Find Deeper Healthcare Supply Chain Savings

Having already picked most of the low-hanging fruit, provider organizations are looking for—and finding—new ways to spend less on materials.

This article appears in the April 2014 issue of HealthLeaders magazine.

As margins shrink and budgets tighten in reaction to healthcare reform and the development of value-based reimbursement models, hospitals and health systems need to trim as much expense as possible from the supply chain in order to remain financially viable.

Simply relying on a group purchasing organization to contract with vendors for competitive pricing is not going to cut it anymore. What hospitals need now are strategies for finding deep, sustainable reductions that move the dial even further on supply-chain costs.

Cutting costs through 'staff or stuff'

Three years ago, Boston-based Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School with 649 licensed beds and about $1 billion in annual net patient service revenue, began a mission to find big supply-chain savings, says Steve Cashton, director of purchasing and contracting.

"We were being squeezed by declining reimbursements, and there was an initiative to cut costs," Cashton says. "We either had to cut staff or stuff, so instead of staff, we decided to look at the stuff. You really can't cut your way to success by reducing staff so we started looking at where we can improve our margins with the supply chain."

Since then, BIDMC has cut about $25 million from its supply-chain spend. "We took out almost $7 million in fiscal year 2011, $10 million in fiscal year 2012, and $9 million in fiscal year 2013, in round numbers," Cashton says. "We have a similar target set for this year. We'll be looking to cut about $8.5 million."

To achieve these savings, BIDMC created six clinical quality value analysis teams in the areas of support services, OR, med-surg, pharmacy, clinical services, and intervention procedures to "look at the value of the supplies that are already in the organization," Cashton says. "Each team has a goal, and all of them hit those goals and typically exceed them. They are looking at everything to find the opportunities that we have to save."

Cashton notes that while the teams are looking for ways to cut expenses, they are also always concerned about quality. "The reason we called it clinical quality value analysis is we didn't want it to be a finance-driven process. We do look at outcomes and length of stay and all of these clinical aspects, which are central to our analysis along with the financial piece."

BIDMC has targeted physician preference items as an area to find large savings, Cashton says.

"We go where the money is, which a lot of times are the physician preference items like knees and hips," he says. "We are not talking about small numbers. These are big opportunities."

For the most part, physicians have been receptive, Cashton says. "They do realize more and more the need to bring down costs. … We try to engage them and give them figures and statistics on what the savings would be. They generally have responded if they are involved from the beginning and know what the cost-saving opportunities are."

BIDMC also has tapped into nonclinical areas to find savings, he says.

"We've saved about $1 million in food service, and we're looking at janitorial supplies and all kinds of service contracts like collections, IT maintenance, employee benefits. We are looking at all of our services as well as products. We think we are looking at saving somewhere between $4 million and $7 million in purchase services savings over the next few years," he says.

BIDMC also joined the Northeast Purchasing Coalition two years ago to harness its bulk buying power with other regional healthcare institutions.

"It brings GPO pricing to another level. We get an additional tier by aggregating our purchasing through this group," Cashton says. "In calendar year 2013 we took out about $1.4 million in savings based on this commitment."

Standardization reins in spending

Jeff Baiocco, chief financial officer at Eastern Idaho Regional Medical Center, a 312-staffed-bed institution in Idaho Falls that is part of Hospital Corporation of America, says that, like most providers, his organization has already utilized its GPO to find the easy cost cuts. To find more savings, EIRMC is looking to standardize physician preference items.

"Standardization is the new challenge as we look at trying to reduce variability so that we are not stocking five or six items, but are instead stocking two," he says. "If we can eliminate even one item, it allows us to capture some of the purchasing power that is left to gain. Physician preference item management is really a big part of where we are focusing our attention."

Baiocco says that the financial realities of value-based purchasing have encouraged physicians to be more open-minded than ever about trimming supply chain expenses, but he acknowledges that this new outlook only goes so far.

"Physicians are more receptive because they know they are facing the same financial pressure as the hospitals due to rising costs and declining reimbursements," he says. "At a high level, there is no one who argues with the need to cut costs, but when you go a little deeper, it's a lot like a town wanting a landfill but everyone's attitude is 'Not in my backyard.' They know we need to cut costs, but they don't want it to be on the items they like to have."

To overcome this resistance to giving up certain items in the interest of the organization's overall fiscal health, EIRMC's administrative leadership spends time discussing each decision with physicians.

