Health Care's Major Illness

Supply chain pains continue to plague most hospitals. Here's how two leaders used IT to improve their prognosis.

Sutures, surgical instruments and other medical supplies typically account for a hefty 25% of a hospital's operating budget. Add labor and logistics costs, and the total jumps to 35% to 40%, according to the Healthcare Financial Management Association, an industry professional organization in Westchester, Ill.

Yet compared with other industries, like high tech, auto manufacturing and consumer packaged goods, health care -- and hospitals in particular -- is downright dinosaurian when it comes to deploying IT to better manage the supply chain.

Experts recite a litany of explanations, including drum-tight budgets and a sort of institutionalized acceptance of labor-intensive manual materials-management processes.

"Hospitals and clinics tend to want to focus the dollars they have on patient care. They're not going to channel their capital budget into supply chain," says David Yundt, president and chief operating officer at Hospital Logistics Inc., a for-profit hospital supply and logistics company launched by University Health Network in Toronto.

Given hospitals' primary clinical mission, supply chain excellence is typically undervalued by top management, say many in the industry.

"The prevailing thinking is that materials management are those people we can just keep down in the basement," says Sarah Friesen, former director of supply chain at Sunnybrook and Women's Hospital in Toronto. Now, Friesen is general manager of Shared Healthcare Supply Services, also in Toronto.

In the U.S., as in Canada, the hospital industry remains highly fragmented, which has stymied the development of standards for naming, describing, ordering and paying for the tens of thousands of products that hospitals use. With more than 5,000 hospitals and health care systems in the U.S., no single organization is large or powerful enough to dictate how the supply chain works, as Wal-Mart does in the retail sector, says Lee Marston, CIO at Broadlane Inc., a health care software and services company in San Francisco.

Also, very few hospitals have a single, integrated computer system for ordering, tracking and paying for supplies. The upshot is that physicians and other clinicians regularly buy the brands they prefer rather than items a hospital may have contracted for at a discounted price.

Broadlane conducted a yearlong analysis of all of the supplies purchased at one of its multihospital clients. It found that the chain had spent more than eight times what it would have spent had its clinicians all purchased the same supplies at the lowest contracted price. "You find out millions could be saved if everyone got together and paid the same price," Marston says.

The problem is that most hospitals lack integrated computer systems and therefore don't have easy access to that kind of detailed data.

And it's only getting worse as the industry consolidates and hospitals face the onerous task of integrating their computer systems with those of the facilities they acquire.

Meanwhile, the cost of these combined supply chain inefficiencies is staggering, says Albert Pang, an analyst at market research firm IDC. Hundreds of millions, if not billions, of dollars are left stranded throughout the hospital supply chain in the absence of common computing platforms, standard product descriptions and accurate contract pricing data.

Change is coming, but very slowly. Industry groups are working on product data standards, and physicians are slowly but surely coming to appreciate the efficiencies of technology, such as wireless handheld devices used to electronically write and transmit prescriptions. For now, though, few hospitals have seriously tackled supply chain issues. Here's a look at two that have, using very different strategies.

Allina Hospitals & Clinics, Minneapolis

With 11 hospitals and 43 clinics in Minnesota and Wisconsin, $1.8 billion Allina is a textbook example of a hospital system that grew by merger and acquisition. In 1999, each of the facilities had relatively good materials management practices in place, but they were running on no fewer than six legacy computer systems in which procurement and payment data was not automatically integrated with the accounting system. The Y2k remediation effort gave Allina an opportunity to implement a common computing platform for its highly fragmented materials management operation, says Scott Grove, director of IT.

Allina implemented Lawson Software Inc.'s materials management and financial applications as well as its contract-pricing application, which keeps track of the ever-changing prices of the thousands of products Allina has negotiated under contract with various suppliers. By early 2000, the system had gone live, giving hospital administrators their first glimpse of overall materials purchasing activity.

