Solutions for Survival

As pressure mounts for IDNs to show cost savings, supply chain execs look for efficiency solutions to meet their needs

Supply chain executives are renowned for making more out of less. They know as well as anyone the importance of product standardization and centralization of functions in cutting costs and ensuring the success of their facilities. But, the prospect of nearly 36 million newly insured patients entering the system, and reimbursement cuts looming, means supply chain leaders need better solutions for gathering and interpreting data, and converting this information into greater cost savings.

What you absolutely need
Integrated delivery networks need manageable information, and they need it ASAP, say the experts. “In today’s environment, streamlining the supply chain process and ensuring access to relevant information is key to maximizing the value in procurement operations,” says Guillermo Ramas, vice president, strategy and product development, Novation. “Solutions that allow IDNs to acquire, codify, interpret data and support the creation of actionable information in a timely manner are paramount to success. Whether they are confirming a purchase order, uncovering insight in market pricing of medical products or addressing utilization and physician alignment, IDNs must have tools that support organizing datasets into manageable information while it’s still relevant.”

To this end, Phil Pettigrew, director of materials management, Denver Health (Denver, Colo.), looks for solutions that address four supply chain processes in particular:

  • Contracting. IDNs require leverage to demand better pricing.
  • Automation. IDNs rely on efficient data.
  • Logistics. IDNs must process the supply chain as efficiently as possible.
  • Centralization. Centralized functions, including a centralized purchasing system, inventory control and bulk storage, help reduce costs.

Having the right tools available means Denver Health can “have the right people doing the job,” says Pettigrew. “Whereas in the past, nurses and clinical staff did a lot of the supply chain ordering, today we have supply chain experts doing this.”

“The ability to negotiate better contracts means lower supply costs,” says Pettigrew. “With centralization comes increased productivity and efficiency. We need fewer full-time employees to get the job done, so labor costs are down.” And, better inventory solutions have led to more efficient, less costly processes, he adds. “Denver Health sees much less waste today. We are a lean hospital system.”

Novation appears to recognize – and address – the needs of hospital systems like Denver Health. “Solutions that have been gaining widespread acceptance, such as electronic data interchange (EDI), are clearly helping hospitals improve the purchasing process,” says Ramas. “But, the significance here is with regard to resource alignment. Purchasing departments that at one time were unable to do more than the daily order management are now able to move beyond resource intensive phone/fax confirmations and address the more strategic issues like price management.

“Contract management solutions have taken the papers out of the file cabinet and provided visibility to these relevant agreements,” he continues. “Electronic tracking, and processing of commitment and participation agreements have also enhanced the process flow. But, again, the true significance is that volatility of market pricing has made contract analysis a premium activity.” Standardization, such as United Nations Standard Products and Services Code (UNSPSC) and other data initiatives that have enabled greater data transparency are equally important to successful supply chain processes, he adds.

For Chuck Carson, administrative director of supply chain for Beaumont Hospitals (Royal Oaks, Mich.), access to the right efficiency tools helped his IDN trim nearly 5 percent of its total spend in 2009. Optimizing the IDN’s Enterprise Resource Planning (ERP) applications has been a priority, he notes. In addition, “the item master needs to be pristine,” he says. “Key performance indicators are essential, and price benchmarking and reporting is a must. And, we try to pull as much vendor supply detail as possible.” To stay on top of costs and avoid overlapping expenses, Carson runs a vendor spend and supply [program] every six months rather than yearly.

Joe Burns, senior vice president of enterprise accounts at Broadlane, agrees with Carson that great reporting ability helps IDNs stick to their formularies and ultimately cut costs. It begins by having a pristine item master, which provides supply chain leaders with solid data and an understanding of what they do and do not have under contract, he explains. “EDI and electronic invoicing also are very important,” he says. “Together with the item master, this facilitates good reporting ability. We don’t want [supply chain executives] ordering blindly.” Finally, it is essential for IDNs to have the ability to benchmark their performance against their peers, he adds.

At Premier, Stephen Torbett, senior director of product marketing, finds value in many of the same efficiency solutions that are working for others, and he notes the importance of IDNs being able to summarize the various solutions they rely on to help with supply chain oversight. “Hospital systems need good processes in place for managing data quality and maintaining their item master,” he points out. In addition, he recommends:

  • Web-based contract.
  • Electronic price activation (as an important substitute for paper forms).
  • Aggregated spend data (to help analyze total spend across the system).
  • Solutions for price and tier, and price benchmarks to support the contract.
  • Conversion and standardization opportunities.
  • Tools that support modeling and what-if analysis.
  • Value analysis, utilization management and other tools, which can help improve the relationship between supply chain leaders and physicians.

With solutions such as these in place, Torbett estimates that IDNs can typically see greater efficiencies and between 2 and 5 percent savings, depending on the solution.

“We see significantly lower error rates with our members, who realize more accurate price points,” adds Bill Marquardt, vice president of development and adoption, Premier.

