Automating Business: Automation

Making Contracts Work is… Work

You’ve selected a GPO, or identified the product areas where you’d contract on your own, perhaps with some help from a GPO. It was all you could do to analyze the bids, conduct the site visits and talk to other IDNs before embarking on your new strategy. Now, a year or two later, you’ve found that gaining access to contracts may be the easy part. Using them can be much tougher.

Often, those in contracting don’t know exactly how compliant the IDN is to its contracts. They haven’t a clue, for example, whether they’ve entered into another tier and are eligible for better pricing. Those who self-contract are at a disadvantage when meeting with the vendor at contract renewal time, because they don’t know how compliant they have been to the contract that is expiring. Where’s the leverage?

Nirvana would be sitting down with the vendor’s national accounts manager and producing line item details of the IDN’s purchases on its existing contracts.

“To make a deal and then write a purchase order [using] it Ð that’s tremendous power,” says Mike McCurry, president, Resource Optimization & Innovation, (ROi) in Chesterfield, Mo. But it’s not easy.

Efficient trading partner
ROi is the for-profit entity through which the Sisters of Mercy Health System in St. Louis conducts its self-distribution and direct-contracting activities. It provides services to 19 acute-care hospitals, several non-acute-care facilities and about 200 non-hospital sites in four states: Missouri, Kansas, Oklahoma and Arkansas. Annual purchase volume is $523 million.

Self-contracting was a natural evolution of the IDN’s strategic approach to materials management, which to a large extent hinges on disintermediation, first of distributors, and then of GPOs. “We wanted to be, more than anything else, an efficient trading partner,” says McCurry. By eliminating its distributors and its GPO, the organization felt it could become just that.

ROi buys directly from manufacturers and distributes products to its facilities from an 85,000-square-foot distribution facility in Springfield, Mo. With a next-day fill rate exceeding 99 percent, “We have proven we can outperform the distributor,” says COO Vance Moore.

Crusade for a single database
After implementing self-distribution, ROi embarked on its next venture: self-contracting.

Before anything else, ROi executives had to examine to what extent the Sisters of Mercy were using its GPO contracts, which proved to be a difficult exercise. McCurry says the GPO itself didn’t know the answer. Rather, it estimated the Sisters’ compliance by comparing manufacturers’ and distributors’ sales reports against what a hospital system roughly the size of the Sisters of Mercy could be expected to spend. “I was blown away,” says McCurry. “No other supply chain on Earth would withstand this.

“So I began a crusade,” he continues. “Mercy had to have a centralized, single-database system, and we had to be able to drive compliance.”

By late-1999, the IDN began planning implementation of the McKesson Pathways materials management system. All but one of its hospitals were up and running on the system by the end of 2002.

Implementing a common information system was only step one of ROi’s self-contracting strategy. McCurry was without a common item master file for all of its facilities, and the IDN would realize limited benefits from its materials and purchasing system.

Gauze is gauze
“So from February to September 2001, we did nothing but work across the organization to agree on nomenclature for item descriptions,” recalls McCurry. The goal was simple. “A gauze pad was going to be a gauze pad.”

In other words, ROi was determined that all of the IDN’s facilities would adhere to a common numbering system and nomenclature for products. Nothing less would suffice for an IDN with a goal, in McCurry’s words, “to have every dollar of our $523 million (in annual spending) under contract.”

The job was completed, but only in a metaphysical sense. In fact, it’s an ongoing process, overseen by an item file group. “The good news is, [the job] is staffed appropriately,” says Moore. “But it’s a task that won’t go away. Are we better than most IDNs? Absolutely. Is there still work to do? Absolutely.”

The materials management staff worked hard to build ROi’s capabilities for electronic requisitioning, electronic data interchange and e-commerce. Today, 72 percent of its orders are placed via EDI. And electronic requisitions exceed 99 percent. “That allows us to automate the system from ‘need’ to ‘receive,'” says McCurry. “We have become a very, very efficient trading partner.”

In ROi’s case, efficiency translates into dollar savings. “When we go to [vendors], we know everything about our usage,” says McCurry. “We can say to them, ‘We have the ability to be your lowest cost, but highest margin, customer.’ That’s all driven by our information systems and efficient logistics system.

“So when Gary looks at that vendor in the eye and says, ‘I will do this,’ the vendor knows Gary can write a purchase order to back up his word,” McCurry adds.

“Gary” is Gary Kane, ROi’s VP of group purchasing. Formerly with Mallinckrodt and, prior to that, Amerinet, Kane is responsible for identifying contract opportunities and driving compliance. It’s a task that calls for harnessing both the information and human resources of the Sisters of Mercy.

“When we were building the ROi GPO, our first order of business was transitioning contracts that Mercy had participated in under [its prior GPO],” recalls Kane. “That went extremely well, based on the enthusiasm of the vendors.

