The supply chain is second only to labor in its significance as an operating cost and physicians can have a significant impact through their utilization of physician preference items (PPIs) and collaboration with management. Like labor, there is significant variation between top and lower performing healthcare organizations that can be calculated through the supply chain ratio which represents: total supply costs/net operating revenue. Like labor, the variation is enormous and runs from 12% (best practice) to 18% (median) to 25% (poor); a 13% spread that goes straight to the ‘bottom line’ (net operating margin) due to its common denominator. It is a simple ratio to calculate and is typically made up in the numerator of:
b. Purchased services
c. Professional and management fees
d. Operation of plant
With the denominator made up of:
a. Total operating revenue minus total operating expenses = net operating revenue
All of this information comes directly off of the statement of operations (NFP) or profit and loss statement (FP).
Two of the three major ways to reduce supply chain costs involve physicians and the other requires the addition of software and radio frequency identification technology for inventory management and are as follows:
I. Supply management
The greatest benefit of working with physicians is the standardization of all physician preference items (PPIs) and associated vendors. This doubly impacts costs by: reducing the variation of supplies and intensifying competition between vendors resulting in fewer supplies of higher quality and lower cost. This requires physicians to put aside traditional vendor relationships and work as collaborative groups to make supply and vendor decisions based on ‘evidence’ and not ‘eminence’. Ultimately, this benefits physicians through potential gainsharing relationships, reduces the cost to payers and patients, and lowers the adjusted cost per case for management. With fewer supplies, there is less inventory to manage and less complexity to create unintentional error.
The Memorial Hermann Physician Integrated Group (ACO) of Houston, Texas lowered the supply chain cost for its parent organization by $300 M over two years by standardizing all of their procedures and associated setups and thus eliminated almost 20% of their total inventory. They did this through the creation of Clinical Programs Committees (CPCs) through which specialties and sub-specialties met on a regular basis and standardized all aspects of routine care for commonly occurring DRGs. The benefit was not only cost, it was higher quality, fewer inadvertent errors (due to unnecessary complexity), better service, and far lower cost.
II. Inventory management
Many organizations have so much inventory that it sits on shelves for months gathering dust and unnecessary cost. Most organizations are moving to some form of radio frequency identification technology (which Wal Mart pioneered during the last decade) and just in time (JIT) inventory management so that the amount of inventory is tracked and managed in real time, reducing both the amount and complexity of inventory in storage. Warehousing through a computerized network of real time identification systems (RFIDs and bar coding) adds to the efficiency by locating the nearest warehouse that has the precise type and volume of materials needed and collating that information through a centralized processing center that can access the flow of materials and personnel throughout a large geographic area with the support of software for tracking and associated decision alerts. The efficiency of this process is typically measured in efficiency ratios by dividing total operating revenue by inventory cost.
III. Process simplification, audit and value analysis
The greatest source of supply chain cost is non-value added complexity and variation through overly complex systems that drive excessive volumes and types of inventory. Like actuarial risk management, many organizations are vertically integrating supply chain management to rely less on group purchasing organizations (GPOs) and more on its internal management structure through the use of contemporary supply chain technology, audit and value analysis committees. The latter represents a wonderful opportunity for executive management and physicians to collaborate to both minimize supply cost and optimize its quality and safety.
A ‘best practice’ prototype for this committee is the University of California, San Francisco’s Healthcare Technology Assessment Program (HTAP) a value analysis committee made up of executive management and physician leadership. Together they look at all investments or utilization costs over a given dollar amount (e.g. $100,000), new technology that represents a paradigm shift, or supply chain issues that result in quality, safety, or service challenges. The committee is interdisciplinary and is made up of clinical, operational, and financial experts who look at new technology, medication, supplies, and devices and make recommendations to management, the medical executive committee (MEC) and the board which are universally accepted as thoughtful and strategic. This committee has reduced UCSF’s supply chain costs by hundreds of millions of dollars through: process simplification, standardization, consolidation of vendors and purchasers, and better computerized tracking and audit of the entire supply chain process.
Supply chain management can no longer be performed by management independent of physician collaboration. Physicians can successfully work with management to drive down supply chain costs while providing better quality, reliability and value to its patients and many related stakeholders and customers.