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         Clinical intelligence for supply chain leadership



June 2009

News Feature


Connecting the dots

A small but growing number of hospitals are linking their item masters to their chargemasters to close the fiscal loop between the expense and revenue sides of the balance sheet.

While that may seem financially logical and fiscally necessary in a shattered economic state, it can be easier said than done.

Following are more than 25 sure-fire tips for successfully connecting the two.

• Train employees on the technology platforms for both the supply chain and revenue cycle sides of the healthcare system.

• Apply consistent charging across high-supply-utilization departments.

• Create cohesive processes for vendor selection when introducing clinical interface systems.

• Invest in resources to support and maintain supply chain and revenue cycle processes and technology that the healthcare system has invested in.

• Utilize technology tools that aid in maintaining and creating supply chain/ revenue links so that systems can be continuously updated and audited for errors, while capturing high-cost items and enforcing business processes.

– Kathy Schwartz, R.N., director, supply revenue operations, MedAssets Inc., Atlanta

• Strategic Alignment: Align the two organizations; move away from the silo mentality and embrace a linked revenue cycle-supply chain as a business discipline.

• Management Accountability: Establish leadership, and the programs, policies and procedures necessary to effect the new discipline.

• Focused/Integrated Approach: Identify the significant DRGs driving the organization and focus the new discipline on them.

• Stakeholder Education: Educate members of your organization about what you’re doing and why you’re doing it, what new competencies it will require, and why it’s relevant to them.

• Operating Rhythm: Establish a time-frame for review.

• Compliance/Audit Oversight: Create a process what will enable you to comply with the parameters of the new discipline and determine whether the goals for the new discipline are being met.

• Reassessment/Review: Identify whether the goals for the new discipline are being met; adjust as necessary.

– Nick Gaich, partner and Chief Strategy Officer, Appleseed Healthcare Resources, Ann Arbor, MI

• Keep your pricing information at the lowest billable unit of measure.

• Develop centralized/upfront processes for keeping your pricing information current.

• Automate the pricing updates into the ERP and billing systems.

• Develop a contract pricing strategy that supports revenue optimization.

• Develop a clear communication plan that includes rapid issue resolution.

• Establish agreed upon quality requirements as well as a measurement system.

– Denise Ashlin, ERP program manager, finance, Mayo Clinic, Rochester, MN

• Link the process of adding a chargeable item to both the billing system and the materials management information system (MMIS) to ensure appropriate and immediate usage.

• Link an item number with the appropriate chargemaster (CDM) number.

• Link an item supply location number with the appropriate CDM number for those items where usage area is important.

• Link the acquisition cost of an item to the appropriate markup percentage in the charge master.

• Link the CDM number in the MMIS to the appropriate ancillary systems to ensure appropriate billing.

– Jim Morrison, vice president and general manager, HIS/revenue cycle solutions, McKesson Provider Technologies, Alpharetta, GA

• Utilize technology to link the "Charge Description Master" (CDM) and the "Item Master File" or utilize the same database for both the "Charge Description Master" and the "Item Master File."

• Perform periodic reviews of the Item Master to insure compatibility and accuracy with the CDM

• Develop/implement policies/procedures for Item Master and CDM management.

• Monitor the acquisition and charging of "special order items."

– Florence Doyle, vice president, supply chain management, Catholic Health East, Newton Square, PA, from Strategic Marketplace Initiative’s
"The Link Between Supply Chain & Revenue" project

Connecting, signing on the dotted line

Revenue cycle, supply chain links straddle the data divide

by Rick Dana Barlow

One of the buzzworthy phrases making the rounds in healthcare information technology circles is "closed-loop solutions." But in the cloudy realms of revenue cycle and supply chain management connections, closed loop is more conceptual than commonplace.

In reality, the IT linkages between the revenue cycle and supply chain resemble clip-on earrings for non-pierced ears. Some spy the bling in connecting their item masters to their chargemasters (CDM), whether in a shared or in separate databases.

Although several group purchasing organizations and the Strategic Marketplace Initiative (SMI) promote the fiscal connections, the former through software and consulting and the latter through active work groups and hands-on programs, their valiant efforts over the past few years have yet to convince more than a few hundred hospitals to take the plunge.

