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Supply Chain
Strategies
Supply Chain and
Cost Reduction
Management
1
Supply Chain
Strategies
Speaker Profile – Farrah Mahoney
Farrah Mahoney is the Director of Business Development for Healthcare Insights, LLC, which
specializes in the teaching and consulting of healthcare financial management issues. She
has been with Healthcare Insights, LLC for over 7 years. In addition, Healthcare Insights has
developed INSIGHTS, the industry leading management accountability and decision support
software solution for the healthcare industry. As part of her responsibilities, Farrah advises
clients on best practice reporting and monitoring techniques.
Prior to her role at Healthcare Insights, Farrah spent 7 years working in the finance
department of several healthcare providers. These included a 350-bed acute care hospital,
as well as long-term acute care providers and a physician group. She holds a Bachelors of
Science degree in Accounting and a Master of Business Administration from the University of
Southern Indiana.
2
Supply Chain
Strategies
Section Objectives
• Present the reasons why there is a great need
and opportunity to reduce non-salary expenses
• Expose the need to manage for increased
accountability in the hospital setting
• Identify specific areas of opportunity for rational
supply chain expense reductions
3
Supply Chain
Strategies
Supply Chain Management
• Management of the supply chain offers a
significant opportunity to reduce expenses
• It is another area where improved profitability can
be achieved through
 overall process improvement and
 departmental action
4
Supply Chain
Strategies
To Maximize Bottom Line Outcomes,
Use a Non-Salary Ratio To Set Goals
• Just like the Labor Ratio, there is a widely accepted ratio
for Non-Salary expenses
• The ratio is
Supply Expenses (excluding depreciation, interest and bad debts) /
Total Revenues
• Best sources suggest that hospitals are generally in the
16 – 19% range
 But some investor-owned hospitals are running in the 12 – 13%
range
• If you start your budgeting process with a ratio goal in
mind, it will simplify the process
5
Supply Chain
Strategies
Supply Chain Metrics
Supply Expense as a Percentage of
Total Revenues
EQUATIONS:
Supply costs divided by total revenues
EXAMPLE:
July, 2012
August, 2012
September, 2012
October, 2012
•
•
•
$
$
$
$
Supply Costs
1,900,000
1,800,000
1,750,000
1,800,000
$
$
$
$
Total
Actual
Budget
Revenues Percentage Percentage
10,000,000
19.0%
18.0%
9,000,000
20.0%
18.0%
10,500,000
16.7%
18.0%
10,000,000
18.0%
18.0%
Benchmark
17.0%
17.0%
17.0%
17.0%
This metric quantifies the total cost of supplies as a percentage of the total revenues
recorded by the hospital. It can be used to determine the average supply costs
percentage needed to operate the facility.
The lower the number, the better.
Benchmark information is available (from the Advisory Board) and general values are
within the 16 - 18% range.
6
Supply Chain
Strategies
Statement of Operations
Ridgeland Heights Medical Center
Statement of Operations
2012
REVENUES:
Inpatient Revenue
Outpatient Revenue
Total Patient Revenue
Less:
Contractual and Other Adjustments
Charity Care
Net Patient Service Revenue
Add:
Premium Revenue
Other Operating Income
Total Revenue
2011
Percentage
Change
73,000
72,000
145,000
74,000
69,000
143,000
-1.35%
4.35%
1.40%
(49,000)
(2,600)
93,400
(48,000)
(2,200)
92,800
2.08%
18.18%
0.65%
2,100
1,200
96,700
1,300
1,200
95,300
61.54%
0.00%
1.47%
EXPENSES:
Salaries
Contract Labor
Fringe Benefits
Total Salaries and Benefits
36,000
1,000
7,000
44,000
34,000
1,500
6,800
42,300
5.88%
-33.33%
2.94%
4.02%
Bad Debts
Patient Care Supplies
Professional and Management Fees
Purchased Services
Operation of Plant (including utilities)
Depreciation
Interest & Financing Expenses
Other
Total Expenses
4,600
15,500
3,600
5,400
2,600
11,000
7,400
3,800
97,900
4,400
15,000
3,600
5,600
2,500
10,500
7,600
5,200
96,700
4.55%
3.33%
0.00%
-3.57%
4.00%
4.76%
-2.63%
-26.92%
1.24%
Operation Margin
(1,200)
(1,400)
-14.29%
NON-OPERATING INCOME:
Gain/(Loss) on investments
Investment Income
Total Non-Operating Income
1,200
6,400
7,600
600
5,500
6,100
100.00%
16.36%
24.59%
Net Income
6,400
4,700
36.17%
Ridgeland Heights Medical Center
For the 12 months ending
Non-Salary Expense Ratio
12/31/12
Supplies
Purchased Services
Professional and M anagement Fees
Operation of Plant
15,500
5,400
3,600
2,600
Total Non-Salary Expenses
Total Revenues
27,100
96,700
Non-Salary Expense Ratio
28.0%
16.0%
7
Supply Chain
Strategies
Supply Chain Management
Cycle Overview
8
Supply Chain
Strategies
What Are Elements of The Supply Chain?
- Establish objectives
-Establish performance standards and measures
-Determine Group Purchasing Organization (GPO) participation
-Determine Capitalization Policies
-Determine warehousing needs and utilization
Purchase
Requisition
Manufacturer
Inventory
Purchase Order
(GPO or not!)
Vendor Ships
Hospital Receives
Capitalize /
Lease
Distributor
Distribution
Floor Stocks
Billable
Non-Billable
Vendor
Invoices
Expense
Distribution
Floor Stocks
Billable
Non-Billable
Hospital
Pays
9
Supply Chain
Strategies
Supply Chain Manager Responsibilities
•
Purchasing


