Tightening Up the Chain

By Matt Skoufalos

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From logistics to management to material goods, supply chains can account for anywhere from 25 to 40 percent of the overall budgets of health care institutions. That huge chunk of capital can also be the cloudiest part of the financial picture at any hospital group – and in a political climate that threatens to repeal the value-based reimbursement standards toward which national health care reforms have been pivoting in the past eight years, keeping a tighter grip on the purse strings may prove more of a challenge than the years of those readjustments.

Todd Ebert, President and CEO of the Healthcare Supply Chain Association (HSCA), said health care providers “continue to need to pay very close attention to their supply chain,” seeking the best-quality products to deliver value-based care. The challenge, however, remains finding ways to implement these priorities within the structure of resource management itself.

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“How do you integrate value-based purchasing into the supply chain?” Ebert said. “If there’s a[n equipment] failure, how do you then go back and invoke value-based purchasing? There’s a lot to be figured out so that when organizations spend their money they do so with the understanding that they’re going to get quality and value.”

As in many areas of value-based care, pinpointing the intersection of responsibilities among patients, providers, and suppliers to leverage the greatest patient outcome –and the greatest rate of reimbursement – can lead to various parties trying to offload responsibilities or claim successes that will minimize obligation and maximize profitability. Addressing those concerns in an environment that has been focused on outcome-based procedures requires a greater granularity of process so that it works for all parties.

Ebert points out that capping prices for disease state management didn’t work, and neither will value-based purchases without defined metrics, clear lines of responsibility, and a lot of up-front agreement. Delineating the boundaries of those arrangements requires risk management expertise, solid negotiating tactics, and patient compliance.

“You need good data, and you need to be very particular up front to develop the deal so you can measure it appropriately so that everyone agrees upon what happens next,” he said.

Of course, complicating the entire process is the looming threat of the Republican political majority promising to repeal or replace the Affordable Care Act (ACA), which was the major driver in performance-based U.S. health care. Compounding that uncertainty, newly inaugurated President Donald Trump has promised to tear up trade agreements, invoke protectionist tariffs, and de-regulate the domestic economy. But American health care is increasingly swung by global influences, including the sourcing and shipment of parts, materials, equipment, and pharmaceutical ingredients that may be complicated in ways as yet unanticipated by those policies.

Ebert, whose background is in pharmacy, said that price competition in this field hinges on group purchasing arrangements, the availability of biosimilar drugs, price spikes in generic drugs, and prescription shortages. When regulatory changes begin to alter the course of the manufacturing side of pharmaceutical production, the wrinkles they introduce can reverberate even more resoundingly throughout the system.

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“A lot of pharmaceutical companies have turned to their raw material sourcing overseas and they do their finished product here,” Ebert said. “I wonder how the Trump administration may address that because that’s where the market is.”

The same considerations may soon more prominently affect the cost of equipment manufacturing, he said. If sourcing internationally manufactured technology or its component or replacement parts becomes cost-prohibitive, how does that affect the already dwindling resources purchasers have available for capital equipment?

“Where is the new technology coming from?” Ebert said. “If you have a biomedical department that’s standardized on GE, do you buy Toshiba? There’s a whole bunch of things that you look at relative to the network that you buy.”

“The amount of uncertainty that’s out there, I would anticipate that a number of organizations, if they can, will put off capital acquisitions until they have a better understanding and certainty as to what health care of the future might look like,” he said.

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Regardless of the mechanics of government, Guillermo Ramas, CEO of Genesis Automation USA, believes these system issues will be balanced by price controls at one stage or another on the macro level.

“Somebody is going to adjust the pain somehow with price; upwards, probably,” he said. “When these global supply chains get disrupted, at the end of the day, you’re going to get the feeling of understanding less of what’s going on rather than more. As long as there’s less transparency and less ability for people to trace things properly, there will be more issues.”

But Ramas also believes that 2017 seems to be the year in which supply-chain strategies will take “much more of a center stage in the hospital setting,” especially as device-tracking initiatives like the FDA Universal Device Identifier mandate will help catalogue equipment throughout its life cycles. He said companies like Genesis Automation, which produces health care and technology value-chain solutions, can help institutions better manage the overall traceability of their supply chain.

“If you do trace equipment properly from beginning to end, from receiving doc and supply chain all the way to patient, then you can analyze better,” Ramas said. “Today, I can tell you that 95 percent of hospitals are not doing this programmatically. There seems to be this antagonistic approach where the hospital sits on one side and the supplier sits on the other.”

“A lot of them don’t even know what they have in consignment,” he said. “They’ll say, ‘The rep tells me.’ Suddenly you have the C-suite asking [purchasing managers] to take cost out of the equation. They think the magic bullet is contracted.”

