Supply Chain Services Integration in High Supply Cost Clinical Services Business Units

By AHRMM

Jim Smoker, CMRP, MPA, CS, York, Pennsylvania

The AHRMM Issues & Legislative Committee is charged with developing supply chain guidance statements. These guidance statements are designed to further the role of supply chain professionals and to assist healthcare organizations in managing and reducing non-labor costs. To better understand the state of the art with regard to supply chain services engagement in high supply cost clinical services business units, AHRMM undertook a survey in May 2010. The survey tool was reviewed by various supply chain leaders to assure ease of completion.

High supply cost clinical business units were defined as:

Surgical Services
Cardiology Services including heart centers, cath labs, and/or electrophysiology labs
Interventional radiology

Levels of supply chain services with high supply cost clinical business units (HSCCBUs) were defined as:

Level I integration was defined as: the supply chain service organization has limited integration with the clinical business unit and the supply chain service primarily supports the clinical business unit by receiving and delivering goods to the clinical business unit and generates purchase orders based upon requisitions developed within the clinical business unit. This was interpreted to mean limited integration
Level II integration was defined as: supply chain organization is partially integrated in supply fulfillment, inventory management, contracting, product recall management, item file-to-charge master integration, consigned goods management, bone and tissue tracking, receipt of goods, etc. In this model of integration supply chain associates perform some, but not all of the functions listed. Some SCSAs may report to the supply chain services department while other SCSAs report to the clinical business unit management.
Level III integration was defined as: the supply chain organization is fully integrated in supply fulfillment, inventory management, contracting, product recall management, item file-to-charge master integration, consigned goods management, bone and tissue tracking, receipt of goods, etc. In this model of integration supply chain services associates perform the functions listed above within the clinical service unit (OR, Cath Lab, Interventional or Invasive Radiology, Peripheral Vascular Laboratory). Supply chain associates in this model report to the supply chain service leader or his or her designee(s).

A total of 5,666 surveys was disseminated via email to supply chain professionals, including individuals employed in acute care provider-organizations, ambulatory care sites, and consultants. A total of 491 responses to the survey was received.

Non-labor cost management has continued to be a key strategy for most healthcare organizations. Numerous articles have been presented in the healthcare financial management press and the healthcare supply chain and materials management press. The results of this survey indicate that supply chain management organizations are migrating into the HSCCBUs. The paradigm of most healthcare material management organizations of the 1950s through the 1980s was, “Tell me what you want and I will acquire it under the ‘best terms and conditions.’” The 1990s ushered in the concept of Value Analysis where multidisciplinary teams were employed to standardize products and technologies used in patient care areas and support services operations. The 1990s also marked the advent of service lines. The premise behind the creation of service lines in healthcare organizations was:

Healthcare organizations needed to understand their key business units and create new organization structures to manage these clinical business units as, essentially, separate businesses or operating units.
By acting as “businesses,” these service lines would develop business plans, marketing plans, grow their services, increase operational efficiencies, and hence, their contributions to the overall financial margins of their parent organizations.

Indeed, a 2004 survey conducted by AHRMM entitled, “Performance Indicators on Surgery Supply Chain Management” revealed that 68% of respondents reported that an independent (meaning not integrated) or somewhat independent entity managed the surgical service supply chain in their organizations. In the 1990s, many healthcare organizations developed service lines within the organization’s most profitable services, such as surgical services, cardiology services, oncology services, imaging services, and laboratory services. Some authors suggest that the creation of service lines also generated higher degrees of business unit autonomy. Autonomy frequently resulted from the organizational structures put into place along with service line specific objectives and incentives.

Survey Results
Results of the level of supply chain integration with Surgical Services Business Units:
Integration Level  Response Count  % Response
I – Limited                     127                      32%
II – Partial                      209                      53%
III – Fully                         61                      15%
(80% of respondents indicated their organization provided surgical services)

Results of the level of supply chain integration with Cardiology Services (Cath Lab, EP Lab, etc)
Integration Level   Response Count   % Response
I – Limited                     107                       30%
II – Partial                      166                       47%
III – Fully                         82                        23%
(75% of respondents indicated their organization provided Cardiology Services)

Results of the level of supply chain integration with Invasive/Interventional Imaging Services
Integration Level  Response Count   % Response
I – Limited                      80                        23%
II – Partial                     166                        48%
III – Fully                       102                       29%
(79% of respondents indicated their organization provided Invasive/Interventional Imaging Services)

Interpretation of the Survey Data:
These survey data seem to indicate that there has been a significant change or movement towards more fully integrating supply chain services expertise in managing the supply chain functions of surgical services business units since the 2004 AHRMM survey where respondents indicated that in 68% of surgical service, supply chain functions were performed by an independent (meaning not integrated) or somewhat independent entity. These survey data indicate that 68% of respondents have partially or fully integrated their supply chain service with their organization’s surgical services. However, only 15% of respondents cited they had fully integrated with surgical services when compared with 23% fully integrated with cardiology services and 29% fully integrated with invasive/interventional imaging services.

A follow-up small area study was conducted among 27 VHA Pennsylvania (VHA PA) hospitals and health systems to learn if there was a correlation between the level of supply chain services integration with surgical services and supply costs per case mix index adjusted surgical cases. The null hypothesis being: fully integrated supply chain services would reveal lower case mix index adjusted surgical costs per case. The VHA PA member hospitals and health systems were chosen for the study as the VHA PA member hospitals had a ten year history of supply costs benchmarking across a wide range of indicators and had the ability to compare and contrast their data not only against VHA PA members, but also against national VHA data. Twelve (27.5%) hospitals and health systems fully responded to the follow-up survey. The AHRMM definitions of levels of integration were used. Supply costs per case mix index adjusted case data from fiscal year ending June 30, 2009 were compared and contrasted at the 25th, 50th, and 75th percentiles.

