What kept you up at night in 2008? How can you get some rest in the year ahead?

A credit crunch, technology costs and rising prices call for creative solutions.

Supply chain executives know very well what it means to balance spending with investments in new technology – without compromising patient care. As if their job isn’t complicated enough, add to that a deflated economy, a banking crisis and potential Medicare cuts, and chances are, many have faced some sleepless nights this past year.

The Journal of Healthcare Contracting talked with several industry figures to see what topped – or steered – their agendas in 2008.

Dawn Javersack, senior vice president and CFO, Broward Health (Fort Lauderdale, Fla.).
The Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

Javersack: The biggest issue for the healthcare industry has been the overall economic climate resulting from the downturn in the economy and the turmoil in financial markets. This has had a significant impact on healthcare. As a result, we are seeing an increase in the cost of patient care delivery and the number of uninsured patients. At the same time, we are seeing increases in the cost of supplies, food, transportation and shipping.

I expect we will see greater demands for healthcare services from uninsured patients and, at the same time, those patients who are insured will have increased responsibility in terms of higher deductibles and co-payments, making the task of collecting cash much more challenging. We can also expect continued pressure on both federal and state budgets, resulting in likely cuts in Medicare and Medicaid reimbursement.

We are also seeing a decline in access to new capital via hospital bond issuances, and healthcare is an industry that is very capital-intensive. Only those IDNs with the highest credit will be able to access the bond markets, which will create even greater pressure from a revenue and cost perspective.

JHC: How should supply chain executives respond to these issues?

Javersack: It becomes more important than ever for hospitals to balance cost with the provision of patient care services. And because supply chain costs typically consume between 17 and 21 percent of a hospital’s revenue (second only to labor costs), we will see a greater emphasis on true vendor-hospital partnerships. We’ll need to set common goals with our vendor partners, and they will have to provide value and solutions. That means supply chain management executives will have to communicate their needs clearly. We’ll have to move beyond the sellers-and-purchasers relationship.

Economic pressures will likely increase before they level off, and patients will continue to look for the best quality of care. Historically, the healthcare industry has provided this. But, in the future, healthcare systems and executives will have to work even more efficiently to do so.

Gary McMann, director of supply chain operations, Billings Clinic (Billings, Mont).
Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

McMann: The banking crisis has been the biggest issue we have faced, followed by The Centers for Medicare and Medicaid’s (CMS) payment policy and the “going green” movement.

The banking crisis has made it difficult, if not impossible, to float bonds to obtain funds needed for major capital construction projects. The majority of healthcare organizations will, at some point have a need for borrowed funds. Even financially strong hospitals will flinch when they think about dipping into their cash reserves to fund seven-figure purchases or projects. Furthermore, our recessionary environment will ultimately impact patients’ ability to pay, thereby inhibiting the flow of cash necessary to achieve profit margins to keep up with operating expenses.

The rising cost of healthcare and consumer interest in patient safety has been a primary driver for CMS to develop a new payment methodology. It has been proposed that Medicare no longer pay for certain conditions acquired during a hospital stay. Hospitals would be required to report on admission indicator data to help identify conditions acquired during patient stays. Hospitals that did not pay attention to details that could prevent hospital-acquired disease or injury would be at risk of losing Medicare reimbursement.

Finally, healthcare entities are beginning to embrace the notion that “green” starts here. The amount of medical waste from a single medium-size hospital is staggering in terms of volume and potential impact on future generations. It’s ironic that soil, water and air are negatively impacted by our effort to save lives, reduce pain and care for those unable to care for themselves.

JHC: How should supply chain executives respond to these issues?

McMann: In the case of the banking crisis, we should do our part to reduce supply/equipment costs and maximize allowable charge capture. We must educate staff on the importance of exercising sound inventory management practices aimed at following established charging and replenishment protocol, setting appropriate inventory levels to include minimum and maximum stock levels, and eliminating waste and standardizing product selection wherever possible.

With regard to CMS payments, having the right product at the right place, at the right time directly impacts quality of care and the incidence of hospital-acquired infection/injury. For instance, choosing the wrong patient briefs, under-pads or moisture barrier products can directly affect infection rates. Similarly, running out of a certain type or size of product and having to make do with something else on hand can lead to a less desirable patient outcome. Incompletely stocked specialty carts can set up a caregiver for failure when he or she doesn’t have the necessary product to respond to emergency situations. Zero stock-out of supplies should be the standard, not the exception.