Those that venture into these costly but ultimately lucrative connections anticipate, and for the most part, achieve considerable returns in the areas of accurate billing so that charged items are reimbursable and vice versa, reduced manpower hours duplicating entries into two disparate systems, and that their facilities generate revenue from the same CDM that is linked to the actual cost of products consumed in real time.

In a face-planting economy that has shattered investment confidence levels, two numbers cited in March by Robert T. Yokl, president, CEO, Chief Value Strategist, Strategic Value Analysis in Healthcare, Skippack, PA, couldn’t be more stark. "It requires about $33 dollars in new revenue to produce just one dollar in new profits for your hospital," Yokl wrote to his readers in his company newsletter. "It only takes one dollar in supply chain savings to have the same bottom line effect."

Taking the plunge

Rochester, MN-based Mayo Clinic, one of the industry’s stalwart standard bearers on supply data standardization and synchronization, gets it and has embarked on its own initiative to improve supply chain management to revenue cycle data synchronization, according to Joe Dudas, director, supply chain informatics and Mayo’s chief advocate on this issue.

"Much of this is currently in progress so we do not have metrics yet as to achieved results but are confident value will be added in revenue capture, data integrity and efficiency," Dudas told Healthcare Purchasing News.

As part of Mayo’s enterprise-wide business standardization and quality improvement objectives, Dudas and his supply chain informatics squad, led in the field by Denise Ashlin, ERP program manager, finance, sought ways to maximize revenue through billable supplies and minor equipment.

Mayo’s team discovered that 5.5 full-time equivalents were keeping three disparate systems in sync for price changes, according to Ashlin. "Even though our Lawson ERP was recognized as the system of record, the price changes recorded in this system were not automatically recorded in the two other systems – one for billing and one for inventory management," she said. "These downstream systems received the price changes but had varying processes by which it was determined when – and if – the price should be updated. As we completed our analysis, we discovered that there were extensive delays in getting the updates into the downstream systems and subsequent problems with the resulting patient billing since our systems were not up to date.    

"We determined that the most efficient process for keeping price changes in sync across the systems would be to have an upfront resource responsible for ensuring that the updates were made automatically and in a timely manner into the downstream applications and to own the process of reconciling any price discrepancies," Ashlin continued. "Our new process has this upfront resource involved with the contract negotiations to make sure there is a clear understanding of the impact on revenue when price changes are made. We also uncovered a problem where the contract managers were not completing contract negotiations early enough to get the updated prices into the systems before they were effective. By having a resource responsible for working with the contract managers upfront, we will be able to minimize these issues."

Revving up supply chain

Mayo’s philosophy and early and expected outcomes only reinforce the argument for supply chain managers to work with revenue cycle managers for their organizations’ top- and bottom-line success.

"The main operational advantage for facilities that have supply chain managers working with revenue cycle managers is that the healthcare system gains a more accurate picture of their profitability," said Kathy Schwartz, R.N., director, supply revenue operations, MedAssets Inc., Atlanta. "Working together, supply chain and revenue cycle managers can optimize supply revenue and give healthcare systems greater transparency to make more informed decisions."

Jim Morrison

Jim Morrison, vice president and general manager, HIS/revenue cycle solutions, McKesson Provider Technologies, Alpharetta, GA, couldn’t agree more.

"One main advantage is we can link the acquisition cost of an item directly to the billable cost of an item – and allow updates to the billing system only when appropriate," Morrison said. "This keeps the revenue for specific types of billable items tied to the cost of acquiring the products. This eliminates the blind percentage update of patient prices in a billing system that is done so often by hospitals every year by having the system applying the appropriate markup to the billing system based on the actual cost of the item."

One additional benefit involves fundamental teamwork. "Having these departments working together we ensure that both the expense side of the house and the revenue side of the house are in communication with each other so that potential revenue sources are not missed and to make sure that there are not any expense holes that can cost organizations if they are left unidentified for any length of time," Morrison noted.

John Hansel

Tangible financial benefits, such as increased reimbursement and reduced supply costs may be realized, according to John Hansel, vice president, product marketing for provider solutions, MedeAnalytics, Emeryville, CA, but much deeper information can be gleaned as well.

