2005 Supply Chain Report

8/2/2019 2005 Supply Chain Report

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Synopsis

This paper summarizes benchmarking metrics

and industry perceptions based on HFMAs 2005

Supply Chain Benchmarking Survey.

Sponsored through an educational

grant by McKesson

HFMAs 2005Supply ChainBenchmarking SurveyManaging Resources to

Achieve ImprovedEconomic Outcomes andHigh-Quality Care

healthcare financial management association

July 2005


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Summary

Background

A growing number of environmental concerns have

led to increased focus on the healthcare supply chain: a

growing uninsured population, labor shortages and costs,

reimbursement and payer trends, challenges related to

reimbursement for new treatments and technologies,

and escalating utilization. Progressive materials and

purchasing leaders are succeeding in align ing economic

interests with those of physicians and clin icians, and

achieving targeted expense reduction. But to make more

significant progress in this area, organi zations must lift

systemic barriers and align goals to max imize supply chain

effectiveness. Fortunately, the effectiveness of supply chain

operations has assumed a higher priority among senior-level management. As a result of this increased attention,

the role supply chain leaders play in the success of an

organization has become more recognized and respected.

This paper highlights findings of HFMAs 2005 Supply

Chain Sur vey, made possible through an educational grant

by McKesson. Based on the feedback of 225 respondents,

the study identified recent successes, future opportunities,

and benchmarking metrics; it a lso includes specific

examples of respondents successes. Furthermore, recent

OIG commentary on gainsha ring is hi ghlighted in order to

present potential opportunities to alig n incentives and thus

increase physician buy-in.

The survey builds on the findings of a 2002 study, which

delineated the state of supply chain management and

identified best practices. Made possible by an educational

grant from McKesson, the 2002 study provided the

perspectives of 600 financial executives and supply

chain leaders (www.hfma.org/FeaturedTopic/resource_

management.htm).

This paper also compares the findings from the 2005

survey to f indings from 2002.

Respondents indicated that supply chain initiatives

reduced their supply chain budget by 1.25 percent per

year over the past two years (median). Looking forward,

respondents estimate twice as much opportunity to

improve supply savin gs.

Top opportunities exist in physician and clinical buy-in,

information technology investments, and value a nalysis.

Developing buy-in was the most prominent concern, with

many respondents indicating that true collaboration

is essential for success. Investments in information

technology were noted to provide more significant

opportunities in the 2005 survey compared to 2002 results.

At the same time, 2005 respondents found significantly

fewer opportunities in automation compared to 2002.The leading opportunities in s tandardization and order

management include clean and comprehensive supply

item master, purchasing controls/processes/structure

for preference items, and cultivating awareness and

understanding of metrics.

The surveys findings reveal that although almost all

hospitals have undertaken a standardization initiative

and most are using va lue analysis teams, physicians

possess relatively low awareness of these initiatives. The

study also highli ghts examples of clinical and financial

outcome variations by product line and by physician as away to encourage physician involvement in identifying best

practices.

Overview


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Areas of Greatest Opportunity

Survey respondents were asked where they saw the greatest

opportunities for improvement in their organizations

over the next two years, based on the impact of potential

initiatives in supply chain management.

Respondents indicated that the hi ghest opportunity

can occur in physician and clinical buy-in, information

technology investment, and va lue analysis.

Exhibit 1. Percent Indicating High or TremendousOpportunity By Improvement Area

Percent Indicating High or TremendousOpportunity By Improvement Area

Overall Opportunity 56%

Physician/ Clinical Buy-In 65%

IT Investments 64%

Value Analysis 64%

Reduce OR Expense 62%

Improve Efficiencies 49%

GPO 42%

Demand Forecasting 38%

Central Supply 25%

Automation 23%

Larger hospitalsthat is, those with patient revenue greater

than $315 millionwere more optimistic about opportunity

overall. Respondents in this classification were most

likely to indicate tremendous or high improvement

opportunit y in information technology investments.

Exhibit 2. Percent Large Hospitals Indicating High orTremendous Opportunity By Improvement Area

* Large Hospitals > $315M Patient Revenue

Percent Large Hospitals* IndicatingHigh or Tremendous OpportunityBy Improvement Area


IT Investment 80%

Value Analysis 70%

Physician/Clinical Buy-In 68%




GPO 37%

Central Supply 31%

Automation 31%

Areas with Low Perceived Opportunity

Most respondents viewed minimal opportunit y in

automation.

