Leaders can keep supply expenses from skyrocketing by engaging physicians in internal supply chain operations and enforcing effective supply policies.
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| Paul Alexander Clark |
At the Health Management Academy, we recently conducted a study of 60 of the largest health systems with average annual net patient revenue of $2.7 billion and average annual supply spends of $487 million. Our members, the C-suite of America’s health system, drove this move.
Our goal was to determine which practices and tactics were most successful in reducing supply chain expenses. We did this by independently tying supply chain attributes and management practices to financial metrics. The results were remarkable. The study found:
- There was a wide variation in supply chain performance.
- Leadership, management and organizational factors resulted in significant supply chain savings, ranging as much as $130 million annually.
- Effectively involving physicians in supply chain teams can improve processes.
Wide Variation in Supply Chain Performance
Anyone familiar with the Dartmouth Atlas studies should be accustomed to variation in the performance of health care organizations. However, the organizations in our study shared such similar demographic characteristics that this wide variance is surprising. (See Figure 1 below. With supply expense ratios, lower is better.) The organizations were all very large, multimarket, multihospital, nonprofit health care systems with large supply spends, group purchasing organization (GPO) affiliations and high compliance with their GPO practices.
System size or supply spend were not related to supply chain performance in this study—most likely because the largest health systems had already reached a critical mass of purchase and pricing power. So if organizational characteristics can’t explain supply chain performance, other factors must be in play. Our study revealed that leadership, management and organizational factors are more strongly related to future gains.
Figure 1. Top 10% vs. Bottom 10% Performance Comparison
[SE = supply expense. TOR = total operating revenue. Rx = medications.]
Supply Chain as a C-suite Issue
Using statistical analysis and conducting qualitative interviews, we found several specific leadership behaviors that lead to lower supply chain expenses systemwide. These practices included:
- senior leaders' gaining cooperation of physicians in supply chain improvement initiatives;
- senior leaders' insistence on cooperation from hospitals;
- involving physicians on expert/technology review committees and supply chain improvement teams;
- refusing payment for the use of non-approved devices; and
- developing a limited vendor access policy.
The degree of leadership support resulted in the biggest difference in results. (See Figure 2 below.) The strongest predictor of lower supply expense ratios was the degree to which leaders engaged physicians in the supply chain process. Rather than have the supply chain team select a single device or technology based on price, and then try to convince the medical staff of its value, the best performing systems involved physicians on the committee, included quality in the selection criteria, and empowered them to lead the decision-making process. Realizing that millions saved can translate into highly desirable capital expenditures elsewhere, physicians often persuade themselves to standardize.
Figure 2. Leadership Support and Supply Chain Performance
Stories from leading health systems confirm the data. Jack Fleischer, vice president of procurement and strategic sourcing at NewYork-Presbyterian Hospital, saw the procurement department contribute $20 million annually for the past three years after aggressively engaging physicians and operating departments in the procurement process.
Most organizations involve physicians by adding one or two physicians to a committee. But with large, diverse medical staffs, such limited engagement is insufficient to make major change. Judith Lipscomb, vice president of materials management at Baycare Health System in St. Petersburg, Fla., created three physician-only committees covering cardiology, orthopedics and technology review. Their recommendations go to a supply chain oversight committee, which includes the CMO, COO and CFO. This intense physician and senior leadership involvement resulted in significantly greater standardization and savings.
Statistically, project results also matched the reality of reported results: Several systems reported savings in excess of $200 million. Many reported increased physician satisfaction and quality of care as a result of their supply chain initiatives.
Leaders at the more successful organizations also support supply chain programs by enforcing clear and effective policies. In this study, vendor access policies and payment refusal for non-approved devices figured most prominently. These policies clearly define the relationship terms between the health system, vendors and medical staff.
Consistently enforcing rules regarding acceptable behavior prevents overzealous vendor representatives from taking advantage of health care organizations. By refusing payment for a device that circumvented the established approval process, health systems reinforce standardization. They also strengthen their selection committees’ importance—and thus encourage good physicians to serve on them.
Managing the relationship between the health system, medical staff and vendors is crucial. Because most physicians are not employed by the health system, consistent and effectively enforced policies are essential for successful alignment.
Effective Supply Chain Management Structure
Effective C-suite involvement goes beyond leadership behaviors: Leaders must establish an organizational structure that promotes high performance. Organizational factors that are highly related to supply chain success include:
- board review of the supply chain program, at least annually;
- appointment of a system-level supply chain executive; and
- centralization of supply chain initiatives within the system’s corporate office.
For example, Beaumont Hospitals in Royal Oak and Troy, Mich., saw a significant increase in their annual savings by aligning supply chain objectives systemwide. Focusing divisions on the same product standardization goals improved accountability and accelerated results without compromising quality.
New Opportunities Needed in Tough Times
Progressive health systems now look beyond negotiation and purchase power to achieve lower supply costs. They achieve operational economies of scale by focusing internally on their practices to become more efficient in their supply chain management. In doing so, they’re finding big gains. In this turbulent financial environment, these gains are even more important as organizations are losing other opportunities for bottom-line enhancement.
As significantly higher costs of debt, lower investment returns and tightening reimbursement pressure the bottom line, systems whose leaders are actively engaged in their supply chain operations will be better positioned to thrive instead of simply survive.
Paul Alexander Clark, Dr.P.H. (cand.), F.A.C.H.E., is the senior director for research and programming at the Health Management Academy in Alexandria, Va.
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