Research by Marty Stempniak


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H&HN has created this exclusive yearlong series called Fiscal Fitness with the support of the VHA. Finding ways to rein in expenses without sacrificing quality and safety is imperative for hospitals as they struggle to maintain financial viability in a shifting payment system even as their operational costs continue to climb. Over the next several months, we'll look at everything from the supply chain to pharmacy, IT and more. Follow the Fiscal Fitness series in our magazine and in our e-newletter H&HN Daily.

Ordering clinical resources such as stents and trays requires a little more thoroughness than buying pens and clipboards. With pressure from all sides to cut costs, hospitals are finding that they can add millions to their bottom lines by keeping a closer eye on supply chain costs.

For years, the management of clinical resources was barely on chief financial officers' radars, says Jamie Kowalski, a consultant and supply chain expert. But the field has blossomed in recent years, and hospitals are transforming the way they purchase medical supplies.

"People are realizing the financial impact, as well as the clinical impact, and they're trying to get a balance," Kowalski says. "Obviously, the clinical need is the priority, but to do it as cost-effectively as possible now, given health care reform and the financial situation in general, they really have to be doing this."

For starters, the clinical staff need to stop managing their own supplies. Doctors and nurses should certainly have a say in buying decisions, Kowalski says, but supply chain professionals can do a better job of overseeing the daily flow of resources, and can free up clinicians to focus on patient care.

Advances in technology allow health systems to monitor their supplies from day-to-day or even hour-to-hour. That eliminates the temptation to buy a year's worth of supplies, thereby tying up less money and less storage space.

Using data to establish a baseline for supply chain performance and comparing it to top-performing organizations is usually a good place to start. For one thing, it will help win over physicians who push for their preferred items. Bob Doyle, R.N., vice president of OMSolutions, the consulting arm of medical supply distributor Owens & Minor, says physicians will be swayed by data showing another item that provides the same or better quality at a lower price.

"Physicians are scientists. So if you've got sound, clean, clear, accurate data, they will tend to support you. If you don't have it, that's where they can start poking holes in your approach," Doyle says.

Three-hospital Scottsdale (Ariz.) Healthcare has used a rigorous method in recent years to save some $24 million in resource costs, out of a massive budget that expends about $200 million annually, or about 21 percent of total operating expenses. Much of those savings were found through the use of seven value-analysis teams that scoured expenses in different areas, from pharmacy to food, says Mike Hildebrandt, associate vice president of supply chain.

Scottsdale's leaders in resource management have made a special point of building relationships with clinicians, even to the point of making rounds with them to get a better understanding of their needs.

Experts' opinions vary on whom should drive change in a hospital's medical purchasing — the CEO or medical staff or materials managers. "My feeling is [that] it needs to be collaborative," Hildebrandt says. "We all need to work together on it, and however each hospital gets around to it doesn't really matter so much as the fact that they're working together and trying to get some positive outcomes."

Collaborating with vendors can be helpful, too. For example, under a bundled payment program, Scottsdale trimmed its joint-replacement implant suppliers from eight to three. By buying more items from fewer vendors, it was able to negotiate lower prices.

No one has more information on the clinical effectiveness of certain products and the advancements coming down the line than the suppliers themselves, and hospitals would be wise to reach out to them as they fine-tune their approach to purchasing clinical resources, says Annette Pummel, chair of the Association for Healthcare Resource & Materials Management and chief operating officer of American Contract Systems, a manufacturer of custom procedure trays.

"Opening the communication line and developing trusting relationships with each other go a long way toward their helping to meet the goals around outcomes and around patient care," Pummel says.


Ochsner Health System
New orleans

For eight-hospital Ochsner Health System, evidence has been the key to perfecting its supply chain philosophy. Leaders there have rooted out variation at every level, looked for data to show what works the best at the lowest cost, and relied on physician leaders to help make the final determinations.

Years ago, for doctors, it was all about getting the elite, name-brand product, regardless of the outcomes, says Mike Louviere, system vice president of supply chain. But evidence, collaboration between doctors and patient feedback have allowed them to see the reality at Ochsner.

"Our deal is we want the best quality of care at an affordable price, and that's a whole different ballgame than years ago when everyone said, 'I want the best of the best, no matter what it costs,' " Louviere says.

On average, the supply chain is the second-highest expense for hospitals, after personnel, representing about 16 percent of total operating expenses. Ochsner is no exception; it spends about $280 million a year on millions of products.

Under its current approach, physicians scour the evidence and push back on vendors to meet pricing. That's enabled Ochsner to save some $725,000, or 8 percent, on costs for knee and hip replacements alone. All told, Ochsner saved $88.9 million in supply costs over the last few years, and saved another $14 million in the first quarter of this year. It has worked to eliminate "rogue buying" so no new products can come through the door without being fully vetted.

Whether a hospital has 50 beds or 1,000, Louviere says the Ochsner approach is easily duplicated. "The process is simple. Find your variation, use your physicians to lead the charge, find the best evidence and move toward the best quality at an affordable price," he says. "That sums it up."

This is the "age of supply chain" right now, Louviere says, with a lot of innovation taking place in the field. One reason for all the experimentation is that CEOs have instilled resource managers with the confidence to try new things, even if they don't work out in the end.

"In the past, everywhere I've ever worked, man, you don't want to ever fail," Louviere says. "There are probably more materials managers changing jobs right now than ever before. But at Ochsner, our top CEO, Warner Thomas, has said, 'It is OK to fail, just learn from it and move on quickly.'"

Five steps to mastering the supply chain

Ochsner Health System in New Orleans has developed a five-phase approach to rooting out variation and reducing supply chain costs. It uses multidisciplinary teams, comprising both physician and supply chain leaders, to dig down into some of the most costly diagnosis-related groups.

Prioritize DRGs for development.

  • Examine those that cost the most.
  • Select the DRGs that can yield the highest savings for further analysis.

Analyze costs and quality data.

  • Assess the cost drivers: pharmacy, length of stay, implants, anesthesia, fixed costs, etc.
  • Analyze quality outcomes by each provider.

Form a multidisciplinary task force.

  • Engage physicians to identify cost and quality improvement opportunities.
  • Prioritize which opportunities to implement first.

Develop an improvement and standardization plan.

  • Examine processes and products for opportunities to standardize.
  • Determine the ideal state of which processes and products to use.
  • Finalize new standards.

Implement plan and track adherence.

  • Engage stakeholders in a change effort.
  • Monitor doctors' adherence to the change plan.
  • Monitor costs to determine if expected savings are realized.

Content by Health Forum, Sponsored by: VHA.