Exhibit 3. Percent Indicating None or Minimal Opportunity

By Improvement Area

Percent Indicating None or MinimalOpportunity By Improvement Area


Automation 52%

Central Supply 38%

GPO 36%


IT Investment 19%

Physician /Clinical Buy-In15%



Value Analysis 9%

Survey Responses


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Change in Focus over the Past Three Years

In the area of information technology, respondents

indicated greater opportunity in 2005 vs. 2002. At the

same time, they see less opportunity in automation,

demand forecasting, and processes in central sterile supply

than they did three years earlier. They view continued

opportunity in physician involvement and the use of GPO

contracts.

Exhibit 4. Opportunities 2002 Versus 2005

Percent of Respondents

65%

67%

Physicians

64%

55%IT

42%

43%GPO

38%

46%

DemandForecasting

25%

37%Central Supply

23%

47%

Automation

2005

2002

Recent Reductions andFuture Opportunity

Respondents were asked to estimate the financial benefit of

supply chain initiatives over the past two years.

Annual Cost Reductions over Past Two Years

Respondents indicated that supply chain improvement

initiatives generated 1.25 percent annual reduction in

supply costs per year (median). Comparatively, VHA sees

significant opportunity. They estimate that healthcare

organizations implementing best practice processes in the

supply chain can save between 15 and 30 percent of related

supply costs. 1

Exhibit 5. Annual Cost Reductions- All Respondents

3.25%25th percentile

1.25%Median

.53%75th percentile

Cost reductions were similar considering the size of the

institution.

Exhibit 6. Cost Reduction By Hospital Size

Cost Reduction (% of Supply Budget)

1.29% 1.33%1.25%

Larger Hospitals

(>$315M)

Mid-Sized Hospitals

($125315M)

Patient Revenue

Smaller Hospitals

(


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Opportunity over Next Two Years

Looking forward, respondents were asked to estimate the

opportunity to improve supply costs over the next two

years. The median response for future opportunity doubled

past reductions: 2.50 percent compared to 1.25 percent.

Exhibit 7. Future Opportunity All Respondents

3.57%25th percentile

2.50%Median

.96%75th percentile

Smaller hospitalsthat is, those with less tha n $125 millionin patient revenuenote higher opportunity compared

to mid-sized and larger hospitals. While past successes

in smaller hospitals were 1.25 percent (median), they

anticipate greater opportunity in the future.

Exhibit 8. Future Opportunity By Hospital Size*

Opportunity (% of Supply Budget)

2.11% 2.08%

3.50%

Larger Hospitals(>$315M)

Mid-Sized Hospitals($125315M)

Patient Revenue

Smaller Hospitals(


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Clean and ComprehensiveSupply Item Master

Due to the sheer volume, complexity, and dynamic nature

of supply data, many hospitals item masters have errors,

redundancies, and outdated information. Additionally,many high-end items and preference items are not

included in the item master. Commonly encountered data

problems are included in Exhibit 10. While challenging,

constant focus on a clean and comprehensive item master

can improve purchasing processes and increase the ability

to evaluate product data and benchmarks. Improved

reporting and analysis can lead to reduced variability in

pricing for the same product as well as improved contract

performance.

Exhibit 10. Commonly Encountered Data Problems with the

Supply Item Master

Incomplete vendor and/or product information

Nonstandard vendor names

Vendor product numbers with missinginformation or additional characters

Overly abbreviated product descriptions

Product descriptions that are not normalizedor may have missing attributes

Unclassified products

Processes for PhysicianPreference Items andPhysician Buy-inPhysician preference items, including medical

devices, account for about 40 percent of a typical supply

budget.3 To reduce supply costs, physicians must be

involved stakeholders in standardization and uti lization

efforts. There must also be a flexible and reasonable

process for preference items.

While 65 percent of HFMA survey respondents indicated

tremendous or hi gh opportunity in involving

physicians, according to a separate VHA study, only

35 percent of physicians are involved in standardization

and utilization programs, and more than 40 percent were

unaware as to whether their hospital even sponsored such

programs.4 This is surprising considering AHRMMs

finding that more than 90 percent of hospitals have

undertaken a standardization initiative over the past

12 months and 57 percent use value analysis teams. 5

Thus, potential opportunities exist to improve physician

awareness and increase buy-in for standardization

initiatives.

