Novant Health employs a process-driven approach to making clinical and supply chain decisions in an integrated fashion
By Mark Welch and Robert Handfield
Ten years ago, Novant Health embarked on a journey to supply chain excellence, recognizing that clinical engagement in a data-driven cultural transformation was a foundation for managing the complex and rapidly changing healthcare ecosystem. With increased growth and absorption of new hospitals and physician offices, increasing pressure on the cost of care, the advent of electronic medical records, and a rapidly aging population faced with longer life spans, the leaders at Novant Health decided to act. The team sought to establish a methodical, process-driven approach to making clinical and supply chain decisions in an integrated fashion.
Accountability for all
Many non-profit hospitals are moving to an environment in which the majority of Medicare reimbursement will be tied to “comparative effectiveness.” In a system of fixed and bundled payments (as opposed to a fee-for-service model), healthcare executives are recognizing the need to drive supply chains that focus on measuring performance, aligning accountability for outcomes to the right parties, and extending this accountability to suppliers.
One of the most critical elements of this journey is a commitment to building data-driven supply management strategies, coupled with significant physician engagement.
Novant Health strives to drive alignment with clinical stakeholders and coordinate decision-making around difficult and sometimes emotion-charged decisions. This requires a new type of culture, one that seeks to bring suppliers along in a collaborative endeavor to relentlessly pursue joint cost reduction and improve patient outcomes.
Data capabilities lacking
When Fred Hargett joined Novant Health in 2003 and rose to become CFO managing the system’s $3.5 billion in annual consolidated revenue, he found the level of data capabilities to be somewhere in the lower quartile. “We had an ERP system, but we weren’t using it,” he says. “Even today, despite all of the investments we’ve made, our analytics capabilities are just slightly above average. We know we have a lot of work ahead.”
These words coming from a CFO provide an indicator as to the appetite for change and improvement that can be found in Novant Health. It also signals a desire to “hard-wire data into all of our decision-making processes,” with the recognition that data is the ultimate basis for driving integrated decision-making – not opinion, not physician preference, not centralization of purchasing authority but rather, aligned and data-driven decision-making.
This recognition of the need for data had its origins in an early meeting attended by Tony Johnson, chief operating officer, Novant Health Shared Services. “When I arrived, we were different subcultures, and we didn’t work together as a coherent group,” he recalls. “In 2003, everyone came together and understood that without a unified culture that included employees, leadership, and physicians, we would not be successful. A culture was needed that was held together by a decision-making process and methodology that we all agreed on.
“Everyone thought we knew what that looked like, but it turns out we really didn’t. So we went through development of an ARCIE chart exercise, where every decision had someone who was accountable for approval, someone who was responsible for implementation, people who were consulted (often subject matter experts, such as physicians), those that were informed of the decision, and those who evaluated decisions. [ARCIE stands for Approve, Recommend, Consult, Inform, Execute.]
In 2005, Johnson brought Mark Welch to Novant Health to lead supply chain operations in the Charlotte, N.C., market. Since then, Welch has served as director of Novant Health’s logistics center and leader of its strategic sourcing department. He assumed his current role as vice president of the system’s supply chain in 2012. His responsibilities include sourcing, contract administration, supply chain data integrity/analytics, self-distribution center, supply chain hospital operations, procurement and supply chain IT.
The key metric
When Johnson and Welch turned their attention to the supply chain, they recognized that an ARCIE was needed to better define roles and responsibilities across clinical and administrative interfaces. “Prior to this exercise, any vice president could write contracts, and with the number of VPs we had, we had no synergy on any of our purchases,” says Johnson. “From that, we constructed a very logical process for approaching our supply market that included physicians, supply chain experts, and the patient. But we needed a metric around which to focus our effort.
“In discussions with Fred, we all agreed that of all the things that we could measure, our supply chain expenses as a percent of revenue was the single most important focus that aligned with many different stakeholders in the network. We now measure many other things, including fill rates, service rates to customers, customer satisfaction, etc. – but we are always focused on that percentage of dollar revenue saved.”
Johnson and Welch have achieved solid results. Over the years, the supply chain management team has delivered over 5 percent of savings as a percent of revenue by 1) focusing on creating the right data, and 2) bringing in the right talent from within the organization and outside of healthcare, who know how to use the data to achieve results. Healthcare expenses associated with med/surg, drugs and other supplies have been reduced from 19.5 percent of net revenue in 2004, to 14.3 percent of revenue in 2014.
