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Across Florida and the nation, supplies are consuming an increasing percentage of hospital operating budgets.


Supply costs are the second largest expense for the nation's hospitals — only labor expenses are higher. Managing materials, supplies and their associated costs consumes 15 to 30 percent of net patient revenues, and hospital supply expenses represent 25 to 30 percent of the organization's total "spend," according to a recent report by Healthcare Purchasing News.

And that spend is getting bigger. Healthcare spending now accounts for nearly 15 percent of the United States' economy — the largest share on record — and this percentage is expected to continue to increase.

Traditionally, hospital materials managers have focused on managing within a single hospital. However, the newly increasing network complexity is presenting these managers with a new set of supply-chain challenges.

Rick Schooler, vice president and CIO at Orlando Regional Healthcare (ORH), oversees supply chain management for the 12-facility (1,572-bed) private, not-for-profit system.

Schooler noted that many hospitals have already squeezed most of the savings out of basic commodity supplies – such as paper products, tubing, bed pans, bandages, and similar items – and have found little yield left. To obtain substantial savings for ORH in the future, the system is extending its focus on managing pharmaceuticals and high-end "physician preference items," such as implantable surgical devices, guide wires and other medical supplies and technologies.

"The bigger an organization gets, the easier it is for variation to occur. Healthcare providers can easily find themselves ordering and/or seeking reimbursement for 'non stock' items outside of a contract which are not routinely purchased," Schooler explained. "Managing physician preference items, for example, is where the gold lies."

Mining for Dollars
The gold rush is a slow process, since physicians select products based on numerous criteria and sources of influence. But their decisions are mostly based on the belief or experience that the products selected will result in the best patient outcome. Physicians have satisfaction expectations of their own and on behalf of their patients, which, if not met, could result in physicians and patients going elsewhere.

To achieve long-lasting cost savings in this area and gain the participation and support of key clinicians and physicians, ORH formed the Medicine Economics and Outcomes Committee, which consists of 11 subcommittees – 10 of which are chaired by physicians. The committee entertains requests to introduce new products, and adheres to a strict formal approval process.

First and foremost, Schooler said any financial connections must be disclosed immediately. "The first question we ask our physicians when they're introducing a new item is: 'Do you have a financial interest in the company?'" He added this is more of a concern with high-end items that doctors typically invest in – such as a state-of-the-art or high-use medical technology – as opposed to sutures.

"If a physician is really pushing a product, we seek clinical evidence that supports it as a better product or tool. If Product X is notably less expensive than Product Y, then why does the doctor want to use Product Y? Is it really better? Or is it simply his/her preference, or what he/she was trained to use?"

The ongoing strategy, Schooler explained, is to reduce variation in the products their hospitals use, reduce the cost of those products, and purchase in bigger bulk through increased use by physicians and surgeons. This increased order volume ultimately reduces prices even more.

But while the committee is intent on getting the best deal, Schooler was quick to point out that any financial initiative involving physicians should emphasize the need to improve or maintain optimal clinical outcomes as well as control costs.

"The key is maintaining flexibility and prioritizing," he said. "It's worth paying a higher price on some items if the clinical outcome is improved."

Analyze This
The Medicine Economics and Outcomes Committee at ORH is basically using a time-tested approach that many hospitals have used to curb supply expenses: value analysis.

Value analysis is a systematic team approach for investigating, evaluating, selecting, and using the right products and services. It focuses on cost as well as quality and performance. These principles can be applied to any product, drug or service used by a healthcare provider. (For an example of how a basic value analysis effort might work, see the "Success Story" sidebar.)

Another key to reducing supply expenses lies in group purchasing organizations (GPOs). For decades, hospitals have relied on healthcare GPOs to keep their supply, equipment and pharmaceutical costs in check.

Orlando Regional Healthcare makes use of more than one GPO in addition to its own direct vendor contracting. And although Schooler said national GPOs certainly have their advantages, bigger may not always be better given an organization's specific needs.

"I do think regional GPOs can offer advantages as well. They often have better control; therefore, better compliance – which can lead to better pricing," he maintained. "Furthermore, when you look at what a large GPO is charging per item, you also have to take into account what 'additional fees' are tacked on and what value that brings."

Ultimately, the best prices come with the highest volume. So, on their own, smaller and rural hospitals simply won't get the same pricing as their larger counterparts. "Even more reason to hook up with a national or reputable regional GPO," Schooler said.

"Most importantly, organizations should be careful not to purchase everything through the same channel or they're likely to pay more," he stressed. "Have options. As they say, you shouldn't put all your eggs in one basket."

On the Horizon
According to a recent report by Healthcare Purchasing News, incorporating automated and electronic systems into supply chain management represents an untapped source of bottom-line savings for many hospitals. Consider that:
· Approximately 35 to 40 percent of hospital supply-related costs are devoted to handling, moving and processing material and supplies as compared to other industries where it is less than 10 percent.
· Purchasers spend approximately 40 percent of their time, and accounts payable departments spend more than 60 percent of their time, on manual processing of transactions.
· A single paper-based purchase order may cost anywhere from $75 to $140. to process. Transactions processed online can cost as little as $6 to $10.
· Current use of EDI (electronic data information) within hospitals only covers 30 to 40 percent of transactions available for automated processing.

Of course, implementing EDI requires pervasive, costly changes throughout a hospital or hospital system, involving systems, procedures, facilities and management. But those who can afford it likely will be rewarded with major gains.

ORH has incorporated EDI into their processes, and Schooler sees it as a huge opportunity to make substantial gains in supply cost management. "Vendors give better pricing when you do things electronically," Schooler concluded. "And using EDI simply improves efficiency and lowers sheer labor costs."

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