Physicians seem to value these efforts. Of the physicianssurveyed in the VH A study, almost two-thirds found

standardization effective and more than half found

utilization programs to be effective at balancing clinical

care and fin ancial outcomes.6 Recent commentary from

the OIG regarding gainshari ng may present additional

opportunity to increase physician buy-in.

A recentHFMarticle identifies the following strategies:

Stay focused on the big opportun ities

Make vendor dealings fair and transparent: physicians

are more likely to support a process that is transparent

and that focuses on vendor inclusion Be sure there is a process for prospectively evaluating new

or incrementally improved products 7

3 Rand Ballard, Strategic Supply Cost Management, Physician Preference Without Deference, Healthcare Financial Management, April 2005, pp 78-84.4 VHA Study Shows 64 Percent of Physicians Believe Hospital S upply Standardizations Are Effective, VHA/ Surgicenteronline.com,

Posted on 04/07/2005, Phoenix, AZ.

5 2004 Performance Indicators Study on Healthcare Surgery Supply Chain Management: 20 04, Association for Healthcare Resource andMaterials Management and BD Consulting. Chicago, IL.


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Gainsharing

Recently, the OIG has issued several advisory opinions

approving ga insharing arrangements in which hospitals

agree to pay private practice physicians a portion of thecost-savings directly attributable to their adoption of

certain cost-saving protocols. These opinions represent

a significant development given the OIGs historical

reluctance to approve gainsharin g arrangements in any

form and the recent federal court decision striking down

a CMS gainsharing demonstration project in New Jersey

as illegal.

Following is an excerpt from the February 25, 2005,

OIG Advisory Opinion:

Arrangements like the proposed arrangement are

designed to alig n incentives by offering physicians

a portion of a hospitals cost savings in exchange for

implementing cost-savings strategies. Under the current

reimbursement system, the burden of these costs falls on

hospitals, not physicians. Payments to physicians based on

cost savings may be intended to motivate them to reduce

hospital costs associated with procedures performed by

physicians at the hospitals.

Properly structured, ar rangements that share cost

savings ca n serve legitimate business and medical

purposes. Specifically, properly str uctured a rrangements

may increase efficiency and reduce waste, thereby

potentially increasing a hospitals profitability. However,

such arrangements can potentially inf luence physician

judgment to the detriment of patient care. Our concerns

include, but are not limited to, the following:

(i) Stinti ng on patient care;

(ii) Cherry picking healthy patients and steering sicker

(and more costly) patients to hospitals that do not offersuch arran gements;

(iii) Payments in exchange for patient referrals; and

(iv) Unfair competition (a race to the bottom) among

hospitals offering cost savings programs to foster

physician loyalty and to attract more referrals. 8

HFMAs Compliance Officers Forum offers the following summary: 9

Exhibit 18. Compliance Officers Action Grid: Gainsharing

Issue Importance What OIG Says Action Required

GainsharingArrangements

The civil monetary penaltyprovisions set forth in Section1128A(b)(1) of the SocialSecurity Act prohibit a hospitalfrom knowingly making apayment directly or indirectlyto a physician to induce thephysician to reduce or limititems or services furnishedto Medicare or Medicaidbeneficiaries under thephysicianss direct care.

There is no requirement that the prohibited payment be tied to aspecific patient or to a reduction in medically necessary care.

Any hospital incentiveplan that encourages physicians throughpayments to reduce or limit clinical services directly or indirectlyviolates the statute.

Gainsharing arrangements can also implicate the antikickbackstatute if the cost-savings payments are used to influence referrals.

The antikickback statute will be implicated if a hospital offers acost-sharing program with the intent to foster physician loyalty andattract more referrals.

Government scrutiny is particularly likely where arrangementspermit a physician to reap benefits over an extended period of timethat exceeds the time necessary to achieve savings or receivecost-savings payments unrelated to action taken by the physician.

Gainsharing arrangements may also implicate the Stark law.

Consider structuringcost-saving arrangementsto fit within the personal-services safe harborwhenever possible.

Payments to Reduce or Limit Services: Gainsharing Arrangements

6 VHA Study Shows 64 Percent of Physicians Believe Hospital Supply Standardizations Are Effective, VHA/ Surgicenteronline.com,Posted on 04/07/2005, Phoenix, AZ.