"Linking the supply chain to the revenue cycle also has the added benefit of improving strategic decision making and planning," Hansel said. "Access to actual cost information is essential for service line reporting, departmental budgeting and detailed margin analysis. Most hospitals rely on billing/claims data and cost estimates, allocated in the [decision support system] to approximate direct and indirect costs. Linking the actual costs of the supply chain to clinical activity and detailed revenue data can provide a level of granularity and accuracy that is not available in most decision support systems."

Historically, supply chain and revenue cycle managers have been attacking the same problems from different angles so it only makes sense for the two groups to partner up, according to Dennis Orthman, project director, Strategic Marketplace Initiative (SMI), Scituate, MA.

"Providers in our industry have been strapped for cash for many years," Orthman declared. "While this situation helped position supply chain operations as the cost management leaders in their organizations, finance professionals searched every nook-and-cranny of their organizations to find more revenue. Eventually, this process led to supply chain leaders also being asked how they can help maximize revenue. In the not-too-distant past, the typical answer to that question would have been: ‘In supply chain, we focus only on cost and do not impact revenue.’ But many of today’s healthcare supply chain leaders recognize that everyone impacts revenue in some way, and that recognition helped initiate an expanded focus by supply chain that includes revenue."

Florence Doyle

As a result, SMI launched an initiative back in late 2006 to explore the linkage. SMI’s work group, led by Florence Doyle, vice president, supply chain management, Catholic Health East, Newton Square, PA, identified progressive and successful practices that can help supply chain maximize revenue gain. In fact, SMI created an automated, narrated presentation to summarize findings, offering it as a free download on its website (

In short, Doyle’s group pinpointed four key areas where supply chain operations can impact an organization’s revenue stream and provided specific recommendations on what they can do. The four key areas include the CDM linking with the Item Master File, as well as to other systems in the operating room and cath lab, for example; new product introduction; patient charge system; and education and awareness programs.

"One of our recommendations is that frequent reviews and audits be conducted to be sure these files are compatible and accurate. Not only will accurate product pricing support accurate patient billing, it also supports transparency efforts," Orthman indicated.

In fact, at Catholic Health East, supply chain and revenue currently are working on a CDM initiative, according to Doyle. "Revenue has leadership for the project but there is a strong collaboration and interdisciplinary approach to identifying the options and agreeing on the final direction," she said. "Any time you create a collaborative culture the probability of success is greater."

For Doyle, it’s all about acting and being strategic. "Strategic supply chain professionals recognize the importance of continually improving organizational performance," she noted. "They understand that there are internal and external organizational stakeholders that must interact and intersect to achieve advantages related to quality, safety, service, cost, process and technology. Healthcare costs and complexity demands a team of strategic professionals to leverage their individual and collective expertise to drive organizational performance."

Pervasive participation, performance

Supply chain participation in the revenue cycle process isn’t confined to the back-end of the process either. It also affects contracting and pricing negotiations on the front end, which improves workflow and performance.

"When supply chain managers and revenue cycle managers work together, you can be sure that all impacted business processes are considered from the start of contract negotiations through the realization of revenue," Mayo’s Ashlin said. "By both areas being involved, re-work can be minimized and processing times can be improved."

MedAssets’ Schwartz agreed. "With materials managers integrating supply information into the revenue cycle, health systems can gain a truer picture of their costs to create the most sensible pricing structure," she said. "This, in turn, allows health systems to achieve greater cost savings and increase revenue."

That’s due largely to the data arming supply chain managers in the negotiation process and backing revenue cycle managers as they work with managed care organizations. "With detailed reimbursement data, the materials management team has better information to negotiate pricing with supply vendors," MedeAnalytics’ Hansel noted. "On the revenue side, managed care and charge master departments require detailed information about supply costs to negotiate profitable contracts and continually ensure accurate/maximum

Nick Gaich

At best, the two sides working together succeeds in breaking through those artificial walls needlessly constructed to block meaningful progress, according to Nick Gaich, partner and Chief Strategy Officer, Appleseed Healthcare Resources, Ann Arbor, MI.