•
Receiving Dock



•
Best prices
Best quality
Cost efficient
Accurate recording of received goods
Immediate distribution to floors
Storeroom/Warehousing


Inventory management
Distribution to floors
•
•

•
Including case cart (complete or limited processing)
Capital


•
Revenue and charge tracking
Sterile processing

•
Medical supplies
Equipment
Examines, develops, and manages data to support the overall capital process commensurate with current
procedures and requirements
Provides full, up to the moment, capital data as required by the Vice President of Finance (CFO) and suggests
revisions to capital processes as necessary given evolving capital needs and reporting requirements.
Value Analysis Committee chair (assigned to review specific items and GPO issues)


Surgical Subcommittee
Medical Supply Subcommittee
10
Supply Chain
Strategies
Which Departments Are Involved
in the Supply Chain?
•
•
•
•
•
•
•
Purchasing
Receiving
Warehousing (Storeroom)
Sterile Processing
Facilities Management
Accounts Payable, and
Every hospital department and…their staffs
11
Supply Chain
Strategies
Key Steps to Strategic Supply Chain
Management
1.
2.
3.
4.
5.
6.
7.
8.
Build relationships
Align with physicians
Practice evidence-based medicine
Focus on clinical integration
Automate the supply chain
Adopt standards
Enhance value analysis
Think lean
Source: “Strategic Supply Chain Management”, by Lee Ann Jarousse and Chuck Lazar, H&HN
Magazine, December 2011
Supply Chain
Strategies
Improvement Opportunities
Within
the Supply Chain
13
Supply Chain
Strategies
Improvement Opportunities
• Revenue Enhancements
 Reduction in lost and late charges
 Getting Supply Chain Management involved in managed care
contracting
• Expense Reductions