7 Rand Ballard, Strategic Supply Cost Management, Physician Preference Without Deference, Healthcare Financial Management, April 2005, pp 78-84.

8 Department of Health and Human Services, February 2005, OIG Advisory Opinion No. 05-06. http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0506.pdf9 HFMA Compliance Officers Forum, April 2005, http://www.hfma.org/forums/ActionGrid.pdf


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Metrics

Traditional supply chain measurements are included in

the benchmarks that follow. In addition to these measures,

many healthcare organizations have shifted their focusfrom reducing costs to a combined approach that

identifies mutual ly beneficial goals aimed at i mproving

clinical outcomes and financia l performance.

Exhibit 11. Sample Product Line Evaluation

QuarterlyGross Expected Variable Fixed Difference Between

Physician Length Revenue Payment Cost Contribution Cost Net VC per Case andName Cases of Stay per Case per Case per Case Margin per Case Margin Best Practice

8 7.14 13,610 6,244 4,205 2 ,039 2,701 (662) 9,640

Dr. Smith 7 5.54 10,453 4,052 3,189 863 3,771 (2,908) 1,323

Dr. Brown 6 7.33 15,325 5,404 3,414 1,990 2,617 (627) 2,484

Dr. Garcia 5 10.67 9,898 6,633 3,265 4,874 (1,609) 18,165

Dr. Chen 5 5.33 8,225 4,884 3,000 1,88 4 2,391 (507)

Others 53 5.92 12,059 5,685 3,36 4 2,501 3,620 (1,119) 19,292

Total 84 6.51 13,076 5,899 3,606 2,293 3,475 50,904

DRG 89 (Simple Pneumonia), Variability of Physician Variable Costs First Quarter 2004 10

Smaller institutions reported 85 percent contract

purchases whereas larger instit utions reported lowercompliance, with 70 percent of purchases made on contract.

Supplies as Percent of Operating Budget

Median medical/surgical supply cost is 15 percent of

operating budget.

Exhibit 12. Medical Surgical Supply Cost as a Percent ofOperating Budget

12%25th percentile

15%Median

18%75th percentile

Measuring and reporting dif ferences in mortality, length

of stay, costs, and revenue demonstrate variations. This

type of data can compel physicians to examine related

process variations and stimulate opportunities to i mprove

care and costs. One example of reporting is included in

Exhibit 11, which demonstrates variation by physician

within a product line.

Variability of supply costs per procedure can differ greatly.

For example, this variation is almost 400 percent for DRG79 (Respiratory Infections) and DRG 250 (Cervical Spine

Fusion without CC).11 Identifyin g and implementing best

practices in care can impact both clinical and fina ncial

outcomes. Similarly, demonstrating cost as well as ma rgin

may increase sensitivity to financial issues.

Benchmarking and Metrics

Respondents shared key performance metrics, which are

summarized below.

Percent of Contract Purchases

Seventy-seven percent of purchases are contract purchases,according to survey respondents. This is up from 75 percent

in 2002 (median).

10 Steven H. Berger, 10 Ways to Improve Healthcare Cost Management, Healthcare Financial Management, Westchester, IL, August 200 4, pp 76-80.1 1 Rand Ballard, Strategic Supply Cost Management, Physician Preference Without Deference, Healthcare Financial Management, April 2005, pp 78-84.


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Larger hospitals indicated that medical/surgical supplies

represented a higher percentage of their operating budgets.

Exhibit 13. Supplies as a Percent of Operating Budget

13% 13%

15%

Small($315M)

Exhibit 14. Supply Expense per Adjusted Patient Day

25th 75thPercentile Median Percentile

All $194 $259 $326>$314M 244 315 369

$125$315M 243 271 301

$315M 1,114 1,36 0 1,601

$125$315M 933 1,19 8 1, 211


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Metrics Viewpoint

Jamie C. Kowalski, MBA

Vice President, Practice & Market Development

McKesson Provider TechnologiesWheeling, Illinois

Supply chain man agement has many important and

interdependent components, which have been described

in these sur vey results. Specific, selected measures

provide data that can help drive decisions, identify areas

of vu lnerability, and determine the overall effectiveness of

supply chain operations. Therefore, despite executive calls

for a single metric for measuring supply chain management

performance, distilling these components into one metric

is not beneficial.

