Logistics services may concentrate on the journey of products and technology moving from manufacturer to consumer, but the heart of the matter remains the destination – products and technology at the point of use when needed regardless of location.
Over the years, the debate and discussion around deliveries and distribution to facilities and locations outside of the acute care hospitals has centered, by and large, on two primary issues – finance and operations.
Distributors of products and technology (including equipment) acknowledge that delivering supplies in lower units of measure to more facilities that may also operate in remote areas can be staff- and vehicle-intensive, which also translates into higher costs that can eat into revenues and drain profits. As a result, distributors tend to mark up the prices to those products that can be sold more cost-effectively in bulk and in greater number to hospitals, fomenting an industry outcry about price differentiation among the same products for different classes of trade.
Those in supply chain understand that it costs more to deliver fewer products to far-flung locations, but they also acknowledge that such awareness may not make the pricing justification acceptable.
Yet a number of industry developments may be unshackling this sacred cow of a practice.
First, healthcare reform, driven in part by payer reimbursement, is forcing more patient care to be delivered outside of the hospital and into ambulatory surgery centers, clinics, diagnostic imaging centers, doctors’ offices, urgent care facilities, retail outlets and even more so to the patients’ homes.
Second, more hospitals, in part as a reaction to healthcare reform, have coalesced into integrated health networks and multi-facility systems, acquiring these non-acute care facilities under their own corporate umbrellas. They may be horizontally, vertically or centrally managed by a corporate office.
Third, more third-party logistics (3PL) companies and services have entered the arena to compete alongside mainline distributors, specialty product distributors and durable medical equipment (DME) suppliers.
As a result, new rules, new processes and new players are reshaping the distribution service landscape for non-acute care facilities.
As patient care continues to migrate and spread out from acute care hospitals to the plethora of non-acute care sites – including the patients’ homes – how are suppliers pivoting with the shifts? A half-dozen corporate executives immersed in the non-acute care segment offered their take on the current state of logistics outside of the hospital walls and how they saw it progressing during the next decade.
Reshaping logistics outlook
Experts agree that there’s a fine line between distribution to hospitals and distribution to non-hospital entities represented by functional similarities done somewhat differently. To some this requires fresh thinking rather than applying the obvious on a smaller scale.
“[This] represents the broader transformation healthcare has undergone over the past several years as we try to provide more holistic care to communities,” DeWoskin indicated. “Accordingly, to effectively leverage their scale, nearly every health system we encounter is trying to unlock the secret of working as a single entity instead of a collection of disparate facilities.”
Logistically, the shift to “systemness” represents a wealth of untapped value, according to DeWoskin.
“Before this COVID-19 outbreak, physically connecting acute locations with non-acute sites allows healthcare organizations to share inventory and reduce the cost of goods to the non-acute environment – not to mention a number of other potential efficiencies,” she noted. “While that remains true, it feels even bigger and more important today. Healthcare organizations with solid, strategically-built logistics networks that are agile enough to quickly add sites of care – such as the new care tents we are seeing amidst this pandemic – are much better prepared to get supplies to where they need to be quickly and orderly.”
The primary hurdle for distributor models, as DeWoskin views it, is that they historically have been built to serve hospitals.
“Many distributors have been re-thinking distribution strategies to better and more cost-effectively accommodate the non-acute care sites,” she said. “For some, this includes partnering with third-party logistics (3PL) experts, such as MedSpeed. We certainly believe that this approach is the right way to leverage the final mile of low unit of measure distribution to non-acute sites. By using the existing network for these deliveries, distributors save costs and it unbundles transportation from the cost of goods sold for the health system.”
“There are some that play in the acute care space that have pushed services down to the non-acute, and those that focus on low-unit-of-measure (LUM) non-acute service,” Lawrence said. “The acute care players are used to dealing at lower margins and are ready to pass along savings, especially when they also manufacturer their own products. But their capabilities to deliver to a single physician office or standalone clinic might not be cost effective or fit their logistics strategy and capabilities. The non-acute care-focused distributors have built their business delivering to small offices, but their cost structure to deliver those services can’t align with the low mark-ups offered by acute care leaders, who may just want to squeeze out these suppliers. Their biggest hurdle becomes adequately demonstrating the value of LUM delivery with higher touch service.”
The variety of demands and needs can complicate distribution to the breadth of non-acute care providers that span physician practices to surgery centers, imaging centers to urgent care centers, long-term care to home care, according to Richard Peters, Associate Vice President, Non-Acute, Vizient Inc.
“In those diverse sets of circumstances, traditional health system logistics have limitations but could work well in some non-acute settings,” he observed. “However, we often find that there is a significant strain on resources and/or a high-level of non-acute provider dissatisfaction. The model generally works best when there are non-acute services conducted on the campus of a hospital and that organization leverages bulk delivery at the warehouse and then distributes products via self-distribution or courier services across the campus. However, even in these scenarios, we find many health systems are still working with a non-acute distributor to handle specific needs.”
