Streamlining the Hospital Supply Chain: Just What the Doctor Ordered

Tags: Supply Chain Management, Pharmaceutical Logistics, Health Care Logistics, Specialized Logistics, Logistics

As hospitals begin transforming to adapt to new healthcare initiatives, they are easing the pain by restructuring and streamlining supply chain operations.

The hospital supply chain is in a transformative phase, as the Affordable Care Act (ACA) drives opportunity for cost savings and better collaboration to deliver quality patient care. Opportunities to restructure operations abound, and major challenges are underway. While the ACA is intended to drive down patient healthcare costs, supply chain analysts and association leaders are adamant that hospitals need a better balancing act when it comes to streamlining their processes.

With margins declining along the healthcare supply chain, providers are reevaluating operation models and best practices by integrating technologies ranging from RFIDs to bar coding, and working with management firms to refocus staffing structures. While the ACA has had a deep impact on the structure of supply chain operations, it is only one element of the overall transformation.

In 2013, the Health Industry Distributor's Association (HIDA) collaborated with global management consulting firm McKinsey & Company to publish the Thought Leaders: Healthcare Supply Chain 2015 report. Healthcare providers and executives across medical supply companies reflected on dramatic changes in their operations and efforts, due in part to the ACA and other key factors, including an impending nationwide physician shortage and increasing adoption of information technology.

Overall, the providers surveyed indicated that they plan to lean on manufacturers and distributors for partnerships to help them buffer key issues across their supply chain.

One such issue is gradual and steep hospital margin declines due to lower reimbursements. Drawing from dozens of interviews, HIDA revealed providers expect operating margin declines of up to 30 percent between 2011 to 2015, with one supply chain vice president noting, "Our entire margin is expected to evaporate starting in 2014 because of the lower reimbursement."

Prior to the ACA, hospitals were reimbursed based on volume, when patient intake, material consumption, and services determined payout. Now, hospital reimbursements are incentive- and performance-based. A key driver behind this model shift is the ACA's Hospital Value-Based Purchasing Program, known as the Centers for Medicare and Medicaid services (CMS), which rewards acute care hospitals based on the quality of care provided to Medicare patients. CMS also rewards hospitals based on how closely they follow best clinical practices, and how well each hospital enhances patient stays.

Meeting Medicare Margins

"With federal reimbursements cut year-over-year, hospitals have to look at different ways to operate within 'Medicare margins,'" says James Spann, global supply chain practice leader for healthcare management consulting firm Simpler Consulting. "They can do a few things to provide distinctive value for patients."

The first step is through value analysis, by determining the best delivered value of products and services, Spann explains.

The HIDA report lists top recommendations to drive the next level of supply chain savings. Among them is addressing end-to-end supply chain costs and refocusing efforts on data standardization, which Spann emphasizes as one of his top solutions.

In order to universally adopt data standards, experts across organizations advise creating campaigns to promote data standardization, building a working team of experts across companies to discuss adoption processes and identify requirements, and demonstrate how data standards can lead to cost savings.

Standardizing systems is particularly helpful at a time when mergers and acquisitions are at a significant peak. In 2013, 98 hospital and health system combinations were announced, reflecting an uptick of three percent from the previous year, and 51-percent growth over 2010, according to analysis by Kaufman Hall.

"Our analysis confirms hospitals and health systems are continuing to pursue partnership arrangements as one approach to accessing the enhanced infrastructure necessary to provide care successfully in the changing environment," said Michael Finnerty, managing director of Kaufman Hall, in a statement release.

"The Affordable Care Act certainly created the incentives for value-based purchasing and consolidation," says Curtis Rooney, president of the Healthcare Supply Chain Association. "Consolidation has been ongoing, and mergers and acquisitions are huge. Predictions say in the next 10 years, 5,000 hospitals will turn into 500 health systems.

"I'm not sure if that will actually happen, but the driver will be the same for everyone: efficiency," he adds.

Getting Ahead of the Game

From Rooney's perspective, the boost in mergers and acquisitions provides the greatest room for growth, especially as providers strategize for 2015 and beyond.

"For providers, the low-hanging fruit is a merger or hospital acquisition," he says. "If they can standardize systems on one platform, and collect data seamlessly, they're way ahead of the game.

"The healthcare system, particularly the supply chain, is filled with inefficiencies," he adds. "Think about it in terms of a bar-code that starts from the warehouse door and moves all the way to the electronic health record at the patient's bedside. All those interactions and information exchanges along the way need to be captured and modified in a standardized way to allow for free flow of information."