The metrics selected by an organization should be

meaningf ul to a ll stakeholders (executives, customers,

supply chain team), measurable (preferably via

automation), and manageable (able to help the team make

changes th at wil l improve performance). Fur thermore,

such metrics must track all outcomes of the supply chain:

service/customer satisfaction, q uality/effectiveness,

resource productivity/efficiency, a nd fin ancial results.

Benchmarks can be s ynonymous with best practices, or

lead to them. They can be based on internal levels (for

example, one patient care unit has achieved inventory turnsof 33 times per year; all patient care units are expected to

achieve that) and/or external sources (a hospital/IDN in

the peer group has achieved supply expense as a percentage

of total hospital operating expense of 14.3 percent). But

caution is required when using national benchmarks

because ensuring that the metrics are actually reporting

and measuring the same items, in the same manner, may

be impossible.

What is most important is to continue strivin g for

improvement to reach best practice levels of performance.

Throughout that process, organizations must be su re to

recognize and celebrate positive performance. But at the

same time, caution should be exercised about intensity

and timing. If the pace is too slow, it will be difficult to

reach and maintain momentum. This can lead to morale

problems, but even worse, can be quite costly to the

organization from a financial perspective. For example,

if the goal is to reduce annual operating expenses by

$1 million through supply spending, every month that the

target level is not achieved costs the organization $83,000

that could have been avoided. Thus, a bit of impatience can

be a good thing.

Best practices in the use of metrics include:

Support from senior executives (CEO, CFO, CNO,

etc.), including providing attention and coaching, and

developing accountability for staff roles

Supply chain management metrics that cover the scope

of the supply chain (see Exhibit below); each major

component can and should be measured

Metrics that are customi zed for, reported to, and tracked

by all stakeholders: executives, customers, supply chain

leaders, and team

Appropriate measurement of performance at the

individual employee level (e.g., productivity, quality) Recognition, rewards, and as indicated, sanctions

Accounta bility for performance at the point of control

For example, if a service department fails to reduce supply

spending or exceeds supply budgets, holding the supply

chain leader and team accountable is not appropriate,

unless the products used by that department are being

purchased for noncompetitive prices. Consumption is

the responsibility of the consumer.


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Examples of Supply Chain Metrics are shown below:

Area Metric CommentFinancial Supply Expense as % of

Total Operating ExpenseIndicator of the impact of supply optimization: supply costs should drop at a greater ratethan overall costs. Also provides assurance that supply standardization does not increasecosts in other areas.

Supply Expense per AdjustedPatient Day

Most commonly used supply chain indicator for measuring cost.

Supply Expense per Adjusted Discharge Can track/trend cost variation across patient types and severity

B est System Price Price management to e nsure lowes t available price is paid within your healthcare enterprise

Best Market Price Price management to ensure lowest available price is paid within your market

Pricing Variance Constant pricing changes can have a detrimental effect on assuring best price

N on- contract spend $ Measures compliance with purchases th rough a GPO contract

Off tier losses total $ Measure of losses as a result of not achieving tier levels

N on co ns ol ida te d t ie r l os se s Me as ure of los se s a s a re su lt of not ach ievi ng ti er leve ls

L os s du e t o ve ndor s el ec ti on Do ll ar s a ss oci ate d w it h of f co nt ra ct pu rch as es

Item Standardization Rebate Loss Dollar lost as a result of not meeting rebate thresholds by product category

Vendor Standardization Rebate Loss Dollars lost at a result of not meeting rebate thresholds at the vendor level

O n- ha nd I nve nt or y Va lu e M ea su re s h ow m uc h c as h i s t ie d u p i n i nv en to ry a nd u na va il ab le f or o th er u se s

Value of Consignment Inventory Tracks the value of consigned inventory; important to monitor vendor management

O ut co me s P ri ce i nfl at io n i nd ex (m ar ke t ba sk et )

Cost per PO Productivity meaure; efficient management of orders should result in lower cost per PO

Accounts Payable $ on hold pendinginvoice discrepancy resolution

Potential for lost revenue increases; time spent on resolving discrepancies results inhigher management costs

% purchases without invoice discrepancies Measures the results of invoicing practices

Available Rebates not collected(TBD) Measures results of effective rebate management