"It takes a lot of time with the medical staff to partner with them and really reevaluate whether we are using certain items because they really do offer a superior clinical effect," Baiocco says. "Ultimately, physicians are responsible for that patient outcome, and the surgeons need to be actively involved in selecting the items they are using."

Reprocessing reduces waste and cost

Demonstrating success in cutting costs without hurting outcomes is one way to win over skeptical clinicians, Baiocco says, citing EIRMC's recent decision to reprocess OR trocars as a success story. By cleaning, disinfecting, and sterilizing reusable medical devices on the carts rather than replacing them with new products, EIRMC has seen considerable savings without impacting the quality of patient care.

"We consolidated to one vendor, and we've gone with a vendor that allows us to reprocess," he says. "We had that vendor come in and work with physicians to get them comfortable. We are saving between $30,000 and $50,000 on an annual basis."

Cheapest is not always best

Reducing supply-chain spending is also an organizationwide initiative for Main Line Health, a 1,295-licensed-bed health system with $1.4 billion in annual operating revenue based in Bryn Mawr, Pa.

"Every year we have a target to cut somewhere between 5% and 7% of our spend," says Chris Torres, MLH's vice president of supply-chain management.

Despite the emphasis on cutting costs, Torres says finding the cheapest product is not MLH's priority.

"The last thing we look at in our supply chain is cost," she says. "We look at safety—both for the patient and employees—and the quality of the product. It's interesting because you can get quality products that are sometimes less expensive and sometimes more expensive, but it all goes back to utilization. If you don't have waste and rework, the more expensive product may be more efficient in the end."

Torres says that because buying a less-expensive product doesn't help the bottom line if more of it has to be used, MLH keeps a close eye on the real cost of every new product to make sure the value is truly there.

"When we implement something new, we monitor it every month. We don't say, 'We are going to change gloves and that is going to save us $100,000,' and then never look at it. We can save money on the cost of something coming through the door, but if we are using five times as much of it because of a lack of quality, we are not saving money."

Data can sway physicians

Like many other provider organizations, MLH sees physician engagement as critical to success when it comes to removing cost from the supply chain. The system has clinician advisory groups in orthopedics and cardiology, two of the areas where the most money is spent on supplies and where some of the biggest opportunities for savings exist, Torres says.

"Year over year, part of that 5% we are taking out of our spend is usually capital equipment, ortho, and cardiology," she says. "We look at those areas every year, and we meet with the clinicians monthly. … We've had an orthopedic advisory group in place for six years, and one in cardiology that involves physicians and nurses who sit in a team atmosphere and talk about where the opportunities are."

It is also very important to be transparent with clinicians about cost containment initiatives and to provide solid data on pricing and outcomes, Torres notes.

"The first thing you go in with is data, but it has to be actionable, and it has to be accurate," she says. "The last thing you want to do is go to a group of physicians with inaccurate data. … Our clinicians don't want to use the most expensive thing. They want to use the product that has the best outcomes for their patients. They might be willing to compromise on some things and not on others."

In deference to its physicians, MLH has not limited physician preference items as severely as other supplies.

"We have standardized general med-surg products like gloves and catheters. When we get to physician preference items, it becomes more interesting because of physician training, and we haven't gone down to one item. We have to understand the clinical needs as well and what physicians need to get the best patient outcomes," Torres says.

"The reason I've been successful is because I have established relationships with our clinicians based on trust and respect," she adds. "We're not clinicians, so we rely on our clinicians to guide us and help us."

Looking beyond a GPO

In addition to working with its GPO to cut costs, Torres says MLH also looks on its own for better prices.

"We leverage our GPOs contracts for the large majority of our med-surg products. About 30%–40% of our spend is through local contracts," she says.

MLH has also found some significant savings through reverse auctions, Torres says. "Basically, there are companies out there that will take your spend and your parameters and host an online bidding process."

Although Torres says this approach is "simple," she also says it can reap important savings. For example, during a recent reverse auction for trash can liners, MLH saved $200,000 by using that method of negotiation.

"When you think about how many trash can liners we use in healthcare, it represents a 6%–7% savings based on the volume of the purchase," she says.

Pulling as much cost as possible out of the supply chain will be critical to health systems' long-term financial success as payment models change, Torres adds.

"I think it is one of the hubs of how we are going to move into a more value-based purchasing system in healthcare," she says. "You have to have a core understanding of your supply chain costs in order to manage it in a more efficient way."

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This article appears in the April 2014 issue of HealthLeaders magazine.