Value Analysis Committee and process
Improved communications
Standardization through formulary and others usage
Accounts payable/purchasing audits
14
Supply Chain
Strategies
Improvement Opportunities Example
Banner Health – Supply Chain Blue Book
1.
2.
3.
4.
5.
6.
Set a target: Reduce Supply Expenses
Identified needs based on current state
Determined the intent of the information
Established target audience
Created a reporting tool for the audience
Provided training and established accountability
Supply Chain
Strategies
Improvement Opportunities Example
McLoed Health
Situation: “supply chain managers were disengaged from frontline caregivers,
which led to process inefficiencies and significant revenue leakage, including
$3.2 million a year in lost revenue as a result of not capturing product usage
at the point of care.”
Solution: Senior leadership created “a multidisciplinary team to analyze supply
chain processes, identify points of revenue leakage and put processes and
systems in place to address them…The CFO, CIO and hospital
administrators served as champions for the work.”
From the work of this group they are developing a value analysis team.
Source: “Strategies for Healthcare Supply Chain Collaboration: Improving Operations, Reducing
Costs”, by Derek Smith, Becker’s Hospital Review, November 11, 2011
Supply Chain
Strategies
Value Analysis Product Request Form
VALUE ANALYSIS PRODUCT REQUEST FORM
Clinical
Surgical
Staff submitting and/or Value Analysis member signature:
______________________________________Subcommittee Forwarded to
Product being introduced at Value Analysis by:
___________________________________________________________
Department Name:_________________________________________________
Item Requested:
__________________________________________________
Date of Request:___________________________________________________
Date to submit to VA:
_____________________________________________
New Item Request: Y N
Replacement Item: Y N If yes, Item Replacing: ________________________ESI number:_________ Cost
$:________
Justification for Request:
Date
Item Description
Vendor
Cost
Trial
Y N
Area’s
Start Date End Date
Approved
Y N
Other
Total
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
Information below is to be completed by Value Analysis Evaluat
ion Committee:
Forward to Infection Control
Y N
Reason: __________________________________________________________________________________________________
Forward to Hospital Value Analysis Group
Y N
Reason: _______________________________
___________________________________________________________________
Forward to Safety Committee
Y N
Reason: __________________________________________________________________________________________________
If Approved, implementation date: ____
________________
If replacing current item, # of items on hand ________
Will current on hand inventory be used before new item put in service?
Can items be returnedto vendor/s?
Inservice required for Product?
Y N
Y N
Y
Present Cost $ _______
New ESI Number _______
N
If not, area to be charged for items_______________
VA Members responsible for establishing inservice _________________________________________Date:_________ Areas:_______________
Approved by Value Analysis Chair ______________________
Rejected by Value Analysis Chair _______________________
17
Supply Chain
Strategies
Value Analysis Committee –
Purpose and Policy
Purpose:
The Value Analysis Committee will establish and monitor a process for the timely,
cost-effective, value-oriented acquisition of needed supplies, materials and services.
Policy:
1. Selection and acquisition of all product supplies and equipment must be coordinated
through the Materials Management Department and the Medical and Surgical Sub Section
Value Analysis Committees.
2. The Director of Materials Management has the authority to direct selection of most
products through the Value Analysis Committee; the Director may elect to work directly
with sub committee and/or the using department if indicated.
3. Recommendations to add products and/or change vendors must be submitted a request
utilizing the “Request for Product Review/Value Analysis Worksheet” to the Director of
Materials Management who will review the worksheet and forward to the appropriate
committee for review.
4. Products recommended for trial will be coordinated by designated personnel, with the
assistance of a designated Materials Management Buyer.
18
Supply Chain
Strategies
Value Analysis Committee –
Product Introduction
Product Introduction:
1. Internal. Any member can introduce a new product or bring a product currently in use before
the Sub Section Value Analysis Committee for review by requesting a Committee Leader to
place it on the agenda for the next meeting once a request form is filled out and submitted.
2. Once the request form has been reviewed by the Director of Materials Management and/or