GPO holdbacks

N um be r o f v en do rs u se d M ea su re s t he r es ul ts o f ve nd or s ta nd ar di za ti on ; t he f ew er t he ve nd or s, t he m or e l ik el yto take advantage of volume purchases and rebates

Number of Ortho used Measures the resutls of Ortho vendor standardizationN umber of Cardio used Measures the results of Cardiology ve ndor standardization

Rebate Index Indicator of the results of contract compliance efforts and tier achievements

Stock-outs Measure of the results of managing PAR levels and stocking protocols

Throughput PO Lines per paid hour Monitors the efficiency of supply distribution

Distribution Lines Pickedper paid hour

Monitors the timely distribution and stocking of supplies within the organization

Inventory Turns A measure of accurate stocking and PAR levels and helps to reduce carried inventories.Most effective when tracked at the product category level.

Volume andCapacity

Requisitions processed electronically Tracks the volume of requisitions processed and the effectives of e-supply management

% purchase transactions via e-commerce Tracks the volume of requisitions processed electronically compared to total transactions

Noncontract as % of total spend Monitors the rate of purchases that occur from a noncontract vendor; increases innoncontract may indicate new products or rogue buying

N on -co mpl ia nt p urch as e Mo ni tor s t he do ll ar s a ss oci at ed w it h no nc ont rac t pu rc ha se sLOC Activation

LOC Activation %

Total Inventory $/AveragePatient Days

% o f Con sign ment In ventory Hig h d olla r, co mp lex p ro ducts, suc h a s imp la nts a nd o rthop ed ic s req uire sign ifi ca ntinvestment to stock in an institution. Consignment helps with inventory managementbut must be monitored for reimbursement and product availability.


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When asked to describe recent projects that have led to the

greatest improvements, respondents most frequently cited

the following:

GPO utilization and pricing

Centralization of supply chain functions

Investments and utilization of information technology

Revising structu re, adding staffing, developing teams

Increasing value based selection

Revising and standardizing item master

Developing physician/clinical buy-in

Developing reporting and metrics

Successes Achieved

GPO utilization and pricing

We reviewed all contracts and suppliers used in the past

18 months to improve efficiencies and identify cost savings

through GPO contracts. Reduced overall supply costs by

approximately 10 percent.

Mid-sized Hospital Respondent

Reduced contract pricing for orthotics. Continue to review

make-up of packs and alter components as required.


We re-bid services to bring down cost of telephone and

other services. Continued standardization of supplies. We

have a committee to limit the number of companies we

work with. This increases the volume at each company and

leads to better pricing.


Negotiating a new contract on urinar y stents. Should

save us 30 percent. Also, going to consignment on cardiac

stents. Previously we purchased in bulk in order to get

a reduced price. Didnt prove successful, so we went to

consignment.

Small Hospital Respondent

Use of online requisitions tied into our MMIS system.

User sees items they need, materials management

doesnt need to re-enter information. Non-stock items

automatically produce POs.


Revision and standardization of the item master

We undertook a formal 18-month Strategic Sourcingengagement that has involved 17 cross-functional teams

to examine and improve our spending in clinical and

non-clinical categories. We looked at about $300 million

in spending and produced over 28 million in documented

annualized saving s. It also has changed the way our

organization views the role of procurement and strategic

sourcing.

Hospital Respondent

Centralization of supply chain functions

Materials ma nagement staff has taken over distribution of

I.V. tubing from the pharmacy. This removes one hand-off

in the process. Savings are not yet determined. Materials

management took over the ordering and stocking of the OR

department. This reduced overstocking and improved lines

of communication reducing overall inventory.

Hospital Respondent

We migrated our purchasing and A/P functions to a

centralized supply chain environment in March 2001. At

this point, the operation is working very well. Chain in top

leadership went from last to first in customer satisfaction

in 15 months.

Mid-sized Hospita l Respondent

Identified supply chain manager for operational oversight

of purchase order throughput, receiving dock flows, charge

capture of various floor stock/patient charge items and

floor stocking/ordering. We call him our control tower

manager, having impact of all facets of supply chain statu s.

Pricelessfrom user satisfaction and elimination of

surprise situations.

Hospital Respondent

Information technology projects

We installed perpetual i nventory this has improvedcontrol on supply use and charge capture.

Installed automated replenishment system in CSD.

