Finding supply chain savings
From HMCwiki
Finding supply chain savings by relying on internal resources can seem a daunting task. Most hospitals struggle to effectively manage their supplies, particularly with the integration of the complex aspects of contracting, logistics, and utilization. Supplies are a fairly significant portion of hospital budgets and involve many complex processes, involve multiple layers in an organization, and are generally controlled by physicians as end users. Many organizations have abdicated some responsibility, and significant dollars, to external consultants to analyze the processes and make recommendations for improvement.
So why does the term "supply chain management" create such anxiety in an organization? Why are organizations so paralyzed by the concept? Why are so many hospitals ineffective at managing supplies? Why are so many consulting firms making money off of the latest craze? Is it possible that an organization can figure it out on its own?
Consultants will typically come in to an organization, use an organization's own people and systems to analyze its data, regurgitate it into impressive spreadsheets and graphics, often agitate the players, and potentially leave behind more rubble than there was before they arrived. There can be significant cost improvements, but results can be short-lived without appropriate training, monitors, and will to continue the process. In HMC’s experience, organizations must ultimately manage the inputs and outputs of the processes, and in most cases, organizations have the data systems, internal talent and resources to figure it out on their own. Would a hospital be better off trying it itself? It does take some organization, resources, time, and most importantly commitment at all levels, but those who do it themselves usually have better and more lasting results. Only an organization can assess its capacity and ability to take on supply chain management.
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Six components of a supply chain
In a 2006 article by Haag, Cummins, and McCubbrew, SCM is broken down into six basic components: Fulfillment, Logistics, Production, Revenue/Profit, Cost, and Cooperation. The first four are primarily managed by the suppliers/vendors in the creation and distribution of supplies to hospitals. It’s fairly straightforward, and most hospital
concerned, are motivated by the most effective use of resources—which goods, when, and at what price—combined with the need to ensure a good outcome for their patients, and to keep their physicians happy. Vendors, of course, are interested in selling as many products at the highest price. Aligning these often-competing motivations is the key for hospitals to achieve successful model in SCM. Remember that healthcare is different than other production-based industries in that the end users are physicians and the ultimate consumers are patients—therefore, more variables. SCM can no longer be just contract review cycles between Materials Management and vendors. Organizations must now include a far more sophisticated and involved review of supply utilization with clinicians at all levels.
Demographics
In 2005, hospitals spent an average of 17% of their total general ledger expenses on supplies[2]. 70% of those dollars were in Surgical Supplies, Drugs, and Invasive Cardiac Supplies. Understanding the distribution of your supply costs is the first step in knowing where to look for cost savings and why.
Approach
To understand if an organization is managing supplies effectively, a review of internal and external data sources is a good first step. HMC advocates an approach of reviewing an organization's general ledger at the cost center and expense line item level, conducting an analysis of its case-mix system by APR-DRG at the severity level, and gaining a detailed understanding of physician utilization patterns at the sub-component level (i.e. OR, Lab, Pharmacy, Imaging, Critical Care, etc). There are many external sources that should be taken into consideration as well—reports and utilization statistics from a hospital's GPO, peer comparisons and external benchmarking, web-based research, and other public databases. SCM consultants shouldn’t be your first line of attack.
Walk through
Here's a walk through of how this approach can applied using an hypothetical scenario as an example. First, a review of the general ledger revealed that the most supply dollars were spent on surgical supplies, these expenses were increasing, and volume was not following suit. From the facility’s HMC benchmark report, Surgical Supplies per case were higher than all other peers. The surgical case mix index was in line with their peers, so their patients weren’t “sicker” than others. After significant guardrail bashing and refuting of the data as not being “apples-to-apples”, the senior leadership team reached the consensus that there was indeed an issue with their surgical supplies and a multi-discipline performance improvement team was formed to come up with an action plan.