“Going green” is truly everyone’s responsibility. Supply chain leaders should help establish “green” committees, which include membership throughout the facility. They should focus on waste management, reprocessing, recycling, consumption reduction and product conversion, and this often requires cultural change.

Brian Bravo, director of purchasing and materials, Broward Health (Fort Lauderdale, Fla.).
Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

Bravo: The three biggest issues impacting healthcare are the cost of raw materials, the economy and the proposed CMS guidelines for hospitals.

With regard to the cost of raw materials, many of our supplies come from China, which is starting to increase costs and limit healthcare supplies. This is especially impacting the glove business. This is further impacted by the rising cost of fuel and transportation. We need to see an increase in our margin to cover these additional costs. Although some U.S. manufacturers own their own plants, most get their supplies from the same producers in China.

With regard to the economy, healthcare may not be a very profitable market, but it is a stable one. Still, in the last year and a half, we have seen a lot of state budget cuts. And, when the state suffers, it inevitably cuts healthcare funds, and we can anticipate federal-level cuts soon afterward. On one hand, we must budget for such cuts, or they can have a dramatic effect on us. But we can’t always foresee them, and must react when they occur. So, hospitals are looking for places to cut costs, such as cutting or freezing positions.

When it comes to CMS cuts and proposed guidelines, again, healthcare is a very reactive industry. As the CMS no-pay list changes, hospitals will have to respond.

JHC: How should supply chain executives respond to these issues?

Bravo: The healthcare industry is constantly looking for new cost-savings and quality improvement ideas, and there are always opportunities for saving, with regard to products and services. But, on the clinical side, it is not so cut and dry. We must consider the value of new and emerging technology each year, and there is a lot of competition out there for us to choose from. We don’t want to limit our physicians’ choices too much.

Because we are a reactive industry, I believe supply chain management will eventually account for the largest part of hospitals’ budgets. The question is, how much can you keep cutting supply costs? They keep going up – then what? We have seen more hospitals closing, and I suppose this is one way that other hospitals survive. With fewer hospitals, there is greater opportunity for them to be profitable. Otherwise, we may see state governments stepping in to bail out hospitals.

Ed Robinson, system, vice president, system support operations, OhioHealth (Columbus, Ohio).
Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

Robinson: After years of steady increases, many hospitals and health systems have experienced a significant drop in patient volumes, resulting from pressures from the economy (e.g., job losses, loss of insurance coverage, declines in elective procedures), the rise of consumer-driven health plans that shift a greater cost burden to patients, and continued competition for outpatient business. Much of this decline has involved less intensive outpatient procedures, which has impacted the supply chain. So, there is less patient volume to spread the fixed costs of the organization. Also, as lower-acuity volume shifts away from hospitals, the case mix index of the remaining volume tends to be higher, which may create the appearance of an increase in supply chain metrics, such as the cost of drugs and supplies per adjusted admission. Finally, the volume loss often is accompanied by margin erosion, which places a greater burden on the supply chain function to deliver contract and utilization savings.

Another pressing issue in healthcare has been the collapse of the financial markets and the severe tightening of credit, which have placed pressure on net operating and investment income, leading to a decreased availability of capital funding. Although this has not impacted healthcare to the extent it has other industries, the effect has still been significant. Most large systems have a master trust, which generates investment income to supplement net operating income and serve as a source of capital funding. This “non-operating income” also provides a buffer during temporary financial downturns. In the current market, health systems are feeling the squeeze from declines in both operating and non-operating income. In some cases, this is causing overall operating losses, and many health systems have decreased their rate of capital spending.

A third issue in healthcare has involved increases in fuel, energy and raw material costs, intensifying inflationary pressures. Inflationary pressures have mounted throughout 2008, especially with regard to petroleum-based products and the transportation expenses associated with most products. Although fuel prices have abated in the past month, much of the damage has already been done. In addition, many health systems are finding they are victims of their own past contracting success. One noteworthy example is that of IV solutions and sets, a commodity that has enjoyed years of price protection in many large systems. While manufacturers have been successful in reducing their cost of goods sold, the pent up impact of years of price protection, coupled with increases in energy and raw materials costs, have resulted in unprecedented increases from all manufacturers of this product. The market has experienced a similar impact with latex exam gloves.

