Improve service levels and reduce costs?

Editor’s note: The Journal of Healthcare Contracting is 10 years old. This year, we revisit some of the people and issues we covered in 2004.


Improve service levels and reduce costs? A worthy goal and, in the case of Banner Health, an achievable one.

“Generally speaking, an increase in service levels is always accompanied with an increase in cost,” says Doug Bowen, vice president, supply chain services, Banner Health, Phoenix, Ariz. But 10 years after opening a consolidated service center, Bowen has found a project that defies that rule of thumb. Ten years ago, he was in the inaugural class of the Journal of Healthcare Contracting’s 15 People to Watch in Healthcare Contracting.

Bowen got his first materials management job at a local HCA hospital, stocking shelves while attending school in Utah. After finishing college and grad school, he stayed in materials management, working within HCA and then HealthTrust (which spun off from HCA).

Bowen relocated to Nashville (HCA’s headquarters) in 1991 to become a business analyst for the materials management system. Three years later, he became manager of materials management systems and led a team that designed HCA’s automated Supply Management and Resource Tracking (SMART) system.

In 1997, Bowen moved to Dallas to guide the development of one of HCA’s consolidated service centers for its North Texas division. The idea was to convert individual hospitals into a multi-hospital, high-performing procurement and distribution operation, with one warehouse and one purchasing system for all. Five years later, he decided to apply his for-profit, business-minded approach to materials management to non-profit healthcare. He got his opportunity with Banner Health.

Fully integrated system
At the time, the IDN had 19 hospitals, six long-term care facilities and operations spanning seven Western states. Today, Banner Health operates 25 hospitals and other related health entities and services. It includes Banner Medical Group, an employed physician group with more than 1,000 physicians; and now operates Banner Health Network, which coordinates care for nearly 300,000 members. At press time, the IDN was in the process of acquiring the University of Arizona Health Network, which will add two hospitals and other facilities to the system. “This will be a great opportunity to test our clinical quality care approach in an academic medical center model,” says Bowen.

“Banner Health has rapidly evolved from a health system of hospitals to a fully integrated system,” he says. “Banner has demonstrated the ability to effectively manage the health and wellness of populations of insured members in both government and private plans, and has expanded convenient access to quality care by placing health centers and clinics throughout the communities we serve.

“Banner is a clinical outcomes company focused on reducing care variability and increasing care reliability, resulting in the delivery of consistently superior outcomes,” he continues. “Our next transformation will be to move from a fee-for-service model to a value-based model of population health. We will continue our legacy of clinical quality excellence and begin to add business (and metrics) for revenue and cost on a per-member, per-month (PMPM) model.”

Supply chain
The supply chain team and function within Banner has grown along with the IDN itself. Bowen’s current title reflects that growth. Ten years ago, he was vice president of materials management; today he is vice president of supply chain services.

“Since Banner is transforming from an acute-care company to a population health company, we expanded our service offering to cover all non-labor spend – acute care and non-acute care supplies, purchased services and capital equipment. We changed the name to ‘Supply Chain Services’ to reflect the broader scope and to accomplish a culture change wherein expense management is everyone’s business.” That includes physicians.

“We have 100 percent integration of our medical group within supply chain,” he says. “We service them from a contract, formulary management, and purchased services perspective. We have a cross functional team of Supply Chain Services and Banner Medical Group personnel. This team identifies savings opportunities, sets formulary standards, and creates work plans to standardize purchased services. All final approvals for formulary go through two appointed physicians. Once standards are approved, we convert the entire organization at once.”

Consolidated service center
When Bowen spoke with the Journal of Healthcare Contracting in mid-2004, Banner Health was preparing to implement a consolidated service center to service its seven Phoenix-area hospitals, with plans to offer purchasing, distribution and accounts payable. The IDN opened its center in November of that year. Today, it services the 11 Banner hospitals in the Phoenix market area, as well as 11 facilities outside of Arizona with custom procedure trays and globally sourced products. In addition, it houses emergency preparedness pallets, which are ready for immediate shipment.

“Our custom procedure trays are manufactured within this facility and distributed to all regions, either directly from our plant or through a third-party-logistics provider outside of Arizona,” says Bowen. Distribution to Banner Medical Group sites is handled by McKesson Medical-Surgical, not the consolidated service center.

