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Physician leaders are being challenged, as never before, to help to bend the curve of escalating costs and to improve quality.  As they look for opportunities, a significant number have identified the health care supply chain as a candidate to achieve these objectives.  This becomes especially apparent as they are made aware of the fact that for hospitals, the supply chain is the second largest cost after labor and that failure in the supply chain also impedes the ability of the hospital to carry out patient care.

Physician leaders are also recognizing that medical devices, especially in areas such as cardiology, spine and orthopedics, represent enormous costs, but also savings opportunities to the hospital.  In many cases, the ability to achieve savings in this area is held up by clinician resistance to change.  The objective of standardizing products across a hospital system conflicts with many physicians’ desires for individual medical independence, otherwise known as ‘physician preference’.  Thus, managing supplies in a coordinated and efficient way for a hospital has become challenging both technically and interpersonally.  However, when these conflicts are resolved, effective supply chain management (SCM) becomes a powerful tool for the improvement of healthcare system performance.

These supply chain functional responsibilities are subservient to the activities that precede purchasing action – sorting through the myriad of competing products to assure that one is delivering the standard of care through product choice.  Thus, physician executives working directly with supply chain leadership to understand how supply chain management is organizing the product selection and product securing decision making process is critical. To this end, actions that physician leaders can pursue include:

• Leading discussions in strategic decisions about product selection. One interesting area is the use of reprocessed items – an area where great savings can be achieved – but also an area in where there may be resistance due to clinician belief about the quality of reprocessed items.
• Collaborating with supply chain leadership and physician product-line leaders to form standing value analysis and technology assessment teams to scrutinize the extent to which products are equivalent and thus candidates for standardization.
• Supporting the development of data to assess product brand equivalency – with the goal of reducing the number of suppliers and achieving resultant improved negotiation opportunities.
• Influencing physician colleagues to recognize opportunities for excellence through product standardization and improved supply chain management. This recognizes that physician SC engagement extends beyond “executive” roles to those who can take a leadership role in providing thoughtful considerations about the materials they use.
• Advocating for the integration materials and medical information systems to support product safety and efficacy efforts. This is especially important in the physician preference area and supported by the recent presence of unique device identification for Class 3 products.

The failure of physicians to participate in supply chain decisions opens the organization to a variety of risks.  One risk is the organization becoming overly dependent on suppliers for information.  Pursuing a program focused on value-based purchasing avoids such risks, especially as it involves a wide range of physicians to communicate the organizations resolve for excellence in this area to the community of suppliers.

Leading medical practitioners invest considerable time and attention improving quality and patient outcomes by managing (i.e., reducing) variation in clinical practice.  Unfortunately, their attention to the sourcing of the medical products that they use is not as focused.  Amongst the thousands of products used daily in healthcare, a large number are duplicates and redundant due to individual physician preferences.   While the products may provide similar applicability and efficacy, acquisition costs can vary considerably. Often the one used is not the lowest cost, adding an unnecessary burden to budgets.  As an example, a typical cath lab may stock a dozen or more different stents.  Some of them will be functionally identical with the acquisition cost varying by thousands of dollars.

Higher acquisition costs are not the only factor driving up costs.  Failure to manage variation in the supply chain also impacts:

• Additional staff training costs
• Increased product storage costs
• Unnecessary utilization of valuable medical facility space
• More time searching for specific products
• Higher inventory carrying costs
• More stale dated write-offs
• Increased sourcing/contracting costs
• Higher order processing costs

Interestingly, few front-line clinicians are aware of these cost differentials as product costs are kept far from transparent.  In fact, contractual requirements usually stipulate that providers carefully limit the sharing of information about the price that they pay for medical products.  While not intended to negatively influence the behavior of a clinician’s choice of products, to comply with these requirements, pricing and product cost information is restricted to very few within a healthcare system.  Consequently, clinicians are often forced to make the right decisions without access to all of the information.

Despite the size and scope of this situation, overcoming it need not be an overwhelming undertaking.  As they say, understanding the problem and gaining consensus on the issues is the biggest step towards a solution.  This solution involves attention to and improvement in a few areas.

• Better and more open communication between clinicians and administrators.  We must begin with an understanding by administrators and contract managers that it is in the best interests of the hospital for clinicians to have knowledge and access to product pricing information.  Notwithstanding confidentiality agreements with vendors, hospital administrators need to share this information with clinicians.
• Easy access to timely information about product pricing.  Using easy to use technology, clinicians need to have immediate and timely awareness of product price differentials.  Using either the existing ERP system or a web-based bolt-on tool, this sensitive (and sometimes complex data) can be shared.
• Performance management reports measuring variances in product use where equivalent products were available.   A performance report showing negative variances traceable to a clinician’s use of a more costly, but equivalent product would help department leaders to monitor and correct product usage.

At HSCX we have found that greater attention to the use of non-standard products, notwithstanding physician preferences, will help lead to far better usage of hospital budgets for medical supplies and devices.  And as an important collateral added benefit, it usually leads to better quality medicine.  Relatively simple tools and practices are available for managing this situation.  Through diligent effort, reducing product variation can be managed as a corporate goal, just as reducing medical variation is managed as a clinical goal.

We have long understood that product standardization, within an integrated delivery network, is difficult to accomplish due to the extent to which physicians have strong preferences for products. Consequently, among the additional roles that physicians take on is to serve as “surrogate buyers” within the hospital.  This ensures that their preferences are sustained.  For physicians and other clinicians, it is even more complex when they are challenged in an environment where the volume of medical knowledge doubles every 24 months.