Collective continuity
Peters acknowledges that non-acute care providers are becoming more community-based and geographically dispersed, motivating health systems to evaluate alternatives that address non-acute logistical challenges. Peters recommends providers focus on six elements:
1. Identify the critical elements for each non-acute segment under the health system’s care delivery network. What services are imperative for smooth supply chain operations?
2. Evaluate current distribution partners. Do your current distribution channels or partners have the capabilities and services that your non-acute providers require? Support services related to supply chain are key to success outside of the hospital environment.
3. Evaluate non-acute specific distribution. Non-acute focused distributors specialize in the unique needs of the various non-acute provider markets. As an example, does your home care agency need a distributor that can send products directly to a patient’s home for treatment by their home care provider? Can they also send trunk stock to the nurses?
4. Understand the value and cost of low unit of measure (LUM) distribution in the context of non-acute provider needs and limitations. If you have product in a warehouse, how much are you spending to pick and package product and then get it out to your non-acute providers? Include expenses related to staff, vehicles, insurance, etc., into your consideration of non-acute distribution or 3PL services.
5. Asses the geographical footprint of your non-acute provider base. Does your current distribution model offer a cost-effective way to reach a geographically dispersed provider base?
6. Review your supply chain technology infrastructure. Is it financially feasible to implement the health system’s central enterprise resource planning (ERP) system for visibility and control of supply chain ordering or would a non-acute supply chain solution that integrates with the health system’s ERP system offer a better option? Does the central ERP system have the features and functionality to support non-acute provider need and satisfaction?
Even then distributors and 3PL companies face four key hurdles they must address, Peters insists.
• Price parity. “Many systems request that they pay the same contract price across all venues of care, which is challenging from a contract administration perspective.
• Contract management. “Related to price parity, the distributors must make sure that they can access the health system’s contracts from any source (group purchasing, aggregation networks, local contracts, etc.).”
• Ordering. “Some non-acute providers may leverage the health system’s technologies for ordering while others are buying on their own and directly through distributors’ websites. Regardless of the technology, health systems are asking distributors to help control the purchases so that they align with clinical preferences and standards.”
• Provision of services under compressed margins. “Health systems are seasoned negotiators and their wholesaler relationships have a lower cost than the non-acute LUM distribution model. However, non-acute providers still need more services, such as ordering or product shelving, to make sure they are optimizing their supply chain function.”
“As end-to-end service across the continuum of care evolves, with the goal of standardization regardless of care setting, service requirements into the non-acute space typically require a different order processing, inventory management and logistical infrastructure,” Saviola said. “The main drivers are legacy ordering platforms, accuracy and cost.
“Non-acute facilities, and certainly patient homes, with limited space and lower inventories, rely on the distributor or partner to deliver the right item at the right time,” he continued. To achieve a very high order accuracy rate, distributors must put in place more efficient systems with built-in order checking methods such as voice confirmation or weight verification system. Smaller orders, with smaller quantities of lower unit of measure items require far more efficient, lower cost, logistics. Items in lower units of measure each versus case goods require breakdown and repackaging for shipment and generally in smaller vehicles for delivery.”
Labor costs to process LUM orders must be reduced through process improvement, Saviola insisted. “It’s the same cost per hour to pick an each as it is to pick an entire case, therefore lower-unit-of-measure picking needs to be several times faster,” he said. “For traditional distributors to stay competitive in the non-acute area, they should focus on highly efficient low-unit-of-measure distribution and delivery methods, such as robotics technology.”
Hospitals have adopted the distribution and logistics strategies and tactics of their industrial and retail counterparts by leveraging cost savings through volume purchases and operational efficiencies through ready access to commonly used items, which historically has generated incremental improvements, Cyr indicated. But limited space and resources in non-acute care settings reduce access to these opportunities.
“Although some non-acute care facilities can retain some of these benefits by redirecting overall consumption to a reduced number of services provided, the volume-generated savings incentives normally offered to full-service acute care facilities are not readily attainable,” Cyr said. “The loss of rebates, discounts and other volume-pricing incentives result in an overall increase in the costs of goods and services.”
Shifting to LUM from case lot may sacrifice volume incentives but that tends to be offset by overall consumption decreases and the corresponding drop in inventory carrying costs, he noted.
Distributors justify higher per-unit item pricing to protect their margins, according to Cyr. “The cost of manually picking a specific number of items for distribution to the non-acute care setting erases the operational efficiency needed to lower overall distribution costs. These increased costs are passed to the healthcare facility to protect the operating margin of the distributor.”
Access to product also affects costs.
