People & Opinions

Reining in exploding emerging technology
and supply chain costs

By the end of 2003 the senior executives at Pennsylvania Hospital recognized that supply chain costs were growing at an explosive rate. The hospital experienced a 9.94% annual growth rate for supplies in 2002 and an additional 11.96% in 2003. This growth rate was having a dramatic negative impact on the hospital’s margin. In comparison, this growth was two and a half times labor, and more than five times greater than the United States Consumer Price Index rate of 4.3% for 2002-2003 (U.S. Department of Labor, Bureau of Labor Statistics).

While efforts were being made at the University of Pennsylvania Health System corporate level to evaluate products that were expected to have a financial impact greater than $200,000 a year, processes were lacking at Pennsylvania Hospital for products under this threshold. Recognizing this, the executive team met with members of H-Works from the Advisory Board (H-Works, the Advisory Board Company 2005) and sought solutions from other sources to create a sustainable infrastructure for evaluating new technology to assist controlling new spending. Separate processes were developed to reduce current spending through product exchanges, utilization practice review and a centralized inventory control system to reduce inventory levels.

In the past, the Director of Materials Management had traditionally conducted supply chain value analysis, managed logistics and inventory controls as well as other traditional materials management departments. The oversight and analysis required to direct a high quality value analysis process necessitated the creation of a separate system and reporting structure led by the Director of Value Analysis (DVA). This position allows the Director of Materials Management to focus on supply chain services and reducing inventory levels while the DVA performed all of the
required product analysis (Refer to figure A).

During the spring of 2004, multiple committees developed the infrastructure needed to support the value analysis process. These included the New and Existing Technology Committee, Enfranchising Physician Committee, Hardwiring Discipline Committee (financial reporting), and Maximizing Supply Reimbursement Committee. Each committee was delegated to create policy and procedures needed to support the value analysis philosophy that would govern the organization. Many of the functions of these committees were completed and incorporated into the New and Existing Technology Committee and job functions of the DVA. The infrastructure created continued to mature as policies and process flows relating to the introduction of new and existing technology were completed. The final phase to start the value analysis/new technology review process focused on hospital wide communication of the issues, solutions, as well as steps for implementation to control exploding emerging technology and supply chain costs.

Previously, in many healthcare organizations, it had been common practice for physicians to obtain and utilize new as well as existing technologies from vendors without the hospital’s approval or knowledge thus adding millions of dollars to supply costs. To facilitate this process, the New and Existing Technology Committee’s interdisciplinary team of physicians, clinical and administrative staff evaluate the clinical efficacy and financial/marketing impact of those technologies before their utilization. Intelligence is exchanged among the constituencies within the hospital system to assist with the decisions on which technologies and products to adopt.

A DVA’s job function has a unique vantage point for identifying weaknesses and work silos in the business model and developing corrective measures. Business model discipline should be instilled through the integration of work flow processes associated with new and existing technology introductions. Specifically, a defined algorhythm safeguards that each product will follow the business model (Refer to Figure B). The algorhythm insures that savings are achieved through: 1) vendor control, 2) pacing the rate of product introductions, 3) creating an opportunity to financially review and make rational product decisions before its use, 4) evaluate products through a cost benefit analysis as related to clinical quality data, 5) utilize only free product for trials in return for a marketing opportunity rather than paying list prices for un-contracted products, 6) delay product use for increased leverage to improve pricing, 7) utilize business model discipline related to contract management and material control systems, 8) minimize shelf stocking, 9) encourage consignment when feasible, 10) force the vendor to bring in the product per case as needed, and 11) lower clinical supply inventory levels.

The first stage in developing and implementing a successful value analysis process revolves around changing the supply chain procurement culture that has persisted for generations in healthcare. The hospital needs to communicate and explain the explosive cost increases associated with emerging technologies and supply chain costs, and emphasize their direct impact on the hospital’s ability to afford these technologies, capital improvement and labor. All planning and steps of implementation should become standard agenda items for key committee and leadership meetings to encourage an inclusive and participative environment. Front-end education and information is important in order to minimize negative perceptions and garner continued support for the process after its implementation.