Integration Level  Response Count  %Response
I – Limited                   1                             8%
II – Partial                    6                            50%
III – Fully                      5                            42%

It was interesting to learn that those respondents indicating their supply chain services were fully integrated with their respective surgical services had fiscal year 2009 supply costs at or below the VHA national 50th percentile benchmark of $1,721 per surgical case. The VHA PA hospitals and health systems reported “fully integrated” were the larger hospital and health systems. Of those hospitals indicating “partial integration”, four respondents reported surgical supply costs per case higher than the 50th percentile, and two reported surgical supply costs per case lower than the 50th percentile. Though a small sampling of hospitals, these data do support the underlying premise that there is a direct correlation between the level of supply chain integration with surgical services and supply costs per surgical case.

Platform for Integrating Supply Chain Services with Surgical Services
A Management Health Solutions (MHS) report in a 2009 white paper entitled “Superior Inventory Management Services Increases Patient Safety and Lowers Clinical Supply Costs” stated, “Many hospitals do not have accurate, up-to-date data about the supplies they are buying, using, and storing in operating and emergency rooms, pharmacies, cath labs, and other clinical departments. (Furthermore) at any given time, the average 350 bed hospital has roughly $2,000,000 in clinical supply inventory in its operating rooms alone.” MHS found that many surgical services supply items were purchased without approved contracts and available discounts which could reduce hospital costs by 20 percent or more.

Citing the August 2010 American College of Healthcare Executives survey of 1,187 members, Jessica Zigmond of Modern Healthcare stated that the top two action plans of respondents were "reducing operating expenses and aligning physicians as they navigate the changes brought about by this year’s landmark (healthcare reform) legislation.”

In the article “The Burning Platform: One Year Later,” HFMA President Richard L. Clarke stated that early 2010 HFMA research found “three quarter of hospitals had reduced costs over the previous 12 months; one fifth had achieved savings of more than 5%. Those cost containment efforts had focused on the traditional areas of supplies and labor.” Respondents reported that they planned to use more strategic approaches to cost containment and that traditional approaches to cost containment can only take the industry so far. It would appear that engaging and integrating supply chain professionals and skills sets in high cost clinical services departments could be an effective “non-traditional” strategy to lower inventory carrying costs, lower product acquisition costs, and lower labor costs by substituting supply chain associates for nursing personnel in supply management functions.

The Strategic Marketplace Initiative, a non-profit organization of senior-level executives representing selected medical device, diagnostic, and pharmaceutical manufacturers, distributors, and healthcare supply chain, published a two-part white paper in 2010 entitled “Supply Chain Integration and Collaboration with Clinicians.” The white paper establishes a “how to” strategic approach to more effectively advance supply chain’s strategic role in assisting driving increased efficiencies in product and technology life cycle cost management. The first of the two-part series, published in AHRMM’s Supply Chain Strategies & Solutions, September-October 2010, outlined the key steps essential to successful integration. Those steps included:

Establishing a Clinical Advisory Role for Supply Chain
Improving Data Access, Transparency, and Accountability
Market the Supply Chain Value Proposition
Know Your Customer’s Issues and Challenges
Collaborate to Define Goals
Partner for Success

In the Institute for Healthcare Improvement’s “Innovation Series: Increasing Efficiency and Enhancing Value in Healthcare: Ways to Achieve Savings in Operating Costs per Year” (2009), the authors state that a key contribution of supply chain was in the area of mass (health system-wide) product standardization and purchasing. The authors also cite six primary drivers of cost and waste reduction. The five primary drivers cited included: clinical quality, staffing, patient flow, mismatched services, and supply chain. In this paper, Noriaki Kano cites three possible approaches to improving quality of a product or service, thereby increasing value.

Approach 1 - Eliminate the quality problems that arise because customer expectations are not met.

Approach 2 – Reduce costs significantly while maintaining or improving quality.

Approach 3 – Expand customer’s expectations by providing products and services perceived as unusually high in value.

By combining Kano’s three approaches with the practical advice outlined in the SMI white paper, supply chain services can effectively commence the journey of fully integrating its services into high cost clinical services departments. Successful integration takes talent, time, and incremental successes to develop trust.

Works Cited:
1. AHRMM “2004 Performance Indicators Study on Surgery Supply Chain Management”, pp 16-18. Published by AHRMM
2. “Superior Inventory Management Services Increase Patient Safety and Lower Supply Costs”, Published by MHS-Management Health Solutions, 2009. (available at www.mhsinc.com)
3. “In the Wake of Reform: Execs already Working to Lower Operating Costs”, Jessica Zigmond, “Modern Healthcare”, October 11, 2010, P 10.
4. “The Burning Platform: One year Later”, Richard L. Clarke, D.H.A, HFMA, The Board Room Press, (available at www.GovernanceInstitute.com), June 2010, pp. 1-8.
5. “Supply Chain Integration and Collaboration with Clinicians…. A Strategic Marketplace Initiative “Deeper Dive” Executive Briefing”. Published 2010. pp. 1-4. (available at www.smisupplychain.com).
6. “Increasing Efficiency and Enhancing Value in Healthcare: Ways to Achieve Savings in Operating Costs per Year”. Martin LA, Neuman CW, Mountford J, Bisognano M, Nolan TW, Innovation Series White Paper, Cambridge, Massachusetts: Institute for Healthcare Improvement; 2009. (available at www.IHI.org)