INSIDE THE CURRENT ISSUE

August 2008

Back Talk

The future of supply chain
expense management

Utilization management drives ultimate success

by Robert T. Yokl

For years, those of us in the supply chain management industry have mostly skirted around utilization management. Because there have been so many other savings opportunities, we haven’t had to invest our time in utilization management.

But times change, and lately, we’ve seen our price, capitation, standardization and contract savings slowly disappear. Sure, we all love to pluck the low-hanging fruit because it requires less effort and tastes just as sweet as that on the higher branches. But once those lower branches are barren, none of us will choose starving over getting out a ladder and reaching for the higher fruit.

And it’s definitely time to get out that ladder. Our studies show that 79 percent of all new supply chain savings reside in utilization. This means that there is $11,998 to $30,039 in savings to be had per occupied bed. That’s seven to 12 percent of an average healthcare organization’s annual total supply spending. Examining these numbers, we can see that those savings aren’t "fruit" we can afford to leave unpicked.

Price savings on the decline

Supply chain management professionals can unequivocally say that price
savings are on their way towards extinction. Currently, only one to two percent — historical lows — of a healthcare organization’s savings result from price breaks.

This decline, though, was inevitable; for the past 50 years, we have been putting the squeeze on suppliers to give us the best price, with the assistance of our GPOs. Now there are no more margins to reduce. Simply put, those low-hanging branches have no more fruit.

The good news is that utilization savings are out there right this very minute just waiting to be had. The challenge is that most healthcare managers simply don’t know where to find them, but I can assure you that it isn’t as hard as you might think.

Utilization management’s value

Managing utilization costs can save $1 million to $2 million per 100 occupied beds on total supply expenditures — a big leap from the one to two percent in price savings.

As a 30-year veteran of the supply chain management industry, I was surprised eight years ago when I began realizing that newly uncovered savings weren’t coming from price, but rather from eliminating waste, inefficiency, misuse, misapplication and mismatches of products, services and technologies.

Waste and misuse is actually a natural result of non-existent monitoring. Think about it: no one is really responsible for the healthcare organizations 18,000 to 46,000 products, services and technologies once they’re purchased.

Staff go about using the products, services and technologies in the way that is easiest and most convenient for them. They don’t think, "This is wasteful, so I should do this differently."

At one hospital we worked with, the staff were using primary IV sets only (no secondary sets had been purchased) on patients for one year without anyone questioning it. This oversight unnecessarily cost the client hundreds of thousands of dollars that year.

Don’t dismiss this example as an anomaly, because I can guarantee that you too have similar utilization misalignments at your hospital just waiting to be harvested.

Topping the watch list

I have been at this supply chain game for a long time and as such have had the opportunity to watch our industry’s supply chain trends (GPOs, Just-In-Time, value analysis, MMIS, spend managers, capitation, etc.) come and go, or become a supply chain best practice. In fact, it’s actually my job to identify, analyze and evaluate these trends and catch the wave on the ones that I believe will contribute the most to the supply chain of the future. You guessed it; utilization management is on the top of my watch list!

I feel strongly that utilization management is one of the new and emerging trends (not a passing fad or craze) that not only will become a supply chain best practice, but is the future of supply chain expense management. Now that we are squeezing the last few dollars out of our prices, we must look to the future to uncover new vineyards to be harvested just to stay in place. To ignore this most important advance in supply chain management is like throwing away a few million dollars a year in new, achievable and sustainable supply expense savings.

Robert T. Yokl is president and Chief Value Strategist of Strategic Value Analysis In Healthcare, which is the leading healthcare authority in supply and process value analysis. Yokl has nearly 30 years of experience as a healthcare materials manager and supply chain consultant, and also is the co-creator of the new Utilizer Dashboard that extends beyond spend management for deeper and broader utilization savings. For more information, visit www.strategicva.com. For questions or comments e-mail Yokl at bobpres@strategicvalueanalysis.com.