In developing a value analysis process, the second component involves physician support and participation, as well as appointing a physician chair for the New and Existing Technology Committee. Physician Enfranchisement is critical for a successful value analysis process. It is important to involve physician leadership early in the process to foster physician participation, seek new product introduction procedures that would be fair and to identify obstacles and their solutions. The upfront work and collaboration with the physicians creates a foundation that will foster a successful value analysis program. The second part of physician enfranchisement is recruiting the correct physician to chair the New and Existing Technology Committee. The physician selected should have an active practice, years of experience and an understanding of the issues. His or her role as a physician liaison provides valuable assistance communicating with fellow physicians, reviewing emergency and one-time product requests and insuring that standards of patient care are not impacted. The committee composition should include heavy physician representation, the DVA, an Executive Sponsor, Perioperative and Cardiology representation, a Purchasing Representative, as well as other pertinent administrative and clinical staff. The DVA, serving as the Co-chair will provide the data and intelligence for the comprehensive cost benefit analysis, while the Executive Sponsor provides senior executive representation.

• Attempting sales in a clinical setting

• Violating the visitation policy

• Removing inventory

• Exchanging more for less expensive inventory

• Interrupting patient flow

• Invoicing for procedures not performed

• Invoicing at prices greater than agreed upon

• Adding enhanced and more expensive product to a contract after a less expensive version was approved

• Adding additional non-reviewed products to a contract

• Attempting different and higher pricing for individual entities

• Attempting to change to a higher price after a product is approved (submitting a lower price to achieve product approval)

• Misleading about a product’s "true cost"

• Creating clinician discontent

• Enticing staff with gifts

• Attempting to change other contract terms such as shipping and freight, duration of price guarantee, and adding volume thresholds without agreement or consultation.

• The contract manager then enters the new product into the material control system

to insure the price and contract terms

• The product is added into the charge description master to insure charge capture

• When appropriate, the DVA will contact the Managed Care Contracting Department to inform them of a product add that may warrant solicitation for additional reimbursement from third party payers

• When appropriate, the Medical Records Department is informed of new technology to insure appropriate coding

In addition, the DVA has other functions that assist coordinating and integrating the value analysis process into the various constituencies within the health system:

• Coordinating and communicating all local entity value analysis efforts through the Corporate Value Analysis Committee (CVAC Rep, Refer to Figure A)

• Coordinating all material acquisitions through Corporate Purchasing for leverage points related to pricing and contract terms

• Identifying non-approved products

• Facilitating interdepartmental communication as related to the material control and CDM numbers for future ordering and charge capture

• Communicating departmental in-servicing needs prior to product utilization

• Coordinating all value analysis committees (Refer to Figure C)

Other value analysis committees can help control supply costs. The creation of a Supply Cost Containment Committee (Refer to SC3 Process, Figure A) is recommended to seek product exchanges and utilization review of current products to generate savings. A Nursing Products Committee (Refer to PAH Products Committee, Figure A) should be instituted to review all other non-perioperative clinical supplies that are being introduced into the facility. If a product is clinically approved for use by the Nursing Products Committee, it should then be submitted to the New and Existing Technology Committee for further financial and clinical review and utilization determination. The New and Existing Technology Committee should be the umbrella committee for all product introductions.

The final component in controlling supply costs is the implementation of a centralized materials management process and an inventory control system for all procedural areas. The goal is to take supply management out of the hands of the users and put it into the hands of the materials team who have the expertise to achieve savings. Clinicians can now focus on patient care, and not worry about managing supplies and supply costs. This includes establishing processes to incorporate new supplies, adjusting inventory levels of existing products in the same class, creating a consistent review process for expired or soon to-be-expired products, establishing triggers to identify spikes in utilization, and creating opportunities to quickly respond by reconfiguring the product, class or purchasing pattern. Two examples of implementing the above include a $44,000 reduction of inventory in the Interventional Radiology Department in 2005 and a combined 2003-2005 total of $915,516 reduction of inventory in the Interventional Cardiology Department achieved through straight inventory reduction at PAR locations, increasing consignment and the removal of obsolete inventory.