non-contract purchases, and incorporate contract terms directly into their enterprise-resource-planning systems.

The timing was right for such an agreement, says UHC Director of Contract Solutions Don Zak. “Our research indicated that several of our members were making investments in new systems. Cleaning up the data prior to implementation was critical.” But because few medical centers have the resources or discipline needed to clean and maintain their own files, a third party was needed – hence the agreement with Neoforma.

The opportunity for UHC facilities is huge, says Zak. Given the duplication of names and numbers for products, few academic medical centers can get their arms around all their purchases. Consequently, they miss opportunities for standardization or for taking maximum advantage of UHC or Novation contracts, says Zak. And without a common numbering system, a facility can find itself ordering products at list price without knowing that they are available on contract.
Just as large an issue is inventory. “Academic medical centers aren’t warehouses, but unfortunately, they have to operate them,” says Zak. Without common identifiers or a means of standardizing similar items, medical centers can accumulate millions of dollars of products. “There’s inventory in the storeroom, on the patient floors and other areas throughout the hospital,” says Zak. Consequently, when an item is needed, it may be difficult to find. And if it’s difficult to find, the hospital may end up buying another case, even though it has several cases already in stock – somewhere.

Like most worthwhile endeavors, data cleansing isn’t easy, says Zak. In fact, it’s laborious. Although Neoforma has the ability and resources to electronically pull out and analyze potential duplicate items, it’s not a one-way street.
“Members need to be committed to the process,” says Zak. For example, they must make their vendor and item master files available to Neoforma, he says. And although Neoforma can suggest ways to consolidate item numbers and descriptions, the medical center must make the final decision. To do so, UHC recommends that each center assemble a “product content review staff,” including individuals from accounts payable, purchasing and the clinical staff, to consider Neoforma’s recommendations and make some final decisions.

Universal and Broadlane
Still another hospital system that has identified an opportunity to clean up its (data) act is Universal Health Services, the King of Prussia, Pa.-based hospital company. In April, UHS subscribed to Broadlane’s Contract Management System – Premium, which includes the use of Broadlane’s advanced contract management system and its Item Master Services offering.

The contract management system allows UHS to access both national and custom contracts through a single system and provides real-time visibility to all contract information via a Web browser. As UHS places orders through the Broadlink exchange, Broadlane can tell buyers whether the products they are purchasing are on or off contract, and (for contract items) whether UHS is paying the agreed-upon price.

Meanwhile, UHS will use Broadlane’s Item Master Services to consolidate, cleanse and maintain its item master data in its ERP system.

“With the centralized item master, especially in a multi-facility system, you can’t support certain initiatives,” points out Broadlane Senior Vice President Dan Detorrice. For example, you can’t standardize – easily, at least. And you can’t get your arms around how much you’ve spent on certain items system-wide in the past, say, six months.

The goal for Broadlane is to help its members improve their purchasing practices.

“Our job is to help our customers save money,” he says. “By looking at their spend, we can help them. We can tell them, ÔIf you standardize here, you can save this amount of money.’ ÔIf you convert this product, you will save this amount.’ ÔOn this item, you’re paying five different prices.’ We do all these advanced analytics and report back to them.”

Broadlane’s services can help manufacturers too, says Detorrice. For example, its automated ordering system means manufacturers no longer have to accept orders via fax or the phone. “And we can give them better insight into what the demand for their products is,” he says.

“Granted, this is out there, but we can help manufacturers with demand estimations,” he adds. “We can help them predict what orders might come up in the future.”

Don’t Forget Distributors
Not to be forgotten in the discussion about data flow in the supply chain are medical-surgical distributors.

Despite being a vital link in the supply chain, distributors are sometimes the last to know about contract and price changes, says Danny Adams, vice president of e-business development for Nashville, Tenn.-based National Distribution and Contracting. And when they are notified of such things, it is often through outdated, paper-based means. The result is plenty of work and re-work.

NDC is a group of approximately 285 independent distributors who have pooled their resources for group purchasing, warehousing and marketing initiatives.

Many manufacturers continue to send contract information to distributors the old-fashioned way – by fax, says Adams. In the process, numbers get distorted and cut off, or may simply be too small to read. In addition, the manufacturer may fail to note the contract’s start and stop dates, or its ID number, which is essential for sales tracing and rebate reconciliation. The distributor’s record-keeping challenge gets bigger if the contract contains multiple pricing schedules or tiers, as many do today.

Distributors must not only digest information from manufacturers, though. They also must field membership information from GPOs, so the distributor knows which of its customers are eligible for which contracts.

“It’s a four-way synchronization process,” notes Adams, referring to the fact that information from the manufacturer, GPO, provider and distributor must match up for the system to work smoothly. The chances for mix-ups are many.

To help its members deal with these issues, NDC has developed a Web-based contract management and rebate processing system. Using the NDC/MedConduit electronic clearinghouse, manufacturers can transmit contract information to NDC members in real time. NDC members, in turn, send sales data to NDC, which does all the necessary cross-referencing, then transmits rebate claims to the manufacturers.

NDC’s clearinghouse helps its members look and feel like national distributors to manufacturers, hence helping them compete in the market, says Adams. So, rather than receiving sales tracings and rebate claims from scores of independent distributors, a manufacturer with a GPO contract can receive one report on behalf of all the NDC distributors participating in the contract.

The system benefits not only distributors that service the acute-care market, but also those who serve the non-hospital market, who are experiencing some GPO “contract creep” of their own, says Adams.

It is especially valuable for small, independent distributors, many of whom lack the resources to cleanse data and cross-reference their product numbers with those of their manufacturers, says Adams. “A small distributor that lacks a sophisticated distribution software system with contract-database and rebate-processing capabilities can’t play in this market.”

Although NDC’s system can automate what is now an error-prone, paperbound process, it can only go so far. Many questions remain:

Can the industry agree on a common identifier for end users? Complexity is when manufacturer, distributor and GPO call the same provider three different names, with three different account numbers. “You try to run a report and it’s in Klingon,” says Adams.

Can the industry agree on a common number for products? “If you call this product an apple and I call it an orange, we can’t communicate, and we can’t come up with a common number to create a bar code,” says Adams. Yes, the supply chain has been lumbering along using elaborate cross-referencing systems, but at a great cost in time and money. “That’s the justification of a universal product number,” he says.

Will manufacturers begin sending contracts and contract changes to distributors in an electronic format? “If there were a conscious effort to get information into a clear, readable format, preferably in an Excel spreadsheet with all the detail information, that would greatly speed up the loading of contracts,” says Adams. “And the quicker all this happens, the quicker the hospital gets billed accurately.”

Will GPOs begin sending updated membership information and letters of commitment electronically?

It is only by resolving questions such as these that the industry can move forward into the future that the EHCR authors envisioned but never realized.