Another issue we have faced involves a growing trend toward supply chain volume-aggregation through purchasing coalitions and regional collaboratives, where non-competing health systems have come together in GPO-facilitated ventures. As health systems continue to search for ways to reduce costs, the concept of aggregating purchasing volume within a defined regional area is gaining momentum. Many of these efforts are being spearheaded by alliances/GPOs, such as VHA and Novation, which provide a major benefit in member networking. Neighboring health systems in the same region are coming together and developing collaborative contracting strategies, which deliver enhanced pricing and other value in exchange for new and retained business. Some of these efforts are leading to the investigation of other collaboration initiatives, including the analysis of consolidated service centers and other joint ventures.

Finally, we are once again seeing more acquisitions of subspecialty physician group practices (e.g., cardiology, neurology, and orthopedics) by hospitals and healthcare systems. As competition for these physician subspecialties intensifies, and as physicians in these highly profitable disciplines consider ventures that would compete with hospitals, there is a growing trend for health systems to acquire these types of large group practices. These partnerships are extremely positive for health systems because they shore up the relationship and provide the opportunity to more closely align incentives around quality, safety, patient satisfaction and cost. When physicians are employed by hospital systems, mutual expectations can be more precisely crafted around productivity and resource utilization and directly linked to compensation and other incentives. Also, better information sharing can evolve between physicians and supply chain executives, and a shared savings model can be developed.

JHC: How should supply chain executives respond to these issues?

Robinson: With regard to inflation, for such commodities as IVs and gloves, we may not be able to mitigate the impact of inflation. For most commodities, supply chain executives will need to remain diligent to competitive alternatives when a supplier presents a price increase that is excessive. A competitive, non-incumbent supplier may still be able to offer a cost-savings for the promise of new business. Health systems must stand ready to move business and send a message to the marketplace that they will not roll over and take whatever price increase a supplier attempts to implement. Supply chain executives must also step up efforts around utilization management, waste reduction and general process improvement to further mitigate the impact of inflation.

Regarding the tightening of credit, supply chain executives will need to be much more involved in negotiating and leveraging the capital spend at health systems to ensure the maximum value is received for these limited dollars. They will also need to become more creative in developing other innovative methods of acquiring the use of capital technologies, including operating leases and other funding mechanisms.

Regarding volume aggregation initiatives, supply chain executives will have to be open-minded to this type of collaboration and be more flexible in their contracting approach. They will have to focus on initial opportunities to drive enhanced value among commodities and non-clinical preference items, in order to gain the support of senior leadership for these efforts.

Finally, with regard to physician practice acquisitions, supply chain executives will have to forge a strong relationship with these newly employed physicians and find ways to make their practice of medicine more effective in hospital settings. The mutual development of evidence-based guidelines for resource utilization will be critical to ensure the success of these relationships.

Mike Hildebrandt, associate vice president of supply chain, Scottsdale Healthcare System (Scottsdale, Ariz.).
Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

Hildebrandt: One of the biggest issues facing supply chain management this last year has been the effect of new technology on rising healthcare costs. For the most part, new technological advances have improved patient care and clinical outcomes. Unfortunately, the new technology comes with a high price tag and little or no corresponding revenue reimbursement.

The second major issue that has affected supply chain practitioners in 2008 has been the development of effective physician and clinician relationships. As many supply chain leaders have discovered, physician preference items represent a large percentage of a hospital’s total supply spend, and this percentage is expected to increase in the coming years.

The third major supply chain issue in 2008 has concerned data and decision-making. Like most healthcare organizations, we struggle to keep our materials management information system and item master file current and accurate. Recent surveys have indicated that for most purchasing systems, at least 30 percent of their item master files are inaccurate, resulting in errors, duplication, invoice discrepancies, pricing problems, delivery issues and inventory increases.

JHC: How should supply chain executives respond to these issues?

Hildebrandt: With regard to the effect of new technology on rising healthcare costs, our IDN has taken steps to minimize cost increases. This past year, we have increased our use of DaVinci robotic technology, introduced the excimer laser procedure, upgraded to the latest coated stents and selectively approved new implant products for pacemakers, ICDs, total joints and spinal implants. In order to minimize the cost increases resulting from this new technology, we have solicited competitive bids and partnered with our group purchasing organization to optimize pricing and contract performance. We have also reduced costs in other areas of the supply chain process. I believe that new technology will be a continuous challenge for supply chain leaders for many years to come.