Ramas believes that as much as 13 percent of all of hospital supply costs can be recouped from wastage in the operating room. Instead of applying overly detailed management to low-cost, high-volume supplies, he said institutions could stand to mete that same level of scrutiny among surgical supplies, which have the highest per-item cost of such inventory.

“If you look at a medium- to small-sized children’s hospital, they might have half a million dollars worth of stock in their general storeroom, and that’s the stuff that goes out to general inpatients,” Ramas said. “Then in surgery, they have $6 million of stock. If you ask the DMM what happens with that surgical stuff, he has no idea. The guys in OR actually manage the surgical inventory. There’s like this dark wall that allows for very little visibility into what’s going on.”

That lack of oversight harms bottom lines in two ways, Ramas said: first, in the expiry of inventory that is never used before the clock runs out on it, and second, in the discarding of equipment that is prepped for surgery but which goes unused, and which can’t be restocked, or for which there is no system to recapture it.

“This gets thrown away, and because there’s no traceability, nobody’s the wiser,” he said. “If that surgeon is doing 100 surgeries that month, every single item gets prepped, and he might be throwing away the same item.”

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Ramas said the same pitfalls affect many hospitals’ inventories of implantable devices, which are among the most expensive of all supplies. Another cost of the dearth of oversight can emerge not with the expiration of equipment, but during the accreditation process, he said. When staff separate expired equipment out from the remainder of the inventory, “then JCHAO comes and opens up a drawer and finds potentially expired supplies, and the hospital gets dinged.”

Contributing to the cloudiness of this oversight is a health care industry that Ramas said has grown accustomed to single-use applications for every need. The byproduct of such one-shot fixes is a diminishment of strategic thinking. In an environment in which long-term thinking and solutions planning is instrumental to resolving larger distribution issues around equipment inventory and pricing, too many executives have a short-term mindset.

“It’s not something you can just deal with in a couple of months,” he said. “Instead of keeping their cool, they basically say, ‘I need something that will solve a problem in the next quarter.’ People are doing things because it gives them short-term benefit. These guys aren’t interested in a five-year plan. They think, ‘I won’t be here.’ ”

“I’m hoping that things that are happening now with supply chain, now that it’s coming out of the basement of the hospital, will elevate the discussion,” Ramas said.

Michael DeLuca, Executive Vice-President of Technology and Client Services at Prodigo Solutions, Inc. of Cranberry Township, Pennsylvania, believes that the key to controlling cost management lies in better management of supply chain contracts. Of the 5,700 hospitals in the country, he said those systems with a growth patient revenue command about $2.3 trillion in net patient revenue and spend $466 billion, or 20 percent, in their supply chains.

“Our clients have the same problem: ACA forced them to really change their view from volume to value,” DeLuca said. “As providers transitioned to value-based care, large providers were driving towards making themselves more efficient, treating themselves as more of a business. You can measure defects in the production line and costs of manufacturing [but] in chasing value-based care, there were variations to it that did not exist in a manufacturing world.”

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Although health care is not bound by the same dictates as manufacturing, supply-chain contracts with manufacturers are “layered, complex, and have volume commitments in them,” DeLuca said, which obligates supply-chain management professionals to be cognizant of how those committed contracts affect internal costs.  If the costs of materials used for a knee surgery escalate, that defined list of items can change based on equipment consumption rates, which often drive purchasing discounts.

“That drives the cost of the bill up on top of the variation in how the procedure’s actually performed,” he said. “Value-based care is going to continue to be important to health care providers; cost as a component is going to be critical because it will delineate or detail the operating margins of hospitals. Those who can control the cost will win the game; those who don’t have tight controls will see costs increase as manufacturers get what is promised in the contract.”

DeLuca said hospital systems have understood that if they can’t improve their brick-and-mortar square-footage along with the scope of their patient populations, then they must create internal efficiencies in patient management systems to recoup the revenues that growth would otherwise provide. He foresees that more will implement closely managed cost controls as systems can diversify their risk across a variety of cradle-to-grave continuum of care services, particularly if the threat of ACA repeal or replacement persists.

“You’re going to see a continued effort for hospital systems to get into other lines of business: post-acute care, ambulatory care, diversifying revenue streams into for-profit consulting,” he said. “If parts of the ACA are repealed and replaced, what you’ll see more of is lowering the costs on other parts of the bill. Increased competition forces people to provide more care and be more efficient.”

Along with that tight control, DeLuca also believes that group purchasing organizations and large hospital distributors are on the way out, coming back in-house and under administrative control amid those revenue-generating and budget efficiency efforts.

“They are realizing that to be more efficient, they need to take out the middle men in health care,” he said. “There is strength in being able to take product, negotiate directly with the manufacturer, and ship product to a distribution center that they then leverage among their growing network.”