GL review
As expected, a GL detail review of the surgical cost centers revealed significant increases across most line items, particularly in spine and cardiovascular implants, orthopedic prostheses, along with custom packs, trays and general med/surg supplies. While helpful to isolate the issue, it didn’t yet provide enough focus for action. Turning to internal case-mix reports and the HMC clinical benchmark, they verified the hypothesis that they were spending the most dollars and the most dollars per case in spinal fusions, joint replacements, and cardiac surgery cases. Many of these APR-DRGs showed significant external variation as well. Though more focused than before, the question of precisely where to go first still felt too broad.
Profitability analysis
The team decided to do a profitability analysis of the three major service lines (Neurosurgery, Orthopedics, and CT Surgery) showing the highest variation. While higher than the external targets, CV Surgery and Neurosurgery were profitable, while Orthopedics was not (-7%). All of the variation in Orthopedics was tied to joint replacement cases—hips, knees, and shoulders—so focusing on these supplies seemed like the best course of action for the biggest financial yield. They decided that Obstetrics should be another team’s responsibility.
Clinical review
Digging further, APR-DRG 301: Hip Replacement, showed the largest cost per case variation to the external group and comprised over 50% of the savings potential from the HMC benchmark. Furthermore, analyzing the severity levels revealed that most of the variation was in level 2 and 3, so again, it wasn’t because of their hip replacements were “sicker” than others. Operating room costs—both supplies and labor—comprised 80% of the total cost per case for hip replacements, so it made sense to focus initially there as opposed to Nursing floor costs, length of stay, or other Ancillary costs.
The team still didn’t know exactly why they were so much higher than others. Was it price? Was it the lack of product standardization? Were they not paying the contract price? Was it physician utilization? They broke down APR-DRG #301 down by surgeon to see where to go next. The data was put into a simple pivot table from their decision support system. Among the 10 primary orthopedic surgeons doing hip replacements, they discovered significant variation in OR costs—$3,300 per case! Achieving the cost level of their best internal cost position would achieve $414K in savings.
Physician engagement
So now the team felt like they had enough information to meet with the orthopedic surgeons as a group, talk about the issues, and ask for their help in designing the most efficient and cost effective model to develop hip replacements. Many organizations do not present this level of detail—blinded or otherwise—to their physicians, fearing comparing them on cost, profitability or LOS would alienate them. HMC takes the opposite stance. When presented fairly, without placing blame, and with a general interest in engaging the physicians in figuring out what is the best patient care model, physician’s natural competitiveness and interest in basing decisions on sound data will create a collaborative environment for open discussion and cooperation.
Case study
In 2003, a facility in Illinois went through the steps outlined above. The Hospital's analysis revealed that its joint replacement cases were $1,600 higher per case than their benchmark target, and its cost per case had increased $650 since 2001, the service line had turned unprofitable in 2003, and there was a large gap between its highest and lowest cost surgeons. The primary driver was having a wide variety of prosthetic implants with several vendors in-house, not always paying the price agreed upon, and there were no real demand-matching criteria in place. For a variety of reasons, the hospital didn’t want to limit the vendors or product mix used by the surgeons, so they decided to implement a capitated pricing model for all implants and approach standardization at a later date. Only one low-volume vendor did not sign the capitation letter and that surgeon eventually retired.
By collecting internal utilization data by vendor and type of implant, comparing national pricing models, and working closely with the primary surgeons to gain buy-in, the hospital was able to put pressure on each vendor’s sales reps to sign a letter committing to the capitated pricing model. By the end of 2004, the facility's cost per case improved by 16%, volume actually increased by 46%, and OR costs decreased by $1,300 per case versus 2001 levels. Demand matching criteria was implemented in 2003 as well. The net result was a move from the higher end of its benchmark peer group to the second lowest, a reduction of $702K in costs, and through other efforts, an improved LOS of 12%.
Summary
Finding supply chain savings is a task any organization can accomplish if a thoughtful approach is adopted. Familiarizing one's self to the six basic components of a supply chain is a good first step. This coupled with a review of internal and external data sources, which are already at an organization's disposal, will likely lead to a sufficient reduction plan that addresses the necessary supply chain savings. Hospitals, despite the size and complexity of supply chains, should not be too quick to assume that the solution resides within the knowledge-base of external consultants; the answers may already exist in information and expertise found within its four walls.
References and Resources
^ HMC's Database
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