With regard to improving relationships between physicians/clinicians and supply chain executives, we view our physicians as valued partners who contribute to the success of our health system and our supply chain goals and objectives. As a supply chain leader, I am committed to working closely with our key physicians, attending their medical section meetings, understanding their needs and concerns, and proactively involving them in the negotiating process. We recently partnered with our key cardiac physicians to implement a new capitated price program for cardiac rhythm devices, which resulted in an annual cost savings of $400,000. It is very important for our supply chain team to understand the needs of our practicing physicians and seek opportunities to reward them for their support. This may mean having senior administration send a formal “thank you” letter, improving operating room start times and block scheduling, or giving our physicians proactive input into the selection of products. We also work closely with our group purchasing organization to offer our physicians purchasing discounts. Also, our capital equipment program is designed to solicit physician input to ensure that their clinical and equipment needs are met and kept current. Finally, we now employ three RNs on our supply chain team. Their experience and clinical background have been invaluable in engaging physicians in the supply chain process. And, we have developed a strong relationship with our chief medical officer, who is a member of our Supply Steering Committee.

With regard to data and decision-making, we have teamed up with our information technology provider and department to clean up our master file and improve our system processes between supply chain management and other key departments. We also plan to actively support the national effort to standardize and synchronize data. If providers, suppliers and distributors come together to support data standardization, there is a tremendous opportunity to reduce costs significantly and improve efficiencies in the supply chain. We now support GS1 standards and the Global Data Synchronization Network (GDSN) through our membership in our group purchasing organization and the Association for Healthcare Resource and Materials Management (AHRMM). And, we meet with our key vendors to solicit their support for these data standardization initiatives, as well. This issue will become very important during the next two years, as implementation timetables are established.

Jody Hatcher, acting president, Novation (Irving, Texas).
The Journal of Healthcare Contracting: What, in your opinion, were the biggest issues facing healthcare and/or your IDN in 2008? How have they affected supply chain management or the healthcare industry as a whole?

Hatcher: The three biggest healthcare-related issues in 2008 were raw material price increases (particularly for offshore products), the confidentiality of data, and aggregation, or the formation of subgroups for collective price negotiation.

With regard to price increases, hospitals did not budget for mid-contract-term price increases, which placed additional pressure on the supply chain to meet its goals. In addition, many of these increases were driven by factors outside of the United States, and in the control of other countries, creating further risk to the healthcare supply chain. Higher prices continue to put pressure on hospital operating margins. With little ability to reduce healthcare labor costs, these lower operating margins have forced a reduction in expansion plans.

Regarding the confidentiality of data, the transparency of pricing has been a major factor in reducing and rationalizing pricing for high-cost items. In 2008, many suppliers attempted to leverage access to price for further restrictions on data confidentiality. The short-term impact has been limited, and in some cases has resulted in lower prices. However, in time the lack of transparency will result in overall higher prices for these products.

Regarding aggregation, price negotiation groups have formed, placing further pressure on group purchasing organizations to adapt to a changing environment, as well as adapt their contracting strategies. These groups also have raised many questions in the supplier community about the value of GPOs. In the short term, this may result in some price decreases. But, over time, if this strategy erodes GPOs’ ability to obtain good pricing while suppliers hold back for secondary negotiations, prices will rise and impact operating margins.

JHC: How should supply chain executives respond to these issues?

Hatcher: Supply chain executives should respond to increases in the price of raw materials by taking advantage of their GPO contracts. There often is value that goes unused, which can help bring down overall cost. Additional segmentation of the supply chain can result in higher prices over the long haul. Commitment to national contracts, along with conversions where appropriate, will result in suppliers continuously delivering best value and holding the line on price increases.

Price transparency is critical to ensuring best value in the supply chain. Executives should ensure that their organizations don’t give up their data rights to gain a few points in price. We suggest that hospitals continue with ongoing “price” negotiations, but work with their GPO on terms and conditions to ensure that the proper protections regarding data rights are included in any agreement the hospital may negotiate.

GPOs have a broad view of how the supplier is working in the market, as well as what types of value they deliver in various settings. Working with group purchasing organizations on local initiatives will ensure that best prices are obtained and protect the foundation of the GPO national contracts. This strategy also will ensure there is no segmentation of the supply chain and that value continues to be delivered through the GPOs.

About the Author

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