"Hospitals have to look at how they manage what I call the 'profit curve'—as they move up over time, they want to increase profitability or reduce cost. They can do that through pricing programs, standardization, and consolidation," Spann says. "They start to be most effective when they evaluate how to utilize assets and capital."

Across health systems, supply chain leaders stress that hospitals need to address clinical-evidenced-based support.

"Physician engagement is a huge part of that strategy," notes Spann. "How hospitals help manage physician preference items, the items physicians order, and the supplies that they need to impact patient care is paramount. Hospitals need to integrate the physicians, and align them within the supply chain of the products and services they bring in to support patient care."

Statistics on the medical device side of the supply chain and the physician disconnect are telling. Few orthopedic surgeons know the dollar value of the devices they commonly implant in their patients, finds a 2014 study published in Health Affairs. In fact, 36 percent of physicians and 75 percent of residents rate their knowledge of device costs as "poor" or "below average," even though more than 80 percent of the same group indicate the cost should be "moderately," "very," or "extremely" important in the device selection process.

There is work to be done to bridge the gap between the physician and medical device supply chain, as the study suggests. The research also reveals that of the 503 physicians who completed the survey, attending physicians only correctly estimate the cost of a device 21 percent of the time.

dollars and devices

Despite this, medical device costs are rising, albeit slowly. In 2010, medical device spending totaled $156.3 billion or six percent of total national health expenditures, according to the Advanced Medical Technology Association. Over the course of 22 years, from 1989 to 2010, national medical device spending has grown slightly as a percentage of National Health Expenditures, from 5.3 to six percent.

But Gartner Research underscores some good news amid the rising costs along the supply chain. Its studies reveal that providers can save five to 15 percent by implementing better strategies to analyze and control goods and services purchases. For supply chain executives, such statistics and studies illustrate the need to move fast to structure their organizations for better access to—and understanding of—medical devices and other supplies among hospital staff, not just among physicians.

"If you leave purchasing up to the clinical staff, they will overstock to avoid not having a product to provide patient care," says Luis Martinez, who represents MD Buyline, a healthcare and hospital supply chain management solutions company. "While that's understandable, the supply chain manager's job is to have enough stock to avoid any supply issues."

One challenge is for those physicians to accept the idea or the concept of change in learning new supply chain methods. Another challenge is the general collaboration from suppliers. "They're typically all for profit, so keeping prices high and volume up is important to them," Martinez emphasizes. "Looking to collaborate strategically with hospitals and supply chain departments, however, is an ongoing challenge."

Other factors, including healthcare procedures, can also pose a challenge to better collaboration. "There's one major market shareholder in the trauma implants space," says Martinez. "Because it owns the market, and held it for so long, it doesn't move, change price, or consign. In that case, it's hard to convince physicians to use something different. And it's hard to convince the supplier to collaborate more strategically because it holds the leverage in negotiations."

To keep inventory low from an efficiency standpoint, hospitals are integrating technologies to help aggregate crucial supply chain data. "Inventory management has grown more sophisticated," Martinez explains. "Technologies such as bar coding become a bigger player within hospitals because data is captured electronically. When it comes to lowering costs, using technology helps collect data, but better planning is simpler."

The emergence and growth of systems integrator businesses can also streamline supply chain data. Baltimore-based Barcoding Inc., for example, provides end-to-end automated data capture and mobile solutions for businesses ranging from manufacturing to healthcare. Company president Shane Snyder explains that while automatic identification and data capture (AIDC) is not the "core" solution for the supply chain, it can positively impact the healthcare provider's ability to manage the balancing act more proactively and effectively.

"First, AIDC technology reduces the amount of capital investment in clinical equipment needed to deliver services, and gives healthcare providers better control of their assets, current utilization rates, and location," Snyder explains. "Lack of control in these three areas can lead healthcare providers to overbuy assets to ensure product is available when patients or staff needs it. As a result, capital and operational spending increases.

"Or, if they do not overbuy, healthcare providers may not have the assets they need to provide adequate care for their patients," he adds. "Naturally, this negatively impacts customer satisfaction ratings."

Other AIDC asset management systems can directly impact the customer experience and satisfaction levels, including tracking patient valuables.

"Patients often come to the hospital with valuable items, such as jewelry and money," Snyder explains. "It then becomes the hospital's responsibility to remove, track, and safeguard these valuables. Traditionally, hospitals catalog and inventory valuables manually, or in a basic spreadsheet. Both methodologies are burdened with excessive labor, and are error prone. By leveraging AIDC technology, hospitals can provide the same cataloging and inventory process more efficiently and accurately."

