When it comes to expense management within a healthcare organization, three specific departments handle it in three somewhat different but also somewhat familiar ways – particularly involving supply chain and purchased services, which includes segments of labor.
Some may give the highest marks to Pharmacy for how it manages supply chain and purchased services with a specific knack for drug inventory management, tracking and tracing through product and service codes and relationships with distribution partners. Others give considerable credit to Supply Chain for the breadth and depth of sourcing, contracting, purchasing, inventory replenishing, warehousing, tracking and tracing and other related areas on a much larger scale even if they do not have the data standards enjoyed by Pharmacy.
Certainly, Pharmacy and Supply Chain could work together in a complementary way and to an extent, learn from one another. But historically it’s more likely for Supply Chain to share expense management expertise with other departments, such as the Operating Room/Surgical Services and Diagnostic Imaging/Radiology, that may be revenue-generating but also carry higher expense streams.
Another similar department in terms of revenue generation coupled with higher expenses is the Laboratory, which has attracted expense management coaching and consulting over the decades by a small and growing number of Supply Chain departments. Healthcare Purchasing News has profiled some of these efforts that have yet to reach as much of a fever pitch as it has in the OR, for example.
In recent years, several distributors, payers and service companies have launched programs to help manage the Laboratory expense stream that includes reducing process and product waste; improving product logistics and procurement (e.g., sourcing, selection, contracting, shipping, tracking and tracing); and incorporating clinical value analysis and management in product and technology selection, use and maintenance.
Short of relying on external sources to control, maintain and reduce expenses, Lab could look internally to two examples: Pharmacy and Supply Chain.
How might Pharmacy help?
Eric Jurinic, Vice President, Corporate Supply Chain, Accumen, presumes that Pharmacy’s procedures for negotiating local price agreements and utilizing best practices in process improvement might draw interest.
For Doug Heywood, Managing Partner, RDA, it’s the inventory management technology.
Pharmacy information systems, by and large, may be directly linked to the systems of their primary distributors for managing orders, pricing and stock. Depending on Lab’s supplier agreements, this option may not be available. But Heywood recommends Supply Chain serving as a more appropriate example for Lab when it comes to procurement, logistics and inventory management.
Nichole Hukill, Director, Contract Services, Vizient, however, thinks Lab could learn from and work with Pharmacy’s techniques.
But Hukill pinpoints a notable disconnect in functionality.
“The most distinct difference between the two departments is how they function,” she said. “Pharmacy operates to administrate treatment to patients, while laboratory operates to retrieve, analyze and diagnose. Progression in patient care, like that with cancer treatment and effectiveness, can correlate greatly with pharmacy. The formularies of cancer treatment can change based upon testing results.”
How might Supply Chain help?
Experts see more of a correlation between Supply Chain and Lab in the area of procurement, logistics and inventory management.
“Because of Supply Chain’s visibility across the full hospital system, they are well-positioned to drive purchasing standardization across the various Laboratory sites within their network while collaborating with the Laboratory to ensure clinical efficacy,” said Emily Berlin, Vice President, Laboratory Products, Cardinal Health.
Accumen’s Jurinic questions Lab’s resident expertise in supply chain processes.
“We feel that the lab lacks transparency to pricing,” he noted. “Lab Directors and higher titles are involved in sourcing activities; however, they are not the people who order products. This is done at the bench tech level who do not always understand [the] cost and impacts of too much inventory, nor have they been trained in proper material management. This is important because when ordering supplies, it’s critical to understand the cost implications of ordering too much – spoilage, shipping costs, holding costs, cash flow, etc. Therefore, transparency and training can influence better ordering patterns based on actual demand versus bulk orders or blanket orders because it’s ‘easy’ and ‘hands-off.’ In some instances, we have seen labs that let their sales rep manage their inventory. For obvious reasons, this is not an acceptable practice.”
The flip side involves dedicating lab staffers to do it in much the same way that nurses may search for and order supplies, according to RDA’s Heywood.
“Most Labs are using expensive Lab Technicians to order and manage reagents and chemistry items for the analyzers,” he said. “Supply Chain techs typically only manage commodity items. The Lab technicians are ordering by ‘gut.’ Reagents and chemistry items are never optimized for the accurate amount they should be ordering. This exposes the Lab to waste and sometimes missing key utilization criteria to support the analyzer agreements.”
Heywood recommends that Lab enable Supply Chain technicians to expand inventory management beyond commodity items in the lab to all items – including chemistry and reagents. In fact, they should “perform inventory optimization on these items to ensure the reorder points and reorder quantities support the terms of the analyzer agreements and don’t impact QA testing upon lot number changes,” he added.
Expanding Supply Chain’s approved influence in Lab shouldn’t be a challenge either way, according to Heywood, because “most [materials management information systems] applications can already manage it like any other PAR inventory location. To track lot numbers, you would need a system overlay, similar to what they already use in the Cath Lab or Surgical Services,” he said.
Vizient’s Hukill indicates that the COVID-19 pandemic brought to the surface additional challenges for the Lab.
“The pandemic brought to light many issues around supply chain that ranged from supply disruption, raw material shortages and overall decrease in supplier and hospital workforces,” she said. “The largest disruption in lab has been COVID testing and blood collection tubes. While the market has been better for COVID tests, that is not the case for blood collection tubes and needles. The demand for these supplies was exacerbated by unfilled backorders that took months for distributors to completely resolve or clear out.”