These results continue to be headed in the right direction, as medical/surgical supplies per discharge are continually being reduced. These are financially validated results that show the net impact on the ability of the system to not only withstand cost pressure from payers, but also to retain budget flexibility as a result of allocation of these savings to capital, talent, and equipment upgrades.
Spend analytics is the mechanism by which organizations view aggregated past, present and future data by supplier, part/commodity, and the organization’s divisions. Using that information, organizations can make allocations in the Source Approved Vendor List. This data consists of historical spend for a given time period, current open purchase orders, and future demand for a given time period broken down by current and potential supplier allocation. Metrics such as current supplier allocation and potential supplier allocation are used.
In the new era of healthcare cost controls, the need to better control costs is a direct function of healthcare management’s ability to isolate, track, and manage third party spending (Byrnes J., 2004). Although these facts are widely recognized by executives, the spend management landscape is in a nascent stage in healthcare.
Interviews revealed that data cleansing was a massive investment in terms of systems and human capital. Novant Health invested in talent in a time of budget cuts, supported by a strong commitment from leadership. Over the years, the company has invested in a contract repository and electronic ordering system, a data cleansing and spend analysis system, an ERP system, and an electronic medical records system. These systems serve to provide much of the data required to drive changes in supply management.
Business intelligence analysts first had to construct a manual database to pull data from three systems into one analytical tool, report on savings opportunities as well as run compliance on larger contracts to support strategic sourcing. Conducting this type of analysis required pulling data to categorize spending by a unique “User Defined Category” (UDC) system.
The team began by using the categories that were pre-defined in the benchmarking system, but quickly realized that these categories did not reflect the manner in which spending occurred around DRGs and surgical operations. The team began to develop a set of “user defined categories” that would better define not only how products were consumed, but also how they were purchased from a similar group of suppliers.
This UDC system requires that analysts pull information from pricing files and work with a finance team to ensure that the data is categorized correctly, and establish the right inventory, implementation, pricing agreements, and associated operational data. Because some spending is done via voucher vs. PO, the system requires manual reviews of vouchers to track savings.
Future opportunities in this area involve being able to link spend and product data to hospital infection rates and post-operative outcomes, and thereby to begin to measure the true total cost of ownership linked to an accountable-care-organization bundled payment. “We are working towards the point where patient-related outcomes can be linked to our spending on UDC items,” remarked one manager.
Supplier segmentation involves determining the supply base for sourcing activities, along with the optimum quantity/value split between the suppliers selected. Segmentation defines the types of relationships that will exist between the focal organization and key suppliers, and establishes relationships with a handful of “strategic suppliers,” which become highly integrated into the organization.
At Novant Health, one of the most important efforts has been the development of category teams. Certain categories have fully segmented supplier relationships in place. The teams occasionally struggle with identifying UDC categories that make sense and align with the supplier market. The portfolio management approach evolved from this challenge, to begin to establish approaches on how to organize and classify supplier relationships. For example, Food Services is sourced entirely through a single supplier, while clinical services are just beginning to evolve towards a segmentation model.
A major opportunity for segmentation is in the services categories. For example in capital equipment (any equipment acquisition over $5,000), massive opportunities exist to bundle purchases across various divisions aligned with the budgeting cycle. For this reason, it is important to have an early view of spending cycles and upcoming capital equipment replacement needs.
The POD (category sourcing team) concept has also evolved in the last nine months, and has become a good opportunity to openly discuss product issues and contract compliance, and to talk about which supplier relationships make sense and which ones should be “optimized” to fully leverage the benefits of a smaller supply base. Ensuring that stakeholders clearly understand sourcing rationalization and measures is a critical element in Novant Health’s journey, to drive compliance to guidelines and contracting procedures.
The customer of choice
One of the important litmus tests associated with evaluating the level of supply management maturity is the level of feedback from suppliers. Novant developed a measurement scale based on the concept of being a “customer of choice.” In general, suppliers report viewing Novant Health favorably, because:
- Suppliers aren’t treated as a “vendor,” but are treated with respect, and as a valued partner.
- Novant Health category leaders and hospital staff demonstrate a strong bias towards ethical behavior.
