Strategic supply cost management physician preference without deference: adopting a strategic approach to managing supply chain costs can lead to a productive dialogue between physicians and financial leaders

Healthcare Financial Management, April, 2005 by Rand Ballard

The quest for cash.

If you are a healthcare CFO, it's probably foremost on your mind. To find cash, you work at reducing expenses, improving existing operations, and speeding the payment cycle. You've probably focused your attention on the revenue enhancement drivers of your financials--tinkering with pricing formulas, denials, payment, and management process improvements. You may have gone as far as analyzing which of your service lines are profitable and then aggressively marketing those services.

Yet when was the last time you looked at reducing supply chain costs as a way to improve your organization's bottom line? Far too many senior healthcare financial leaders give short shrift to looking for cost savings in their supply chain, even though they know it's their organizations' second largest expense. They commonly assume that it's the materials management team's job to squeeze every penny out of every line item they can. Materials managers are probably doing that for the 60 percent of the supply chain that's visible, including medical- surgical supplies.

What about physician preference items, however? These items--which include advanced medical devices such as implants, stents, and pacemakers--can account for as much as 40 percent of a hospital's supply expenditures. They typically are brought to market at blazing speed and marketed directly to physicians, thereby bypassing the checks and balances of a hospital's normal purchasing process. This "shadow market" in PPIs often eludes the watchful eye of the materials managers. A traditional materials management team using a task-driven, transaction-processing, stock and inventory management system cannot effectively stem the cash leakage resulting from such physician-directed purchasing. The best way to address the PPI problem, as well as costly inefficiencies in your normal supply purchasing processes, is to institute a broad-scope strategic supply cost management operation, including a systemwide supply purchasing plan with clearly defined and measurable goals.

Key objectives of SSCM are to:

> Implement organizational changes that enhance communication and data flow regarding supply costs, purchasing processes, and the effects they have on revenue

> Bring discipline to the PPI shadow market while preserving physician choice

> Use IT that supports overall strategic direction and provides pertinent and useable data

Shifting Organizational Paradigms

SSCM requires a philosophical and organizational shift from an isolated departmental perspective that focuses on supplies in one bucket and revenues in another to a service-line perspective that focuses on supplies as an integral part of a single cost, revenue, and margin center. Under a SSCM approach, materials managers scrutinize medical-surgical supplies, PPIs, and other hospital services for each service line to identify the optimum cost savings for every type of supply. This approach requires three essential commitments:

> The materials management team must assume a strategic role.

> Specific measures must be used consistently to evaluate supply expense.

> Supply chain leaders must assume accountability for results.

The role of materials managers. SSCM requires a commitment to invest in training the materials managers, who must view their role as strategic, not just transactional, and must be empowered to contribute to their full potential. To be able to leverage their expertise in transaction processing and contribute to improved margins, materials managers require new competencies in logistics management, data analysis, and utilization. Most important, they must fully understand how their job function fits into the whole strategy. To this end, strategic materials managers also require deeper clinical knowledge. Some hospitals instill this knowledge in their materials managers by rotating nurse managers through the materials management function. Other hospitals create value analysis teams--multidisciplinary groups composed of materials managers, operating room managers, nurses, physicians, and service-line managers, with representatives from reimbursement or finance as needed. Whatever approach is used, acquiring a clinical perspective will remain an important part of the materials management role because critical clinical factors may be pertinent to a product choice, especially when it comes to implants.

Performance measures. A single method with specific measures for evaluating supply expense should be identified and used consistently. Examples of measures include:

> Supply cost as a percentage of net revenue

> Supply cost as a percentage of total expense

> Supply cost per adjusted patient day

> Supply cost per adjusted discharge

Because no single method is universally accepted as the "best," many hospitals and integrated delivery systems use a mix of these metrics, applied consistently. The organizations track these performance measures over time as a way to manage their supply chain spend.