Designee it will be forwarded to the proper sub committee for analysis. Anyone on the
hospital staff can bring new products, product changes, and/or complaints about products to
the Sub Committee Leader or a member of the Value Analysis Committee. Physician
requests for evaluation and trial of a new product are handled in the same manner.
3. External. Representatives of suppliers who wish to introduce their product to the hospital
must first present it to the Materials Management Department. If the product merits further
investigation, the Materials Management Department will refer it to the Sub Committee
Leader. The Sub Committee Leader will refer the item to the committee for consensus of
opinion on the merits of the product.
4. A “Request for Product Review/Value Analysis Worksheet” form should be returned by sub
committee leader to the Value Analysis Committee for final approval. Implementation of
product will be arranged with Sub Committee Leader and a Materials Management Buyer.
19
Supply Chain
Strategies
Value Analysis Committee –
Product Survey
Product Survey:
Once the sub section committee has completed the evaluation and cost analysis , the Hospital Value Analysis Committee will:
1.
Provide a point of entry and an arena for the consideration of new expenditures to be incurred by the hospital based upon the following criteria:
a)
Any product, equipment, or service that requires the purchase of a disposable component.
b)
Any product or purchased service that represents an annual expenditure in excess of: ______________.
c)
Any product that, in the opinion of the Director of Materials Management, or the Sub Committee Leader, may
underline the efforts of standardization within the hospital.
d)
Any current contracted commitments of the hospital.
2.
Provide a forum to monitor and summarize accomplishments and cost-effective practices within departments of the hospital.
3.
Investigate and, where feasible, standardize when two or more products are used to perform the same function.
4.
Ensure the use of a Product Evaluation Request form be utilized when tracking a product trial.
5.
Review product usage so its economic impact can be identified and evaluated as necessary.
6.
Reduce the number of different brands of essentially identical products.
7.
Monitor and evaluate the use of disposable and re-usable products.
8.
Review cost analysis studies prior to deciding whether a product should be assembled in-house or purchased pre-assembled.
9.
Review the use of current products to project and verify continued cost-effectiveness into the future (long-range analysis)
10. Approve all new inventory items and deletions form the Store-room (deletions to be reviewed at least quarterly).
11. Enlist experts to assist in the evaluation of items for specialized units within the hospital.
12. Assist with the analysis of patient charges, when so requested by the CFO and/or Patient Accounting CDM Manager.
13. Materials Management will be responsible for requesting product samples, while working with the Sub Section VAC
14. At the conclusion of each trial, the sub committee team leader will submit a completed Request For Product Review/Value Analysis Worksheet to the
Hospital Value Analysis Committee for documentation and review.
15. As part of the product evaluation process, the Value Analysis Committee, with the guidance from Materials Management, must allow for disposition of
“old” product stock.
20
Supply Chain
Strategies
Supply Chain Savings - Scope Areas
General
o Office Products
o Forms
o Copiers
o Equipment Rentals
o Freight
o Postage
o Furniture
Clinical Supplies
o PPI
o Other Surgery
o Med/ Surg
o Other Cardiac
o Lab
o Diagnostic Imaging
Purchased Services
o Utilities
o Telecommunications
o Foodservice
o Building Maintenance
o Building Insurance
o Transcription
o Reference Lab
o Linen*
o Reprocessing
o Temporary Labor
o IT Services
o Patient Transportation
o DME
o Dialysis
o Outsourced Programs
o Advertising
o Storage
o Fees and Subscriptions
o Security
o Landscaping
o Cleaning Services
o Travel, Ed and Books
o Other
Other
o Revenue
o RFID
Source: Strategic Sourcing Results, 773-529-1277, www.strategicsourcingresults.com
21
Supply Chain
Strategies
Current Issues That Involve
Saving Money
and
Improving Quality
22
Supply Chain
Strategies
Section Objectives
• Recognize where some non-salary expense
reductions opportunities are hiding
• Determine how to take actions to improve
(reduce) costs in these areas
• Define the implementation steps to use ensuring
that the actions are achieved
23
Supply Chain
Strategies
Analysis: 2012 Hospital Cost Savings
Opportunities Identified
•
•
An 2012 analysis by Premier healthcare alliance has identified measurable hospital
savings opportunities in 15 categories.
The five areas with the greatest opportunity for average annual savings for a typical
200- to 300-bed community hospital include the following.





