ne 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,
couldnâ€™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 industryâ€™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 Mayoâ€™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
As part of Mayoâ€™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.
Mayoâ€™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 â€“ 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 â€“ and if â€“ 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
Mayoâ€™s philosophy and early and expected outcomes only reinforce the
argument for supply chain managers to work with revenue cycle managers for
their organizationsâ€™ 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
Jim Morrison, vice president and general manager, HIS/revenue cycle
McKesson Provider Technologies, Alpharetta, GA, couldnâ€™t agree
"One main advantage is we can link the acquisition cost of an item
directly to the billable cost of an item â€“ 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.
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: â€˜In supply chain, we
focus only on cost and do not impact revenue.â€™ But many of todayâ€™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."
As a result, SMI launched an initiative back in late 2006 to explore the
linkage. SMIâ€™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 (www.smisupplychain.com).
In short, Doyleâ€™s group pinpointed four key areas where supply chain
operations can impact an organizationâ€™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, itâ€™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 isnâ€™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," Mayoâ€™s
Ashlin said. "By both areas being involved, re-work can be minimized and
processing times can be improved."
MedAssetsâ€™ 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
Thatâ€™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," MedeAnalyticsâ€™ 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
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,
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 â€” from
a financial, sustainability, and quality perspective â€” itâ€™s necessary to
link supply chain with revenue cycle."
But McKessonâ€™s Morrison questions how much supply chain should be
participating in the revenue cycle process beyond software system
"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 â€“ such
as point-of-use systems like Intellishelf and surgery systems like Horizon
Surgical manager â€“ 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."
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 â€” and most
important â€” challenge is recognizing that both groups have a tremendous
impact on the institutionâ€™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 â€” 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
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 â€“ expense â€“ to use â€“ 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."
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,"
"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
"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 managementâ€™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."