“Everything depends on data, today,” says Marla Weigert, group vice president, contract management and administration, Premier. “[IDNs] are light years ahead of where they were in the past.”

Then and now
Indeed, hospital systems can’t afford to operate as they did 20, 10 or even five years ago. “The environment 10 years ago was clearly different,” says Ramas. “The intensity of price management and cost savings wasn’t near what it is today. [In the past], hospitals succeeded and quality clinical care was delivered because they were meeting the demands of that supply chain. But, that supply chain doesn’t exist anymore. “

Healthcare’s supply chain does not exist in a vacuum, and as other industry supply chains have become more dynamic and complex, so too has the healthcare supply chain, he continues. “Those hospitals that have adapted and are meeting the challenges of an increasingly unpredictable supply chain are continuing to deliver excellent healthcare.”

From Burns’ perspective, at one time IDNs managed by “throwing people at the solution. They faxed orders and waited for confirmations,” he says. “They went to the vendors for history reports. And, they used outside benchmarking services to see how their pricing stacked up.” But, by the time they received data, it was outdated, he points out. Today, he adds, hospital systems have “up-to-date intelligence,” enabling them to act more efficiently. And, with better controls, IDNs can better ensure they are paying for that which they contracted for, Burns continues.

All hands on deck
If supply chain leaders felt they were working in a vacuum 10 years ago, that’s changing, according to experts. In the past, bringing physicians and clinicians on board with cost-saving measures, such as contracting for physician preference items, was like pulling teeth for many hospital administrators. But, today, automated efficiency solutions enable supply chain executives to more easily share compelling data with their physicians. “Gone are the days when hospitals were like islands, alone and unable to get the information they needed to make decisions,” says Ramas.

And, the more data contracting executives can present to physicians, the easier it is to elicit their support and buy-in, notes Carson. “In the past, physicians didn’t realize how much it cost to provide healthcare,” he points out. “But, with [the passing of] healthcare reform, they are becoming business people.” And, it helps to have physician leadership driving the process, he adds. “On each value analysis team, we have a medical chief and an administrator [serve as] co-chairs,” he says.

Pettigrew, too, has been more successful eliciting physician buy-in through the sharing of data. “Yes, we have had some pushback [over the years] with regard to certain physician preference items, such as implants,” he admits. “But, we have overcome this through data transparency. As long as we can show our physicians data that supports how [certain strategies] drive down costs, we can overcome that pushback. Our philosophy is to [remain] lean throughout our medical organization, including our medical staff.

“We had $1 million in inventory cost reductions [in 2009],” he continues. “At the end of 2010, our materials managers will control 95 percent of non-pharmaceutical inventory. This will free up our clinical staff. That said, the materials managers at Denver Health could never accomplish nearly as much without the help of an automated supply chain, he points out. “Automating the entire supply chain – electronic requisitioning and invoicing, funds transfer and more – automating the entire supply chain reduces the number of steps our people need to take.”

As healthcare reform plays out, hospitals potentially could lose $200 billion over the next 10 years, making efficiency solutions more important than ever, according to Torbett. “For the longest time, supply chain savings were all about price,” he says. “The next level will be to make [hospitals] more clinically integrated. Supply chain executives will rely on increased data and the value analysis process to reduce variability and increase efficiency.”

What to expect
Healthcare is a messy business, and that likely will not diminish any time soon, according to experts. As such, supply chain leaders will continue to require the best efficiency solutions to ensure the success of their organizations. “There is no reason to expect the dynamic or volatile nature of the current healthcare supply chain to end,” says Ramas. “Increasing complexity and intense scrutiny will continue to elevate these aspects. And, solutions to address these needs will continue to be developed.”

With nearly 36 million more people requiring healthcare coverage, demands on the industry will continue to grow. As they do, contracting executives will need more accountable data and electronic data interchange, say experts.

Continued reimbursement challenges may force hospital administrators to partner with doctors with regard to gain sharing benefits and driving down costs, says Burns. The ability to do so will depend on good efficiency and benchmarking tools, he adds.

“The revolutionary solutions will focus on predictive analytics, with an eye toward usability and intuitiveness,” says Ramas. “Easy access to information across the purchasing continuum will support applications that seamlessly integrate supply decisions with clinical outcomes and quality of care. We should expect our solutions to transform data into insight and tell us – and our hospitals – what it is we don’t know.”

As far as Pettigrew is concerned, all of this is good for the industry. “I see the future as being incredibly bright,” he says. “I believe an even greater premium will be put on reducing costs, particularly salaries (FTE) and outside service and supply costs. We will probably see greater pressure on materials managers to show cost savings, which will challenge all of us.” And, contracting will become more important than ever, he adds, noting that supply chain executives will have to develop “the perfect department.

“Materials managers will have to become even smarter at being more efficient,” he continues. “They will have to create greater productivity, streamline the system and essentially do more with less.”

About the Author

Laura Thill
Laura Thill is a contributing editor for The Journal of Healthcare Contracting.