Although it is called a distribution center, its real value is facilitating a sophisticated procurement strategy, says Bowen.

“The distribution center enables the procurement benefits and the ability to execute strategic sourcing for the system. We work with our manufacturers to take advantage of money-saving procurement strategies. For example, if we have products that are entering an inflationary curve, we buy forward. If we have products that are entering a deflationary curve, we run thin to take advantage of falling prices.

“One of the main reasons we go to the trouble of converting a product is because we have contracted for a more cost-effective product,” he continues. “We can’t save money until we start using the new product. Now that we can convert products 60 days faster, we can produce an additional two months’ worth of savings (16 percent) on every product conversion.”

The center has enabled Banner to improve fill rates by 5 percent, which translates to 9,100 fewer stockouts per year, he adds. “That’s 9,100 fewer problems for our caregivers per year.” What’s more, it has enabled an improvement in contract compliance. “With more than 1,000 contracts to learn, it can be very confusing for our employees to know which products are on contract. We make sure that we are bringing the correct contracted products into the distribution center, and every hospital now receives their products from the company store.”

Future growth
While Bowen and his team have accomplished much, he looks forward to more professional growth in the years ahead. “In order to be a better supply chain leader, I know that I must be a better supply chain student,” he says.

“I am very grateful to get to work with Dr. Terry Loftus on a daily basis,” he says. Loftus is Banner Health’s medical director for surgical and clinical resources, who leads and facilitates physician communications and physician value analysis teams. “With Terry’s work, we have been able to actively engage physicians to improve our supply chain results and to resolve supply chain problems.”

In addition, Bowen completed a Lean Six Sigma Green Belt certification in order to learn more about process improvement. Banner Health also has a Six Sigma Black Belt – Ray Davis – on its team to help lead process improvement projects.

“Our team is also dedicated to continual learning,” says Bowen. “Recently, we have been studying the Gartner supply chain maturity model from the Gartner Group. It is a great resource to gauge our current status and to begin working on the next steps to move us to an industry-leading supply chain organization. This will keep us busy for the next ten years.

“This reminds me of a favorite Peter Drucker quote: ‘The best way to predict your future is to create it.’”


Banner Health’s contracting philosophy and strategies

  • Direct Sourcing
    Increases efficiency by removing links from the supply chain.
    Shipping containers delivered direct to AZ Distribution Center
    Eliminates need for value analysis (products sourced to spec)
  • Bulk Buys
    Aggregate purchase volume and synchronize with suppliers to capitalize on discounts and timing
  • Local Contracts
    Local contracts uniquely meet our needs with no waste or added overhead expenses
  • Capped Pricing
    Capped pricing provides consistency and reliability in case cost accounting
  • Self Manufactured Packs
    Source raw materials and self-manufacture procedure packs
  • Pharmacy Distribution
    Bulk buys and self-distribution for selected pharmaceuticals
  • Pharmacy Compounding
    Centralized source for pharmacy compounding services

Consolidated service center

Functions that Banner Health operates from its consolidated service center are:

  • Procurement
  • Accounts payable
  • Contracting
  • Logistics and distribution
  • Manufacture of custom procedure trays
  • Analytics and performance improvement
  • Mail
  • Copy/print
  • Transportation/courier
  • Pharmacy compounding
  • Pharmacy distribution
  • Pharmacy mail order and refill (opening soon).
  • Med/surg distribution
  • Strategic and direct sourcing
  • Biomed equipment repair and management
  • Technology management/clinical engineering

Enduring principles

Ten years ago, Doug Bowen noted four things he had learned in his professional life:

  • The power of contract compliance.
  • The difference between data and information.
  • The benefits of standardization.
  • The benefits of centralization of such functions as contracting, purchasing and accounts payable.

And he’s sticking by that story today.

“Looking back at our success over the past 10 years, I am even more convinced these are true principles,” he says. “We have a very talented supply chain team that works extremely hard to execute on these principles, and they deserve all the credit. Special credit goes to Tim Miller, who carries a heavy workload and expertly handles all of Banner’s supply chain operations.

“My favorite quote is from Peter Drucker,” he says. “‘Everything must degenerate into work if anything is to be accomplished.’”