Written by Rod Moore

Radical cost-cutting is a routine practice for many hospitals and health systems today, especially with reimbursement increasingly tied to quality and cost performance. While some facilities look to service lines or billing for budget cuts, savvy health care providers are investing in supply chain management efficiencies.

Supply chain management in hospitals and health systems traditionally has been complex and fragmented. On its face, supply chain management is simple—the resources needed to deliver goods and services to a consumer. For Texas hospitals, it is a delicate series of operations that must occur with near precision to ensure patient safety, care quality and payment. After all, what good are breakthrough treatments and advancements in medical technology without the most basic resources to implement them?

Cost Reduction and Group, Purchasing Organizations

Instead of purchasing inventory directly from manufacturers or distributors, the transaction can be conducted through a group purchasing organization. The group purchasing organization then makes purchases on behalf of the hospital and ensures that providers have access to essential medical products and lifesaving tools.

A recent report by the Healthcare Supply Chain Association found that group purchasing organizations save the health care industry up to $34.1 billion annually in 2017 and are expected to reduce health care spending by up to $456.6 billion over the next ten years (2017-2026).

Those cost savings, combined with the ability to reduce inefficiencies, is why Texas Health Resources in Arlington recently announced a joint venture with Premier Inc, a national group purchasing organization and health care services provider. Called Texas Health Supply Chain Services, the partnership is designed to negotiate better deals on local products and leverage national contracts to scale up supply levels in facilities statewide.

Shaun Clinton, senior vice president, supply chain management said the new regional organization “will build on the two organizations’ powerful scale, successful business models and industry insights to create a technology-enabled, supply chain partnership that allows us to more effectively source certain products and services at the local level.”

Shaun Clinton

Clinton said there was also a recognition that hospitals across the state could benefit from the application of various technologies into the strategic sourcing process such as machine learning and artificial intelligence, which typically work well on repeatable tasks.

“As we move forward, creating better algorithms in the sourcing process and turning them over to machines gives strategic sourcing specialists more time to address shortages,” Clinton said.

Clinton also sees tremendous value in standardizing products and services across hospitals and health systems. “There’s safety in standardization and that holds true for any industry,” Clinton said. “I think if everyone knows what’s being used and it’s common across the system, there are certain skill sets that just get built up through standardization.”

Standardization’s Impact

Leveraging local products and suppliers was a contributing factor for Parkland Hospital expanding on a group purchasing partnership with Vizient, a leading supply chain improvement company in the health care space.

Pamela Bryant

Parkland’s relationship with Vizient has provided flexibility to meet occasional shortages in preferred equipment, such as a breathing apparatus following certain procedures. According to Pamela Bryant, Parkland’s senior vice president of supply chain, outside of pharmaceuticals any shortages have been brief, as improved adaptability has yielded quick solutions for any issues that arise.

“Empowering and engaging supply chain leaders to help make important decisions within the health system is a priority from an operational perspective,” said Bryant. In Parkland’s case, emphasizing enhanced collaboration with clinicians has allowed for more opportunity to address cost overruns on supplies or equipment and resulted in greater cooperation on value-based contracts directly with suppliers.

A few years ago, Parkland’s commitment to working with women-owned business enterprises shifted from compliance to more of a strategic local sourcing and supplier diversity initiative.

“If you standardize the way you order supplies, and have the right products you need, the better the quality of care that’s given because the physician is skilled in [using those products],” Bryant said. “Improved quality can be achieved through product and procedure standardization; routine use of a product enables physicians to identify variations when a product fails to perform or to produce expected patient outcomes and to address appropriately.”

Across the board, hospital leaders have found that standardizing the use of physician preference items and medication has helped to maintain quality outcomes at a lower cost.

Overcoming Drug Shortages

Perhaps the most significant impact on supply chain over the past several years has been shortages in necessary drugs.

In 2018, a total of 186 drugs ran short in supply, according to the American Society of Health-System Pharmacists. Discontinuation accounted for roughly 10 percent of those drug shortages, according to the University of Utah’s Drug Information Service.

Simultaneously, hospital drug spending is on the rise. The American Hospital Association reported a 12% increase in inpatient drug spending per admission in 2015.

Drug shortages have significant and direct impacts on patient and population health outcomes. To temper potential crises, innovative solutions are emerging somewhat quicker than with other supply chain impacts. Take Civica Rx for example, a not-for-profit drug manufacturing company founded last year by three philanthropies and seven leading health systems to address generic drug shortages.

Civica Rx expects to bring over 14 hospital-administered generic drugs to hospitals and health care systems this year as the initial focus of the company’s efforts.

Angela Shippy

According to Angela A. Shippy, M.D., chief quality officer at Memorial Hermann in Houston, the decision to join Civica Rx as one of 12 founding member hospitals and health systems was an easy one.

“When Civica Rx made their announcement, we were immediately interested and started inquiring because of the impact it could have on the education and the delivery of services to our patients and the bottom line,” Shippy said.

Going beyond a GPO model is a positive sign, Shippy said. And it’s why Civica Rx is different, since the partnership has spurred more collaboration and will achieve synergies that haven’t been considered before related to generic drugs. Shippy stated, “Civica resonated with us because drug spend has been one of the most impactful from a line item perspective when we look at our expenses across the system.”

Addressing Over-Utilization

Over-utilization of equipment and testing treatment is another growing concern in hospitals since it can potentially impact shortages. Simply ordering less expensive tests or medication could have far-reaching impacts when physicians are able to make decisions in real-time, which typically requires access to better data analysis.

Smart Ribbon, a service provided through a collaboration with the Texas Hospital Association and IllumiCare, provides an overview of real-time costs and risks to inform treatment decisions within the electronic medical record. This allows clinicians to keep track of orders and see how their decisions impact overall cost. The Smart Ribbon also provides a benchmark comparison with sub-specialty peers at other hospitals.

Since providers largely are in control of ordering, the less excess that is ordered, the more beneficial it is for the supply chain.

Mukul Mehra

“We’ve always tried to attack waste in the inpatient setting because that is where hospitals are most at risk,” said Mukul Mehra, M.D., medical director, IllumiCare. “Because most admissions are in a bundled reimbursement setting we can effectively attack waste in medications, labs and radiology ordering.”

Results across various Texas hospitals show that transparency into real-time data empowers clinicians to be better stewards. On average, hospitals using Smart Ribbon have seen a decrease of $90-$140 per admission, including a 14% reduction in inpatient lab and medication costs.

As pressure to control costs continue to grow, active supply chain management solutions will be an evergreen resource for hospitals and health systems. Expect more partnerships and innovative approaches to solving shortages along the supply chain.

Aggressive supply chain management not only improves quality, but the process also allows space to adjust to shortages along the supply chain. Clinton said the trend to become even leaner with sourcing processes is likely to continue for the short term.