Unnecessary labor expense: Includes inefficient processes that take too long or require too
many employees to complete: $6.18 million annually per hospital and up to 5.1 percent of a
hospital’s total labor budget
Excess readmissions: $3.38 million annually per hospital and up to 9.6 percent of a hospital’s
budget
Inappropriate length of stay: $2.63 million annually per hospital, and up to 5.4 percent of the
hospital’s budget
Skill mix variance: Occurs when higher paid employees do work that less expensive or less
experienced staff could do equally well: $2.38 million annually per hospital, and up to 6.2
percent of a hospital’s total labor budget
Unnecessary lab testing: Includes blood, urine, or hemoglobin tests: $2.23 million annually
per hospital, and up to 1.6 percent of a hospital’s total lab budget
Publication Date: Wednesday, June 13, 2012 http://www.hfma.org/Publications/Newsletters/Healthcare-CostContainment/Archives/2012/June/Analysis--Hospital-Cost-Savings-Opportunities-Identified/
24
Supply Chain
Strategies
Analysis: Hospital Cost Savings
Opportunities Identified
•
A follow-up analysis on certain drivers of spend found that the diagnoses with the highest average
percent of readmissions and additional costs per case include the following three diagnoses:



•
Circulatory system (heart attack/heart failure):17 percent readmission rate, $15,517 additional cost per case
Respiratory system (pneumonia, asthma, chronic bronchitis): 12 percent readmission rate, $12,146 additional
cost per case
Musculoskeletal system (major joint replacement, spinal fusion): 9 percent readmission rate, $17,730
additional cost per case
The next 10 categories of opportunities and their average annual savings per hospital are the
following:










Unnecessary diagnostic imaging: $1.52 million annually per hospital
Unnecessary respiratory therapies: $1.50 million annually per hospital
Blood utilization: $1.06 million annually per hospital
Unnecessary overtime pay: $708,922 annually per hospital
Unnecessary patient safety events, such as infections, medication errors: $564,126 annually per hospital
Overuse of antiinfectives: $419,008 annually per hospital
Overuse of intensive care services: $595,222 annually per hospital
Excessive length of stay in the intensive care unit: $339,083 annually per hospital
Anesthetic and sedation drug expense per operating room case: $68,089 annually per hospital
Nonautomated purchase orders: $51,700 annually per hospital
25
Supply Chain
Strategies
Healthcare CEOs Develop Checklist
to Save Money and Improve Quality
•
•
•
In a collaborative effort between CEOs and senior executives from 11 leading hospitals and health systems across
the country, a comprehensive checklist to promote high-value healthcare at reduced costs was released
June 5, 2012.
The CEO Checklist for High-Value Health Care, includes 10 strategies proven effective and essential to improve
healthcare quality, reducing waste and lowering costs. The checklist emerges from a discussion paper from the
Institute of Medicine (IOM) on excess costs in the U.S. healthcare system.
The authors of the checklist represent CEOs and senior executives from the following institutions:











•
•
Cincinnati Children’s Hospital Medical Center,
Cleveland Clinic,
Denver Health,
Geisinger Health System,
Hospital Corporation of America,
Intermountain Healthcare,
Kaiser Permanente,
Partners HealthCare,
ThedaCare Center for Healthcare Value,
Veterans Health Administration and
Virginia Mason Health System.
The strategies outlined in the checklist should help save lives and money. The list describes a comprehensive
approach to promoting high-value healthcare, and can serve as a blueprint for other hospital executives when
considering their own efforts to improve the value of care delivered.
To demonstrate the potential of each of the 10 checklist items, the list includes supporting case material describing
the experiences of authoring institutions already working to implement these strategies.
26
Supply Chain
Strategies
Healthcare CEOs Develop Checklist
to Save Money and Improve Quality
•
Checklist items include:
1.
2.
3.
4.
5.
6.
Senior leadership that is committed, visible and determined;
Institutional culture of continuous improvement and real-time learning;
Comprehensive IT systems for integrated, streamlined and safe care;
Evidence-based care to ensure the best care is delivered every time;
Optimized resource utilization to reduce waste;
Integrated care delivered in the setting most appropriate for the patient’s
needs;
7. Patient-clinician collaboration on care plans;
8. Targeted resources for the sickest patients;
9. Safeguards to reduce injury and infection; and
10. Internal transparency on performance, outcomes and cost.
27
Supply Chain
Strategies
HFMA Leadership Magazine
2012 Most Read Articles
These following articles have seen the most traffic on the HFMA Leadership
website during the past year.
1. Unclogging Patient Flow in the ED and Beyond
2. Eliminating Waste Without Harming Quality
3. Coordinating Care Across Sites
4. Children’s Hospital Boston Cuts Asthma ED Visits by 64 Percent
5. Patient Experience Scores Are Dragging Down VBP Scores
6. Nursing Homes and Hospitals INTERACT to Reduce Readmissions
7. Pursuing Disruptive Innovation at Rust Medical Center
8. Using Business Intelligence Intelligently
9. Medication Handoffs: Mending the Gaps
10.Case Study: Assigning the Right Nurse
http://www.hfma.org/Publications/Leadership-Publication/Archives/EBulletins/2012/August/Leadership-E-Bulletin--August-2012-Issue/
28
Supply Chain
Strategies
8 Waste Areas Driving Healthcare Costs
•
•
•
•
There's a tremendous amount of waste occurring in the healthcare industry. In order to
address that waste, organizations are moving to lean management because it exposes what
and where these wastes are and rethinks the way work is done via value streams.
Most providers are set up by departments, or vertical silos. In the case of manufacturing, it's
products that traverse these departments, from receiving an order to collecting the money for
it. In healthcare, what traverses departments are the patients.
Tracking patients horizontally through a healthcare value stream changes the way you think
about what's value-added and what's not said Marc Hafer, author of the book Simpler
Healthcare and CEO of Simpler, a firm globally dedicated to lean application, techniques and
transformation in healthcare. "When you reconstruct patient flow through an experience at a
clinic and you think horizontally... that's when you see all the waste there really is," he said.
Hafer shared with Healthcare Finance News the eight different types of waste that inhibit
patient flow, add cost, increase poor quality and infection and decrease patient and
clinician satisfaction. "
August 14, 2012 | Steff Deschenes, New Media Producer, Healthcare Finance News
http://www.healthcarefinancenews.com/news/8-kinds-waste-driving-healthcarecosts?topic=04,14,22,25,24
29
Supply Chain
Strategies
Non-Value Added Healthcare Costs
1. Too much Transportation – Patients and Equipment
2. Excess Inventory – Pharmaceuticals, Other supplies, Patient waiting
3. Unnecessary Motions – Ergonomic issues
4. Waiting – Clinicians, Patients, Managers
5. Overproducing – Departmental miscommunication / Repetitive testing
6. Processing Waste – Unused efforts / Bad Reporting not used
7. Defects – Hospital Acquired Infections, Incomplete Medical Records, Bad Registrations
8. Unused Human Potential – Redesigning work for optimal outcomes
30
Supply Chain
Strategies
Nonprofit Hospitals
Must Do More With Less
•
•
•
•
•
Moody's Investors Service said recently that in order for nonprofit hospitals to
survive the "transition period" to less Medicare reimbursement, they will have
to drastically curtail free or discounted services offered to lower-income
patients.
The ratings firm said in its May 9 report that in the face of tightened federal
funding, nonprofit hospitals "face an imperative to deliver higher-quality
service with lower reimbursement rates per unit of service."
Moody's has a negative outlook for the sector and expects the number of
ratings downgrades to outpace the number of upgrades this year.
Hospitals positioned to survive the funding drought are looking for new areas
to cut beyond where they cut spending during the last recession.
Moody's said that hospitals are also using financial models to gauge future
gaps and are creating economies of scale through partnerships as a way to
cut costs.
From Nonprofit U.S. Hospitals to Do More With Less -- Moody's
Reuters (05/09/12)
31
Supply Chain
Strategies
Action Items
• Understand the elements of the supply chain and other non-salary
costs so that informed decisions can be made
• Make a conscious and concerted effort to recognize the many areas
of opportunities for supply chain cost improvements
• Use Supply Chain and other non-salary metrics to set goals and
monitor outcomes
• Involve your physicians in supply chain improvement efforts
 Make sure appropriate and effective information is available
 Be firm about achieving improvements
• Establish a Value Analysis committee if it currently does not exist
• Determine how to improve Value Analysis committee outcomes if one
already exists
32
Supply Chain
Strategies
Conclusion
• There are untold millions of dollars being misspent within
a hospital’s supply chain
• Significant opportunities exist to reduce overall supply
chain expenditures by up to 30%
• Identifying the most likely areas of cost reduction
opportunities is not that difficult and needs to be
undertaken by hospitals for good management purposes
• Enlisting the assistance of the physicians will be essential
to maximizing reduction opportunities
33