"Silo-based operational strategies are inherently self-limiting as they fail to incorporate the inherent strengths of other departments within the institution," said Gaich, a former healthcare system supply chain executive-turned-consultant. "As such, independently-run supply chain and revenue cycle operations are ultimately self-limiting and will not enable an organization to achieve optimum margin performance. While there are good intentions on both sides, without a linked effort, the supply chain and revenue cycle may be at cross purposes and/or not able to fully leverage the inherent strengths of the other. To fully optimize margin performance — from a financial, sustainability, and quality perspective — it’s necessary to link supply chain with revenue cycle."

But McKesson’s Morrison questions how much supply chain should be participating in the revenue cycle process beyond software system connections.

"I do not think it is necessary for the material manager to be involved in the revenue cycle process, but they normally control the Item File, which is used by both the supply chain and normally any ancillary systems – such as point-of-use systems like Intellishelf and surgery systems like Horizon Surgical manager – to charge patients for items issued to them as an artifact of their care. This is what makes it imperative that the CDM is completely in sync with the item master to ensure patients are properly billed for the products used during their care. If these systems are not in sync patients can be billed for the wrong supplies or not billed at all."

Clearing roadblocks

While sources acknowledge that supply chain and revenue cycle managers working together and linking CDMs with item masters may be no-brainers on paper, it can be more challenging in practice.

"Just as supply chain managers typically are not well-versed in coding, compliance and reimbursement, revenue cycle managers usually are not as familiar with contract negotiations, the volatility of supply costs or management of materials systems," Schwartz said. "Both teams tend to be comfortable working in different technology platforms for materials and patient accounting systems, a factor which lowers the incentive for operating in a more cohesive fashion. In addition, time constraints and the processes required to learn new systems can lead to challenges when these typically separate teams work together."

For Gaich, the key roadblock is the most obvious. "The first — and most important — challenge is recognizing that both groups have a tremendous impact on the institution’s margin performance and that performance can only be maximized by aligning them," he noted. "The organization needs to recognize and embrace this, and then commit to putting in the time and effort necessary to building a relationship between the two — or they risk missing their best opportunity to maximize margin performance. Tactical challenges include aligning revenue and materials management systems and achieving compliance at the point of service to ensure effective charge capture."

For Doyle, the key roadblock is basic. "If you are both after improving operational performance the only challenges are organizational resources," she observed. "Arriving at leading practice process requires common goals which facilitate working together as well as education on the full cycle of activity from procurement – expense – to use – revenue. All participants must contribute to and understand the objective, tasks required, time lines and responsible individuals."

But Hansel contended for the proper priorities. "The hardest part for material managers can be simply cleaning up the item master," he said. "For example, establishing strict naming conventions, removing infrequent items and adding missing high-cost items. This can be a time-consuming process, and it must be continually maintained. One of the biggest challenges is that supply vendors often have direct access to physicians, and many items never make it onto the chargemaster, no matter how well the supply chain and revenue cycle are linked."

Standard precautions

As the healthcare industry plods and pushes toward supply chain data standardization and synchronization, CDM-item master connections may either be a panacea or a panoply.

"Utilizing supply chain standards can reduce errors and improve the processing cycle time because all items will be discussed in a common language/numbering scheme and keeping systems in sync will be easier," Ashlin indicated.

"Supply chain standards will allow hospitals systems to take advantage of more consistent data and better utilize technology to remove the manual processes that often lead to errors in capturing supply revenue," Schwartz agreed.

"They should accelerate the process as supply chain/taxonomy standards are what are being adhered to when adding an item to the MMIS," Morrison noted. "Today there is a wait time to have the appropriate CDM information loaded into the system so an item can be used and charged. This causes most facilities to have miscellaneous charge codes to use in the time it takes to get a CDM number assigned."

But Gaich remains skeptical if the big picture loses focus. "Supply chain standards should not impact revenue cycle/supply chain linkage one way or the other," he countered. "What truly matters is management’s discipline in aligning essential activities, which, in part, requires strong alignment of the item master and chargemaster. Data consistency, accuracy and reliability are key to successful margin performance/sustainability."