Reduced inventory by 30 percent by eliminating

duplicating inventory in storeroom and on exchange carts.


In Your WordsWhats Worked, What Hasnt?


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Installation of automated purchasing/inventory system

two years ago. Began value analysis within purchasing

and materials assessment and accountability for waste

compliance within our purchasing contracts.

Large Hospital Respondent

Improved automation of managed care authorizations

process. Contractual allowances for unauthorized services

denials have decreased dramatically.

Mid-sized Hospital

Restructuring, adding staff, or developing teams

We have an MM team, composed of MM, clinical, and

financial personnel. Our first project was to review in

depth the MM item list. As a result of this, we identified a

number of items that were obsolete and we have developed

a standardized process of naming so we know what we are

talkin g about.


Development of director of Inventory Management

program. Reduced imaging supply costs by 25 percent .


We used our GPOs special services to gain a team (SG

leader, MM leader, senior management, pharmacy leader)

who would work together to lower implant costs. By working

together and networking with other hospitals, we were able

to achieve a capitated contract with two vendors.

Hospital Respondent

Value-based selection

Have started to utilize a new system for laparoscopy

equipment. We reduced disposable and equipment repair

costs. Improved physician satisfaction because equipment

is in better condition. Led to savings of $100,000. Also, our

pharmacy went from IV to PO for certain drugs.


Physician/clinical buy-in

We had our first physician preference item contract

negotiations to narrow the number of vendors down and

guarantee 95 percent utilization of one vendor through

engaging the physicians, resulting in an annual savings of

$300,000.


We engaged general surgeons to select one vendor for

spinal implants, which led to an average per case reduction

of 15 percent.

Hospital Survey Respondent

Current project to ensure that all parties involved in use

of the supply item have input and buy-in to the product

selected. This process has resulted in five of our high-use

items being standardized throughout the facility. Not only

saving on the product but the amount of items that we need

to keep in stock.


Developed an employee supply saving bonus, which

rewards qual ifying employees for ideas leading to supply

savings. Bonus var ies depending upon ultimate savings to

the hospital.


Metrics and objectives

Addition of clinical resources (RN) to MM staff.

Developing physician profilesworking on cost and

reimbursement profiles.


We have instituted monthly departmental metrics for

linen, distribution, receiving, and mailroom to better trackour own performance. Ultimately it will serve as a source

of whether we are moving things in the right direction in

terms of efficiency.


Extensive review of supply chain processes

Undergoing a supply chain study currently. We have

identified one-time savings of $600,000 to $1 million

in inventory reductions and potential sav ings i n product

standardization and best price practices.



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Advice based on past projects

Feedback centered on a handful of themes: Ensuring buy-in before product launch

Build ing review of item master into major projects

Preparing information technology; specifically, ensuring

clean data and building time and budget for training and

ramp-up.

Buy-in

Developing buy-in was the most prominent concern. Most

indicated that early buy-in and true collaboration are

essential to success:

We struggled with doctor buy-in. At first we focused

on reducing supply costs. We replaced this with a more

open forum. In this, we discuss top issues from both

administration and from doctors. Helped us surface key

issues from both sides. The open exchange has really

helped us rebuild the culture.


We really wanted to go to one vendor but doctors wanted

more flexibility and choice. We compromised and went with

two vendors.

Hospital Respondent

Too many workarounds were allowed in the system that

was designed and the core process was not well defined and

syndicated.


In our capitated ortho knee program, one outlier was

recently approved by administration (with our intense

involvement) at a hi gher price.


Suture/endo product conversion. Ask if they are even

interested in the thought of switching otherwise, doomed

from the beginning.Hospital Respondent

Point-of-use supply management. Nursing compliance

is not where it should bethey dont own this yet. Advice:

VERY worthwhile but it takes a lot to get buy-in. Challenges

are getting accountability at department manager level and

not just in mm.

Hospital Respondent

Review of Item Master

Standardization involves a thorough review of the item

master file:

We have tried to manage our item file master much better

and put a lot of emphasis on this. However, we realized that

not having items like implants from the vendors we use in

the item file does not work. Now we are adding them all to

have better information both for utilization management

and cost/charge capture.


Centralized Functions

A handful noted concerns about centralized purchasing

functions without planned involvement:

Consolidated purchasing through parent corporation.

This has yet to yield expense decrease, only increases.