“Unlike the standardized bill of materials (BOM) used to create manufactured items or the inventory mapping strategies based on consumer consumption in retail, the BOM for healthcare (the physician/surgeon preference card) for the same procedure can vary by user,” he said. “In the acute care setting, this variation is accommodated through the development and maintenance of specialized inventory locations in close proximity to the point of care (the Core). Items delivered to the Core require additional processing designed to protect the sterility of the operating theater.
“In a non-acute care environment, space allocated to the Core could be reduced to optimize patient care areas,” Cyr continued. “The corresponding reduction in inventory capacity increases the pressure on the distribution/logistics arm of the healthcare supply chain to adapt to unanticipated fluctuation in demand. Failure to deliver all items requested for a case at a moment’s notice could impact the standard of care delivered to the patient or cause the cancellation of the case.”
Stepping up
Process and service improvements can and should be adopted and implemented during the next decade, experts agree.
IOS’ Lawrence predicts an alignment of supply chain best practices and supplier services.
“Provider organizations need help adopting processes that will make them more efficient and help drive down costs,” he said. “The provider organizations that are growing their non-acute footprint usually have supply chain leaders who have worked in the acute space and can bring in best practices from those acute care organizations. Many supply chain best practices, like building process automation and creating enterprise-wide visibility, transfer easily from the acute to non-acute setting, and deliver value in any organization.”
McKesson’s Colizzi foresees two C’s: Convenience-driven care by consumerism will continue to grow. “For McKesson this means there will be an increased need for automating processes that allow providers to focus on patients and a delivery model that supports a care-anywhere approach,” he added.
“Most non-acute care locations do not meet the volume threshold to warrant a dedicated supply chain resource,” lamented MedSpeed’s DeWoskin. “Clinical and administrative staff at these locations are burdened with the extra function of tracking inventory and placing orders. Not only does this disrupt their core job, but it can also lead to mismanagement of inventory and non-standard ordering.Additionally, since the transportation expenses are bundled into the cost of goods, they are more expensive. A great improvement would be to create a better system for non-acute inventory that lowers costs and allows clinical and administrative staff to focus on patient care.”
For Vizient’s Peters, distributor transparency remains a must.
“It’s the biggest challenge in the non-acute health care supply chain market, and it includes the availability of data, pricing and the cost of services,” he said. “Let me clarify this further: Pricing can be determined by contracts from several sources, and it fluctuates a lot in some product segments. Pharmacy is an example. It is very hard for non-acute providers or health systems to gather and assess the mass of data for so many venues of care.”
Real-time integration between clinical events and supply chain must be established for supply chain to measure and quantify utilization for fulfillment, according to Intalere’s Cyr.
“Driving the supply chain as a byproduct of clinical activity is the first and most critical step in creating a proactive, patient-centered strategic supply chain resource for the organization,” Cyr said. “By having the clinical event share supply utilization seamlessly across the entire continuum of the patient experience, the supply chain is not trapped in a reactive tactical approach to replenishment. Such data can be analyzed to identify trends, quantify supply spend as a component of clinical outcomes and streamline the clinical architecture by identifying utilization outliers and ineffective use of clinical resources.
Data should be used to formulate a “proactive procurement method” so that demand can be forecast, Cyr insists. “Do we really need to have the healthcare provider to order more burn kits in late June and early July before suppliers and distributors ramp up to meet this annual demand? I wonder what would have happened if such a network of interconnected clinical, financial and logistic key indicators were in place when the number of COVID-19 cases in China began to spike?” he asked.
Cyr calls for a system of dynamic checks and balances designed to manage operational oversight and seamless procurement models.
“As futuristic connection between clinical, financial and supply chain information systems impacts the need for human intervention in the procurement, logistic and financial systems and sub-systems, the need for systematic oversight increases,” Cyr observed. “Oversight must be flexible to facilitate the efficient procurement of commonly used items while providing the framework for effective review and approval of other items when needed. The system must also track items to the most discrete level to support recalls and expired product proactively. Finally, the system must provide easy or even seamless recovery processes when mistakes are identified.”
To drive costs downward and support the continuum of care, non-acute care facilities must strive for internal discipline while distributors get savvy, according to Medline’s Saviola.
Providers must develop and adhere strictly to a formulary that involves standardization of product, he noted. Meanwhile, distributors should bundle deliveries by geography.
“Having multiple delivery vehicles in close proximity to each other that are less than full is not optimal,” he said. “It’s possible that deliveries to patient homes [could] turn into some mini ‘hub and spoke’ model utilizing some traditional distribution method tied into the local postal service for the last mile.”
Editor’s Note: Find these related stories exclusively at https://hpnonline.com/21132374:
• Should 3PL firms concentrate on non-acute care segment?
• Envisioning non-acute care distribution in 2030
• COVID-19 will reshape non-acute care distribution, logistics