- Novant Health has demonstrated its level of commitment to key supplier partners.
- Novant Health category leaders have demonstrated open and honest behavior, but have not always been as concerned as suppliers believe they should be when it comes to rewarding innovation, allowing suppliers sufficient profit to drive innovation and recover R&D costs.
- Novant Health provides a strong level of opportunity. Though this is not always exclusive, suppliers acknowledge that they have grown their market segment size when they have cooperated with Novant Health on price and cost sharing.
This is reflected in some of the following comments from suppliers:
- “I would characterize our relationship as a true partnership. The sourcing department is very collaborative. They have high standards but administer them fairly, and when we have issues, we work through them. They treat us as part of their team and our staff as part of the organization. We are not viewed as contractors or outsiders.”
- “If customers tell me to ‘just drop your price and you keep the business and get to continue to sell to me,’ I tell them we all have a decision to make. I have to ask, is it still beneficial for me to have you as a customer? We are looking for customers like Novant Health who will give us the opportunity to share and control our costs. If my margins are impacted, I will have to start limiting technology and service – and those are the factors that influence how we contract and work with hospitals.”
As noted earlier, SRM is a journey, and issues surrounding supplier relationships will always arise that require management’s attention. However, all parties in the supply chain are effectively on the same journey, so the need for collaboration and joint cost management activities has never been greater.
Category management is the process of collecting internal and external data to establish integrated sourcing strategies for categories of spending. Some types of data collected during category analysis might include potential suppliers, competitor’s demand requirements, market share, competing suppliers’ market characteristics and financial strength, supply capability and flexibility, long-term supply and demand trends, patient-focused product outcomes for the category, and others.
A strong leadership council composed of physicians can become an integral component of category strategy development. One physician recalls, “As a member of the board, the concept of managing the service line was introduced. This referred to the practice of having physicians and administration leadership having joint oversight of the activities that the cardiovascular product line is involved with (cardiology surgery), both in the OR and in the office. The service line concept unified the outpatient and hospital arenas with joint oversight.”
This aligned vision is one of the most important elements of category management deployment in the clinical environment. It is almost impossible for someone in procurement to have a direct line of communication with physicians about selection of products and devices in a normal hospital setting. In most cases, the discussion revolves around getting a cheaper device to substitute for an established one. Today, the discussion is much more focused on identifying physician leaders across the enterprise who have bought into the concept of responsibility for their resource management portfolios.
Novant Health physicians are supported by a team of category leaders who follow a structured methodology designed to establish a data-driven process for decision-making. This consists of spend analysis, prioritization of opportunities, physician engagement and discussion of the data, development of a strategy in conjunction with physicians, implementation of the strategy, and ongoing savings validation and compliance management with the physician community. These steps provide a rigorous methodology, which is replicable.
The focus in the past few years has been on understanding the baseline spend and conducting sourcing events with the assistance of physician leaders. The latest push towards POD teams is to drive ownership and management of the category through category leaders, who can identify savings and value creation beyond simple price leveraging that occurs in a sourcing event.
This effort will largely depend on the development and application of a supplier performance measurement system. Such a system can improve physicians’ understanding of supplier performance and enable aligned decision-making on category strategies. Supplier scorecards will become a critical component of the POD team concept. The early work on pulling together data is an important step, but more important is how the data is used to drive supplier engagements and internal discussion.
The path forward
Novant Health’s success has resulted in significant contributions to cost savings, improved patient value, physician engagement and understanding of the need for continuous cost reduction, and a strongly committed set of suppliers. Moving this effort forward will require:
- Continued investments in systems capabilities to support logistics excellence, improved analytics and decision-making, and total cost of patient care.
- Investments in talent, ongoing training, and win-win negotiations to drive productivity improvements, value, external market intelligence, enhanced analytics, and cost modeling capabilities.
- Ongoing engagement and discussions with key internal stakeholders, including operations, facilities, IT, and other key parties in the organization.
Our research shows that Novant Health is well ahead of many other healthcare providers in the field, and has achieved a remarkable set of achievements. The evolution to supply chain excellence is a journey, not an end point.
Robert Handfield, Ph.D., is Bank of America Professor of Supply Chain Management, College of Management, NC State University, Raleigh, N.C.
Mark Welch is vice president of supply chain, Novant Health, Winston-Salem, N.C.