Like most large hospitals in the U.S., University Health Care System spends an enormous amount on patient supplies, over $45 million annually. And like most hospitals, its supply chain costs are compounded by the administrative load required to track and manage the purchase of so many items. The hospital has more than 15,000 individual products that are purchased on a routine basis.

University is the leading healthcare provider in a 22-county region, with 450 independent, private physicians. These physicians are used to getting the supplies they prefer to use. Managing this dynamic — physician preferences v. financial realities — is an important part of the materials management function.

Faced with improving the hospital’s supply chain processes, Mike Brown, University’s director of purchasing, explained, "I needed to understand what we were currently spending, and make projections for the future. The information in our data system was not organized or structured to provide insight into how we were spending money."

One of the challenges for Brown and his team was that the healthcare industry lacked standards for product descriptions and classifications. University had put in place a home-grown supply codification system, yet it had limited capabilities since it was based on a rudimentary three-digit schema. "For example, coronary stents were lumped with peripheral stents, urinary stents, etc. We didn’t have confidence in the numbers." With so many items in its item master, the hospital needed a more complete and detailed classification system, yet they did not have the resources or expertise available in house to do the job.

Brown and his team partnered with a leading data management provider that leverages the UNSPSC, an open, global product taxonomy. "The UNSPSC could serve all of our needs because it was to the right level of detail. It was free, you could download it from the Internet, and our partners could do the coding so I wouldn’t have to worry about recruiting clinicians to figure out what code should be assigned where. Outsourcing the work to a trusted third party frees up our time to focus on other critical priorities." Brown also believes it is important to choose a partner that has deep industry knowledge, understands the challenges of the hospital, promotes the adoption of critical standards and has delivered proven information, technology and services to address the complexities in the healthcare supply chain.

Implementing UNSPSC for greater cost savings
Launching into the classification project in August 2004, University mapped out a strategy for bringing structure to the hospital’s supply item master file using UNSPSC categories. The process would require Brown and his team to extract records for the 10,000 most-used active items. University leveraged the expertise of its partner’s staff and its proprietary technology code to update its item master over the subsequent six weeks.

A major challenge within the hospital setting is bridging the gap between medical and finance professionals. Since administrators often have less knowledge of the clinical uses of a product, questions frequently arise about exactly how specific items should be coded. "Starting this project, we were able to get our commodity codes assigned so we could understand where we were spending money, and from there we were able to turn right around and show some ROI. It was quick, targeted and effective."

"We could now tie purchase orders back to the commodity codes. As soon as a month was finished, I could run reports to see what I was spending by commodity and by vendor, and I could easily calculate market share."

A medical advancement increases spend
"When drug-eluting stents came onto the market, our spending went through the roof," Brown said. Early in 2004, one leading medical device manufacturer had dramatically advanced coronary disease treatment when it updated its line of bare metal stents with new drug-coated models. Overnight, demand for the new product surged.

"Shortly after their introduction, our cardiovascular department was using the new drug-eluting stents in 45% of stent procedures," remarked Brown. "When a second manufacturer brought a drug-eluting stent onto the market, we went up to 90% usage for all stent procedures."

With two models available, University was intent on negotiating a purchase agreement that would rein in the high prices. "In order to strengthen our bargaining position, we needed to get all our information together on exactly how many stents we’d been using, and which models," explained Brown. "And to do that, we needed properly classified product codes, which is where the UNSPSC came in."

Bargaining power
As soon as the classification project was completed, Brown and his team were able to access and analyze the data they needed. First, they had to review usage patterns with physicians and hospital administration. With these stakeholders on board, and with accurate spend data in hand, Brown was able to negotiate a contract with one of the manufacturers.

"We absolutely enhanced our bargaining position," explained Brown. "We approached our supplier, and reviewed our program with them. We had tracked a couple of months of data to show market share, and put together an achievable program that met the needs of both the hospital and the supplier. By agreeing to use this manufacturer’s stents in a certain percentage of the procedures at the hospital, we got a 14% reduction in price. It’s an agreement that is saving us $600,000 a year."

Looking at the hospital’s use of spinal implants also revealed opportunities for savings. Brown relates, "The physicians were not accustomed to someone coming to them and telling them that they can only buy from one particular vendor and others are off limits. The physicians would not agree to any kind of sole source or dual source contract. We put together a chart and showed the physicians what we were spending, and with what vendor or vendors. This chart really got the department chair’s attention. After seeing the data, he agreed to work with us on implementing a more advantageous contract." Through enhanced spend visibility brought by UNSPSC, Brown was able to document an avoided cost increase of $75,000 per year.