Moving to the Cloud

Various healthcare technology companies, including Louisville, Colo.-based Global Health Exchange (GHX), help hospitals gain better visibility and transparency to the data they need to understand their costs through cloud technologies. In light of the many mergers and acquisitions within hospital systems, one big area for improvement is capturing data, specifically in disparate systems, explains Tina Vantanka Murphy, vice president of global markets at GHX, which was founded in 2000 by GE, Johnson & Johnson, Abbott, Baxter, and Medtronic.

"When a patient goes to an emergency room, the hospital collects all the information about that patient," she says. "But if the patient moves to a surgery center, or a different section in the hospital, suddenly that data is not transferred.

"Interoperability between these hospital systems is a huge gap because what happens in the emergency room needs to be transferred throughout the supply chain to deliver the best patient care," says Murphy. "It's also a huge issue if a hospital is trying to understand its costs."

Murphy cites one example where GHX worked with a large Midwest health system. The hospital was buying 60 times each day from one supplier. "Just by providing visibility, the hospital was able to agree on a more reasonable order velocity, which cut costs significantly for both stakeholders," she says.

Rationalizing the Data

Cloud technology helps connect data sources, and allows hospitals to better rationalize that data. It also enables presenting information to the user efficiently. "The hospitals, distributors, and manufacturers need to be able to present data that has been accurately rationalized across all those stakeholders," Murphy explains.

"There is so much change related to products used in healthcare," says Karen Conway, director of industry relations at GHX. "Prices change depending on who's buying and selling the product. Contracts with group purchasing organizations can result in tens of thousands of changes, every day in some cases," she says.

Because there is no way such a multitude of organizations can hold that data on their systems, many are shifting to using the cloud. "The cloud is a place where data can be held virtually—a virtual item master—as opposed to trying to maintain it in systems that are onsite at the hospital, or at the supplier," Conway explains

But data can be detrimental to patient care, Murphy notes. "The data is critical if a healthcare provider is reimbursed based on the quality of care it delivers," she says. "They need that data to understand their total cost. Providers don't need to care only about the cost of the pacemaker; they need to understand the outcome," Murphy says.

"When a doctor places that pacemaker in a patient, the hospital has to understand what percentage of the time the patient is readmitted, and account for infections because that's how it gets reimbursed," she says. "The data is great, but it's even more critical that hospitals have access to it."

Data capture through cloud-based technology ultimately helps hospitals synchronize price across their supply chain, where they have the ability to drive order, consolidation, and data and process standardization.

"Other industries, such as retail, were able to drive transformational change in the supply chain," says Smith. "Healthcare doesn't have that. The way healthcare has been driving transformation is through thought leaders who are putting the effort into encouraging collaboration and looking at different engagement models."

Going into Labor

Another strategy that involves better collaboration and cost savings is growing an organizational structure to manage hospital staff. In the HIDA healthcare leadership report, one vice president notes that when doctors are faced with cutting labor, capital, or supply costs, they will always choose supply. Other supply chain experts find real value in reevaluating hospital labor.

"We noticed that for a number of hospitals, the staff that supports the floors is significantly higher than we anticipated," says Brian Murphy, business development director of Menlo Worldwide Logistics, a third-party logistics provider based in San Francisco. "There's no consistency in any hospital. We're determining how to develop a defined process.

"Here's an example. One hospital we work with asked us to go to an existing distribution location it had acquired to model two hospitals that were using the same infrastructure and labor for seven," says Murphy. "We were able to drive improvements just by addressing the material flow and waste inside the hospital."

James Liter, senior principal at West Monroe partners, who heads the company's pharma supply chain and operations clients, reflects on the biggest changes within the pharmaceutical supply chain. "Regulatory compliance is a huge issue," he says. "For instance, it becomes more important to make sure the supply chain has been categorized to be appropriate than how critical it is to product safety."

Tracking and Tracing

The bigger movement in the supply chain is the continued vigilance of tracking and tracing capabilities in the life sciences space, which is broader than pharmaceuticals.

"A fair number of technologies have been implemented with bar-coding and RFID tags inside the whole life sciences supply chain," Liter says. "Track and trace is critical because it provides the ability to get to the root of any kind of detrimental product, and understand how to clean it out of the supply chain as quickly as possible."

While technology and organizational solutions are at the forefront to facilitate traceability within the supply chain, experts maintain that more work needs to be done when it comes to improving collaboration among all partners in the medical industry.

Reflecting on the Healthcare Supply Chain Association and Healthcare Industry Supply Chain Institute, which brought together educational programs for suppliers, GPOs, and executives, Rooney notes, "It was encouraging and horrifying at the same time. All parties are operating in a silo, and positioning themselves as the experts in UDI, drug serialization, and healthcare electronic medical records. But the silos haven't talked to each other yet."

Collaboration within his association, he says, is the next step for 2015.