Do not allow a regional office to dictate all improvements.

End users and physicians MUST be involved.


Preparing for New Technology

And adequate preparation for new technology was a noted

learning f rom past projects:

We needed better training before system install. Led to

confusion and slow start up.

Hospital Respondent

Supply chain software installation was problematic. Weshould have had a sufficient implementation team to plan

(back fill). Id advise taking time to build a comprehensive

master file. START with clean data.

Hospital Respondent


15/16

Additional Advice from Respondents:

Tried to move to reprocessing in the hospital. There is stilla lot of concern. No progress has been made.

Hospital Respondent

As an organization, we partnered with one distributor for

all nine of our regions. The distributor was not capable of

bringing the entire organization on at one time. Better due

diligence.

Hospital Respondent

Top Practices Inform and trai n to build buy-in from the back office to

the boardroom

Select metrics and benchmarks that the clinical staff,

physicians, administration, and others value

Integrate physicians in evaluating programs through a

review of variations in clinical and financial outcomes by

program and by physician

Establish a continual focus on a clean and comprehensive

item master

Evaluate technologies to improve and integrate

information for decision-making

Continually examine processes and structures for review

of preference items

Evaluate opportunities to improve asset tracking

Continue focusing on core supply chain management

functions and struct ure, such as purchasing control,

inventory control, transportation, and GPO utilization

Celebrate successes to build awareness and collaboration

Interact and share best practices with peers

Additional HFMA Resources

HFMA Education

Conferences, Seminars, Audio Webcasts and the

Annual National Institutehttp://www.hfma.org/education/national_education_

calendar.htm

HFMA Chapter/ Local Education

http://www.hfma.org/education/chapter_education_

calendar.cfm

HFMA e-Learning lessons:

http://commerce.webinservice.com/hfmacommerce/

Newsletters

HFMAs Supply Chain Solutions Newsletter

http://www.hfma.org/publications/Supply_Chain_ Solutions_

Newsletter.htm

HFMAs Managing the Margin Newsletter

http://www.hfma.org/publications/newsletters/managing_

the_margin/index_2.htm

HFMAs Executive Insights Newsletter

http://www.hfma.org/publications/newsletters/executive_

insights/index_2.htm

HFMAs Revenue Cycle Strategist Newsletter

http://www.hfma.org/rcs

HFMA Membership

http://www.hfma.org/join

HFMAs Comprehensive Guide to Cost Control

http://www.hfma.org/resource/cost_control.htm


16/16

Exhibit 19. Response by Size

Size Responses

Less than 35M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

35-125M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

125-315M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

315-750M. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

>750M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

(Survey organization matched to 2003 Medicare Cost Report)

Representation of Rural Hospitals

Rural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

(Survey organization matched to AHA demographic data usingAHA QuickDisc 2004)

About HFMA

HFMA is the nations leading membership organization for more than 34,000 healthcare financial management

professionals employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and long-term

care facilities, physician practices, accounting and consulting firms, and insurance companies. Members positions include

chief executive officer, chief financial officer, controller, patient accounts manager, accountant, and consultant. HFMA

offers educational a nd professional development opportun ities; information on key issues affecting healthcare financial

managers; resources, such as technical data, checklists a nd research reports; and networking opportunitiesall of which

provide our members with the practical tools and ideas they need to ensure career and organizational successes. For more

information, visit HFMAs website at www.hfma.org.

About McKessonTo truly optimize all a reas of your businessclinical, operational and fiscalyou must evaluate the efficiency of your

processes and the performance of your staff, while building in the flexibility to handle all of those contributing issues,

those emergencies and last-minute changes that derail your strategic business objectives and put further pressure on your

staff. McKessons Resource Management solutions specifically focus on uncovering opportunities to improve operational

efficiency, clinical effectiveness, and fiscal viability. We offer an outcomes-based approach to solving your business

performance objectives. Our comprehensive solution set includes advanced operational, financial and clinical analytic

tools, and specialized departmental software and process improvement experts committed to achieving your organizations

business initiatives. To learn more about McKesson, please contact us at 800.861.9801 or http://infosolutions.mckesson.com.

Survey Response

Two hundred twenty-five CFOs, financial leaders, and

materials management leaders responded to the survey.

2005 Supply Chain Report

Documents

Transcript of 2005 Supply Chain Report