“But after we moved the contracts into the ROi portfolio, we began to think, ‘How can we involve clinicians in the contracting process?'” he adds. The ROi team realized that while value analysis and advisory groups were fairly effective in doing so, ROi had something going for it that other GPOs and IDNs had lacked in the past: a clean item file. The file contains about 120,000 items, which are clustered under 700 product commodity codes in the Pathways system.

“We took it one step further,” recalls Kane. “We said, ‘Let’s take those 700 codes and break them into four categories.'” The result was what ROi calls “ROiAligned,” a program designed to reduce vendor and product variation, improve vendors’ perceptions of ROi, and, of course, drive down costs.

Subcommittees with responsibility for each of these four product groups meet monthly to discuss contracting opportunities (including contract renewals) and product standardization. The “commodities” subcommittee doesn’t require clinical input. However, the other three do. Not surprisingly, the subcommittee for high-cost/high-preference items calls for the greatest degree of physician input.

“We take contracting opportunities and provide them to the subcommittee, which looks at them and assigns a product champion who will say, ‘I will work this through all my peers and counterparts and provide feedback to the ROi GPO to help direct their activities,'” says Kane.

Overseeing the entire process is the ROiAligned Executive Oversight Committee, comprised of the hospital CEOs and significant physicians, who meet monthly to review the activities of the subcommittees. The ROi team, under Kane’s direction, reviews contract compliance with the committee. Unlike past GPOs who gave the Sisters of Mercy ballpark figures for compliance, the ROi GPO reports to the committee “exactly what their compliance is to the dollar, and we give them reports on where they’re not compliant,” says Kane.

The result? Says Moore, “Gary can say to the vendor, ‘I can write a contract with you today, and I can write a purchase order and stock the product. And I have clinical consulting resources that can influence buying patterns.’ So Gary can drive compliance through internal sales reps É and, (because) he can prove he can drive more compliance, we’re willing to participate in long-term engagements.”

“When we sit down with a vendor and explain this model, there’s a level of excitement,” adds Kane. “So when I say it’s a million-dollar deal, it will be a million-dollar deal. It won’t be a matter of hoping for some level of compliance. We’re researched it upfront. We have the buy-in of clinicians; and we can sit down and say, ‘This is the direction we’d like to go in.’ That manifests itself when ROi turns around a value proposition that’s extraordinary.”

Key to compliance
For Bill O’Connor at the University of Pittsburgh Medical Center (UPMC), the key to compliance and purchasing efficiency begins with the item master file. O’Connor is director of corporate purchasing for the IDN, which comprises 19 hospitals and approximately 400 outpatient sites and doctors’ offices in western Pennsylvania.

Although UPMC does much of its own contracting, it recently chose to join Alpharetta, Ga.-based MedAssets, largely because of its information technology offerings.

UPMC has a homegrown contract management system, which allows buyers to view basic information about its contracts. But the MedAssets system will take the IDN a couple of steps forward. Not only will the information in the new system be more comprehensive, but also it will tie directly into the IDN’s item master file, so that changes to one will be reflected in the other, says O’Connor. “It will allow us to automate across the system,” he says.

Long-term, O’Connor expects UPMC to implement what its CFO calls an “e-buy-to-e-pay” system. Users in any department will call up department-specific screens of products, and then electronically place orders directly with approved vendors. The products will then be shipped and received, and UPMC will transmit an electronic payment. Users will be able to track their orders and learn where their products are in the supply chain. Purchases of items not on UPMC’s approved product list would be red-flagged for the purchasing department’s intervention.

Humble beginnings
The slick plan rests on humble beginnings: the item master file. O’Connor says today, UPMC has approximately 30,000 of an estimated 100,000 items on its item master. But he thinks UPMC can do even better.

“We do an excellent job making good business decisions and monitoring compliance for those 30,000 items,” he says. “And they represent a large proportion of our spend. But we want everything to be in [the item master], so we can understand our entire spend. There’s a lot of indirect spending, which we don’t have a handle on, and we think we have some opportunities to save money. We’re confident that with MedAssets’ item master offering, we can capture a greater portion of it.”

With the system in place, O’Connor says UPMC’s purchasing and contracting staff can give its departments reports on how well they’re doing in meeting their budgets and savings goals. It will also have the capability of regularly monitoring product purchases that may bring the IDN out of compliance to a contract. Because the system will be automated, the contracting staff can monitor far more product groups than it can today.

“Basically, we will have, as our CFO puts it, everything coming through a funnel,” says O’Connor. In other words, the contracting staff will have a much better handle on a far greater percentage of purchasing than it currently does.

The task ahead lies not only in implementing the electronic system, but also in gaining the support of the leadership of all of the IDN’s various business units, then training them on how to use it. (The plan already has the blessing of UPMC’s president and CFO.)

“One of our biggest hurdles will be handling the difficulty people have with such a major change,” says O’Connor. But once accomplished, the entire IDN will benefit.

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