- From gauze and paper gowns to implantable medical devices and prescription drugs, provider organizations must implement efficient healthcare supply chain management processes to cut overall costs and standardize care delivery.
But for many organizations, healthcare supply chain management is not as simple as tracking how items are acquired and where they go after purchase. A December 2015 Cardinal Health and SERMO Intelligence survey revealed that supply chain management was the second largest expense for healthcare providers.
While only one-third of the 150 surveyed hospital leaders described their organization’s supply chain management process as “very effective,” about two-thirds strongly agreed that improving healthcare supply chain management would lower costs, boost hospital revenue, and improve care quality.
Many healthcare organizations, however, face some roadblocks with making their supply chain more efficient. Some of the top healthcare supply chain management challenges include costly provider preference items, a lack of health IT implementation for supply chain functions, and limited hidden costs transparency.
Provider preference items result in higher healthcare costs without better outcomes
Many healthcare organizations employ a provider preference card or request system method for managing their supply chain. However, basing inventory on provider preferences can result in significant cost variation.
A The Milbank Quarterly study showed that physician preference items accounted for up to 61 percent of healthcare supply chain spending.
While providers have control over some supply chain costs, another recent report revealed that some providers were unaware of how much their preference items actually cost. A 2014 Health Affairs survey found that orthopedic surgeons correctly estimated the cost of a commonly used implant only 21 percent of the time, and their estimates ranged from 0.02 to 24.6 times the actual cost.
A common area of preventable supply chain waste, however, is standardizing provider preference items or reducing item variation, James Spann, Practice Leader of Supply Chain and Logistics at Simpler Healthcare, told RevCycleIntelligence.com in March 2016.
Spann explained that healthcare organizations that meet particular item requests from every provider could end up buying items that are more expensive than alternatives with similar outcomes or purchasing supplies in bulk that are only used by a handful of clinicians.
Instead, healthcare organizations should ensure that provider preference items contribute to better patient outcomes or care quality.
“Just reaching the clinical-preference phase can enable a hospital to obtain overall supply cost reductions of 10 percent to 20 percent,” he said. “Physicians should be engaged early and often to ensure that products are aligned with clinical outcomes.”
Another method for reducing healthcare supply chain costs at the provider preference level is to implement cost scorecards. A JAMA Surgery study from December 2016 stated that healthcare supply chain costs plunged by 6.54 percent per case after surgical departments received monthly cost report cards.
By providing surgeons with supply chain financial data as well as peer comparisons, the median direct surgical supply chain costs dropped from $1,398 per case to $1,307 per case after scorecard implementation.
“Our approach empowers individual healthcare professionals to make their own decisions regarding resource use rather than relying on mandates from administrators or payers,” wrote study researchers.
Lack of supply chain health IT limits price, utilization transparency
Healthcare organizations oftentimes cannot access supply chain data to develop actionable steps to increase efficiency. The lack of health IT to gather and analyze supply chain data can lead to billions in wasteful spending.
“Due to vertical internal structures, supplies and supply data historically have been siloed and firewalled so that information important for efficient business operations is fragmented,” Steve Kiewiet, Vice President of Supply Chain Operations at BJC HealthCare, told RevCycleIntelligence.com in June 2015.
In response to healthcare supply chain data challenges, more provider organizations are looking to implement health IT systems that can better manage supply chain costs under value-based reimbursement models, a December 2016 Black Book survey found.
Many value-based reimbursement models require healthcare organizations to accurately measure and compare healthcare costs with patient outcomes. Therefore, about 69 percent of healthcare IT leaders said healthcare supply chain will be “the most valuable asset for actionable data mining” in 2017 over population health and data analytics tools.
“In a payment environment that reimburses for value, it has become more critical to understand exactly how much it costs to deliver patient care,” stated Doug Brown, Managing Partner of Black Book. “Clumsy costing based on uncoordinated data will become perilous for hospitals at risk.”
As a solution, surveyed healthcare procurement and IT leaders pointed to more enterprise resourcing planning technologies, which integrate management processes of key business functions. But Kiewiet noted that healthcare organizations can also implement Radio Frequency Identification (RFID) technology and computerized provider order entry (CPOE) systems to make healthcare supply chain management more efficient.
The health IT solutions facilitate data-sharing, which can help healthcare organizations reduce costs by decreasing process variations. The technologies can also help to better track supplies from purchase to expiration to eliminate wasteful spending.
“When we have visibility of product from finished goods to the use on the patient and we actually capture demand and consumption versus capturing purchasing activity, we capture consumption activity,” stated Kiewiet. “We significantly reduce waste and variation in the supply chain. Inventory levels come down for everybody. Product expiration can be virtually eliminated.”
Healthcare supply chain involves many hidden costs beyond product price
The core of healthcare supply chain spending is product cost, but healthcare organizations should be aware of invisible costs associated with the supply chain, such as distribution and inventory holding expenses.
“The first order of business is to recognize that current initiatives may only be scratching the surface,” Spann explained. “In addition to focusing on product costs, focus on distribution and invisible costs as well.”
He suggested that healthcare leaders start by asking themselves what total landed supply costs are, including any other devices and drugs that may contribute to higher healthcare costs per case. Other areas of focus are product standards, purchase price variance, expired products, and excess supplies.
Spann added that provider organizations should also question how much it costs to manage and move supplies.
“Understanding the costs behind utilization, internal distribution, special deliveries, and inventory holding will not only yield savings, but will improve clinician and patient satisfaction,” he said.
To develop a healthcare supply chain management strategy that incorporates visible and hidden costs, healthcare organizations may want to consider a Lean approach.
“The goal for executives should be to build a Lean Supply Chain – which will help you advance up the profit curve. Having the right amount of the right supplies, at the right time and place at the lowest possible cost – can actually increase patient care quality as well as clinician satisfaction,” Spann said in an August 2015 interview.
“Lean can uncover more improvements along the patient-provider continuum all the way back to the manufacturer, thus having an impact on patient satisfaction – because when the supply is right, the patient is not adversely affected.”
Adopting a Lean healthcare supply chain can also have proven benefits. Caldwell Memorial Hospital, a small community hospital in North Carolina now doing business as Caldwell UNC Healthcare, reported in September 2016 that it saved $2.62 million in just five months after implementing a Lean strategy.
The Lean approach helped the hospital to identify $421,000 in distribution-related savings as well as $366,000 in savings associated with the amount of resources clinicians used to manage supplies.
Another key area of savings for the hospital was pinpointing employee productivity inefficiencies. For example, the Lean strategy revealed that nurses were performing labor-intensive supply chain work that could have been done more effectively and at a lower cost in the material management department.
“The reason that we really wanted to use the lean principles was that we were using them in other parts of our organization,” Laura Easton, Caldwell UNC Healthcare’s CEO, told RevCycleIntelligence.com. “But we also believed philosophically that the people who do the work know the most about what needs to be done to improve the workflow.”
With falling claims reimbursement rates and performance-driven payments, improving the healthcare supply chain management process is just one way to prepare healthcare organizations for the value-based reimbursement transition.