Supply chain executives, as well, find it particularly challenging to engage in sourcing programs where in exchange for preferred pricing they make guarantees to suppliers that favorable pricing, based on consolidation of spend, will actually occur.  Much of this change is due to product proliferation, with over 4,000 new 510Ks approved annually in the US.  As a result, no one individual (neither clinician nor administrator) can be sufficiently knowledgeable to fully consider the changing world of options.  Best practices today may not be the best practices tomorrow!  Accordingly, it is an environment where physician leaders must build an environment where clinical colleagues understand that supply chain is their link to clinical excellence.

Physician leaders need a strong understanding of the purchasing dynamics in their own organizations.  They must recognize that they act as representatives of the medical staff to supply chain management – but not as “mere delegates” who assure that all decisions meet the wishes of all colleagues.  Thus, to be successful representatives, they must be trusted by their physician colleagues that they will not only act to meet colleague consensus (and consequently patient), but also act in patient best interest and in consideration of challenges to organizational sustainability.

Physician leaders have become orchestrators of a complex process.  Unfortunately, there is little in clinical education that provides physicians with the skill set for such orchestration.  Successful representation, to meet the needs of both physicians and supply chain goals requires that physician executives

• Meet early and often with their clinical colleagues who utilize items characterized by preference.
• Communicate that their role is to assemble data for colleagues to sustain or reshape preference based on careful reflection
• Recognizing that they and their colleagues are “evidence driven,” engage with supply chain staff to gather credible data on product utilization and the ways products contribute to clinical outcomes and cost within an episode of care
• Work with clinical colleagues to consider and craft exception policies that demonstrate that they understand that many product decisions are unlikely to meet the contingent needs of all physicians nor requirements for patients
• Know that the autonomy at the patient level is important – but that in an era of “big data” – autonomy must be grounded in meeting “evolving” and revised standards of care.

At HSCX we have carefully studied these issues and challenges facing physician leaders.  We understand many of the dynamics and, more importantly, the solutions and tools for orchestrating this complex process. Our ideas and solutions have spurred healthcare organizations to significantly improve their ability to link clinical practices to the supply chain.

Do we know the path to a high performing Supply Chain?  At HSCX during the past couple of years we have assessed and advised dozens of healthcare supply chain organizations.  All are filled with well-intentioned, hard-working professionals striving to drive value in their organizations.  But most will acknowledge that progress is slower than they would like – and certainly slower than their administrative and clinical organization leaders want and need.  Why is this?  How can we accelerate progress?

Our conclusion from this work is that most supply chain strategies as articulated by supply chain organizations are not sufficiently clear, comprehensive, nor understood by the customers (the buyers) of the supply chain services.  Relatively few clinicians understand the workings within the black box of the supply chain.  They just want the best products easily accessed and, increasingly, within budgetary envelopes.  And surprisingly many administrative owners of supply chain only view supply chain as a necessary cost to be worked down through supplier negotiation.

We know that supply chain is much more than sourcing and negotiation.  And we know that in addition to fiscal management, it has a major impact on clinical efficacy and revenue recognition.  When supply chain managers through awareness of these three drivers build and drive effective and comprehensive strategies towards this end, progress is more likely.  Further, when clinicians and administrators understand and are aware of these drivers, they are much more likely to support and facilitate efforts by the supply chain organization.

In next month’s blog, we’ll tell you how to build supply chain strategies for higher performance.

Supply Chain Management (SCM) comprises one of the most diverse set of functions in an organization.  Consequently, it is not surprising that in healthcare organizations, supply chain decisions, more than most other hospital processes, impact almost every other function in a hospital, influencing clinical outcomes and financial performance.  With such breadth and responsibility, layered on top of multiple conflicting objectives specifically in healthcare, managing the supply chain can be challenging and overwhelming.  For leaders keeping their eyes on a multitude of initiatives, functions in a highly dynamic environment requires knowledge, agility, and expertise.

In our consulting, strategy and operational work at HSCX (www.hscxi.com) we have observed 12 specific keys to leadership in supply chain management.  By developing these capabilities, managers can assure themselves that they are addressing the right priorities while keeping their eye on the right ball.

1. Highly committed executive leadership teams which understand and appreciate the value achievable from supply chain management
2. Physicians and other clinicians actively engaged in supply chain management decision making together with open and trusting collaborative relationships between clinicians and SCM staff
3. Supply chain processes designed from Procure to Pay
4. Category Management focus in sourcing
5. Effective and pervasive use of analytics to support decision-making
6. Large majority of spend under contract (both GPO and hospital negotiated)
7. High compliance of purchases to contracts
8. Greater utilization of standardized products
9. Effective and well-organized value analysis team process
10. Product identification through GS1 standards and UDI
11. Optimized distribution networks and capabilities
12. Targeted performance management

HSCX works with hospital administrative and clinical groups focusing on these priorities and to help develop organizations to ably leverage them.

Supply Chain Management has fast become a critical function in healthcare.  Given that supply chain costs are approaching 25% of the total hospital budget today, it is no wonder that there is increased attention to this hospital function.  But even more importantly, evidence shows that product selection and use have a significant impact on patient outcomes. High functioning supply chains directly drive high organizational performance and conversely, supply chain failures can cripple a hospital.  Consequently, decisions by supply chain managers are no longer just about ordering a required product.  Supply chain decisions also have a strategic impact on the overall performance of a healthcare system influencing quality performance.  For this reason, medical practitioners have an important reason (in fact some might say, a responsibility) to actively participate in supply chain decision-making.  At HSCX (www.hscxi.com) we have been helping healthcare supply chain organizations move from tactical procurement organization to strategic supply chain leaders.

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