"With a common system, we finally had a stadium to play the supply chain game in," says Grove. "We spent a lot of time mining transaction data to come up with good usable [purchasing] information," which pinpointed where off-contract buys were being made. In the first year, the system determined that only 50% of Allina's purchases were on contract.

"Large hospitals buy a lot of stuff they want quickly off of contract," Grove says, and the hospital ends up paying a premium on those orders.

In January 2003, Allina set a goal to bump up contract purchases of supplies to 70%, something that Grove says is possible only with "very, very clean data and very targeted information." One of the key tasks for IT, which worked with the hospital's contract administration group, was keeping contract and pricing data current and accurate, Grove says.

Every month, the contracts administration group combs through purchasing reports to determine which buys were made on and off contract, tracing transactions down to departments and individual buyers. They learned that "if you've got very targeted information and a few people making a lot of the impact, you can change the numbers very quickly," Grove says.

Between February and November 2002, spending on supplies dropped from 13.2% to 12.8% of net patient services revenue, but that small change netted between $4 million and $4.5 million, Grove notes. Allina also reached its 70% contract buying goal, which translates to $100,000 in savings for every 1% improvement in contract compliance, he adds.

For IT, attaining supply chain efficiencies in health care is "a heavy maintenance issue of keeping data clean," Grove says. "If you can do that, you then have accurate information. What IT did is really focus on providing that information and left the change management issues to organizational managers."

The bottom line: "There is significant payback, but it's [money] you don't know you're losing until you make an effort to go out and quantify the problem," Grove says.

University Health Network, Toronto

Dissatisfied with the performance of an outsourcer it had hired to handle supply logistics in the late 1990s, the three-hospital University Health Network teamed with its consulting partner, Toronto-based Thiinc Logistics Inc., to form a for-profit hospital supply logistics company. Today, that company, known as Hospital Logistics, serves two other corporate health care customers in Toronto as well as its own three hospitals. The venture has yet to turn a profit, but it has increased the accuracy of deliveries, which ultimately translates to better patient care, says Kevin Empey, vice president of finance and corporate services at University Health Network.

"Before, we were receiving between 85% and 90% of products [that had been ordered] every day. Now, we get between 98.5% and 99.5%," reflecting a significant increase in order accuracy, Empey notes. Among other things, that means surgical cases aren't delayed or postponed because the required instruments aren't available, he says, adding "we did not do this for cost savings; we did it for service."

Nevertheless, a better supply logistics operation had to begin with an integrated computing system that could track contract information, orders and payments as well as warehousing and delivery operations.

Hospital Logistics bought and modified ERP software from Tecsys Inc., a Montreal-based vendor. The system supports radio frequency identification scanning and the use of handhelds as well as in-hospital logistics activities, such as stocking and setting up products at nursing stations. In all, the system tracks more than 25,000 items, all on a just-in-time basis, from the point of origin to delivery at a nursing station. "We spent a lot of time on IT and designing an integrated IT platform," says Yundt.

Sunnybrook and Women's Hospital, one of Hospital Logistics' customers, eliminated its on-site supply warehouse and now maintains minimal backup inventory because supplies have an order-to-delivery turnaround time of less than 12 hours. Customer hospitals maintain very little inventory and have more accurate data about product replenishment, says Friesen.

Hospital Logistics also has a direct electronic link with its customer hospitals' general-ledger systems, to which it uploads transactional information. Hospital administrators can see exactly which products were purchased from which suppliers, so they can reconcile payments against contracted prices.

"Now we're able to access better supplier information for products that flow through hospital logistics," says Friesen, who handles all of the contracting and purchasing for three Toronto hospitals, including Sunnybrook and Women's.

"The real benefit to clinicians is they now truly have the products they need when they need them," says Friesen. "The patient care staff can spend time delivering patient care instead of worrying about chasing down supplies."

Copyright © 2004 IDG Communications, Inc.

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