If anything, the pandemic-driven supply chain complications only reinforced the importance of Laboratory to healthcare, Hukill insists.
“What these shortages brought to light is that laboratory departments are critical to the overall healthcare system,” she asserted. “Quite simply, if tests cannot be conducted, patient care essentially shuts down. With that, the Laboratory department has been and will continue to be fundamental in educating hospital personnel on conservation strategies, such how to limit or stop duplicate testing in order to conserve supplies, as well as limiting additional test-supply orders unless truly needed.”
Historically, the laboratory has done very well around logistics and supply chain, according to Hukill. “Due to regulations around testing in the lab, most supplies are kept on a six-month on-hand supply, which helps with the logistical challenges surrounding same lot/expiration dates. Every time lab personnel utilizes a product with a different lot/expiration date, they must revalidate their testing equipment. This causes delay/downtime, extra paperwork and compliance/accreditation issues. It’s not uncommon for a lab to purchase a six-month-plus product supply to avoid this extra work, which distracts from patient care and laboratory functions. This means they need a storage area, and [because] many reagents and testing supplies need to be kept cool, refrigeration as well.”
Hukill contends the Lab can learn four key tactics from Supply Chain to benefit the department. They include:
- “Automated inventory processes (depending on the laboratory). Currently in the lab these processes are minimal and not as sophisticated – most are manual versus pharmacy with carousels, automated dispensing management and inventory management systems.
- “Differing storage locations for clean/new supplies and patient samples.
- “Contracts for lab equipment designed with specific utilization and purchase requirements for its consumable products so that part of the price for the reagents or consumables is written into the acquisition cost of the equipment (reagent rental). This reduces overall cost; however, it requires storage space for the consumables and does not allow the institution to switch equipment.
- “Space. Laboratories are short on space for many reasons – equipment size has changed, added automation lines for samples, addition of new service lines, rapid growth in molecular area with covid testing. Space that was previously used for storage are now new laboratory areas. In some instances, storage has taken over hallways/conference rooms, and other areas in central supply.”
Lab’s priority one for supply chain ops
What’s the best first step for the Laboratory to get on track for expense management and supply chain operations? Two contend that it involves selecting an optimal distributor.
“Foundationally, it is critically important that laboratories select a distributor who has the Laboratory-specific expertise necessary to effectively guide them through their product selection and implementation decisions – while serving as their trusted advisor,” advised Cardinal’s Berlin. “After choosing the right distributor for their lab, to maximize the value of the contract, the Lab’s first steps to consider are [to] gain clear visibility into the system’s Laboratory purchases across various sites of care, [then] identify opportunities to standardize purchases within the system without sacrificing clinical efficacy. This standardization helps reduce complexity and allows the system to maximize purchasing scale to secure the best price. [Finally,] examine opportunities to convert to private-label offerings where appropriate.”
Accumen’s Jurinic concurs that an “unbiased third party” can be an asset.
“Companies like Accumen have identified and implemented 15% to 25% savings above and beyond [group purchasing organization] contracted pricing, and they do so ‘at risk,’ meaning if you don’t implement and realize savings Accumen doesn’t get paid,” he said. “Most labs are accessing GPOs and most IDNs don’t have dedicated lab experts in supply chain. Therefore, they are merely accessing GPO pricing, and arguably the GPOs are not experts in the lab. We’ve found that you can still purchase through your GPO contracts and remain compliant but enhance pricing at the same time utilizing local contracts.
“At the very least, all hospitals should look from the top down at major contacts and assess the opportunity, but this takes diligence and focus because after all it’s only going to be about 3% of the total health system spend,” Jurinic continued. “But an IDN could have $20 million, $30 million, $40 million in untouched supply and purchased service spend and ‘sitting in the basement,’ which could equate to millions of savings opportunities. You must be focused though and ready to change an area of the hospital that has historically operated on their own and can be resistant to change!”
RDA’s Heywood recommends Lab to analyze their data, inventory optimization and compare utilization against the analyzer agreements to ensure terms are being met.
But he realizes that such strategies require consulting with Supply Chain.
“Supply Chain would have to meet with the Clinical Lab Director to gain access,” Heywood admitted. He referred to an RDA consulting contract at a large teaching facility in Dallas. “For our engagement in Texas, it was the Vice President of Ancillary Services that made the request. There is currently a severe shortage of Lab Techs. It was a strategy to remove a task from their daily routine. The system we are working with has 13 clinical labs spread out throughout the city.
Inventory management is just one part of the equation for laboratory costs, according to Vizient’s Hukill. In fact, labor and reimbursement also matter.
“While labor is the largest cost for a lab, understanding reimbursement is also key,” she indicated. “The Protecting Access to Medicare Act of 2014 (PAMA) has been delayed for quite some time, but changes in reimbursement are scheduled to occur in 2023. Appropriate reimbursement is essential to prevent labs from eliminating tests, laying off employees and reducing services for patients who rely on quality testing. Overall laboratories need to have a clear understanding of coding, billing, compliance and true unit costs for accurate expense management.” h
