What the Doctor Ordered: Streamlining the Hospital Supply Chain

Hospitals are alleviating the agony of transitioning to new healthcare initiatives by reorganizing and optimizing supply chain operations.

The hospital supply chain is undergoing a transformation as the Affordable Care Act (ACA) encourages cost savings and better collaboration in order to provide high-quality patient care. There are several opportunities to reform operations, and substantial problems are currently being faced. While the Affordable Care Act (ACA) is designed to reduce patient healthcare expenses, supply chain experts and association executives believe hospitals must strike a better balance when it comes to streamlining their procedures.

With margins dwindling throughout the healthcare supply chain, providers are rethinking their business models and best practices, using technologies such as RFIDs and bar codes, and collaborating with management firms to restructure workforce structures. While the ACA has had a significant impact on supply chain operations, it is simply one part of a larger shift.

The Thought Leaders: Healthcare Supply Chain 2015 report was published in 2013 by the Health Industry Distributor’s Association (HIDA) in collaboration with McKinsey & Company, a multinational management consulting organization. Healthcare providers and executives from medical supply firms discussed how the Affordable Care Act (ACA) and other major variables, such as an approaching nationwide physician shortage and rising usage of information technology, have impacted their operations and efforts.Overall, the providers polled said they plan to rely on manufacturers and distributors for collaborations to assist them mitigate significant supply chain concerns.

One such concern is the gradual and dramatic reduction in hospital margins as a result of reduced payments. Based on dozens of interviews, HIDA discovered that providers anticipate operating margin decreases of up to 30% from 2011 to 2015, with one supply chain vice president stating, “Our entire margin is likely to evaporate starting in 2014 due to decreasing reimbursement.”

Prior to the Affordable Care Act, hospitals were paid based on volume, which included patient intake, material consumption, and services. Hospital reimbursements are now dependent on incentives and performance. The ACA’s Hospital Value-Based Purchasing Program, known as the Centers for Medicare and Medicaid Services (CMS), which compensates acute care hospitals based on the quality of care delivered to Medicare patients, is a primary driver behind this model shift. CMS also awards points to hospitals based on how closely they adhere to best clinical practices and how well they improve patient stays.


“With government reimbursements decreasing year after year, hospitals must find new methods to operate within ‘Medicare margins,'” says James Spann, global supply chain practice leader at Simpler Consulting. “There are a few things they can do to bring unique value to patients.”

The first stage, according to Spann, is to do a value analysis to determine the best offered value of products and services.

The HIDA report includes a list of top recommendations for advancing supply chain savings to the next level. One of the main options, according to Spann, is tackling end-to-end supply chain costs and refocusing efforts on data harmonization.

Experts from several organizations advise launching campaigns to promote data standardization, forming a working group of experts from various industries to discuss adoption processes and identify requirements, and demonstrating how data standards may save money.

Standardizing processes is especially beneficial now, when mergers and acquisitions are at an all-time high. According to Kaufman Hall’s data, 98 hospital and health system mergers were announced in 2013, representing a 3% increase over the previous year and a 51% increase over 2010.

In a statement released, Michael Finnerty, managing director of Kaufman Hall, said, “Our analysis confirms hospitals and health systems are continuing to pursue partnership arrangements as one approach to accessing the enhanced infrastructure necessary to provide care successfully in the changing environment.”

According to Curtis Rooney, president of the Healthcare Supply Chain Association, “the Affordable Care Act undoubtedly created the incentives for value-based purchasing and consolidation.” “There has been a lot of consolidation and a lot of mergers and acquisitions. According to predictions, 5,000 hospitals will be converted into 500 health systems during the next ten years.

“I’m not sure if it will truly happen,” he continues, “but the driver for everyone will be efficiency.”


According to Rooney, the increase in mergers and acquisitions provides the most possibility for growth, particularly as providers plan for 2015 and beyond.

“A merger or hospital acquisition is the low-hanging fruit for providers,” he says. “They’ll be much ahead of the game if they can unify technologies on a single platform and collect data in a smooth manner.”

“There are a lot of inefficiencies in the healthcare system, especially in the supply chain,” he adds. “Think of it as a bar-code that starts at the warehouse door and runs all the way to the patient’s bedside electronic health record.” To enable for free flow of information, all of those interactions and information exchanges must be collected and adjusted in a consistent manner.”

“Hospitals must consider how they manage what I refer to as the ‘profit curve,’ in which they seek to boost profitability or cut costs as they advance in their careers. Pricing schemes, uniformity, and consolidation can help them achieve this, according to Spann. “When they examine how to use assets and capital, they begin to be most effective.”

Hospitals must address clinical-evidence-based assistance, according to supply chain leaders across health systems.

“Physician participation is a critical component of that plan,” Spann says. “How hospitals assist physicians in managing physician preference items, goods that physicians request, and supplies that they require has a significant impact on patient care. Physicians must be integrated into the supply chain of the items and services that hospitals bring in to support patient care.”

The statistics on the medical device supply chain and the physician disconnect are eye-opening. According to a 2014 study published in Health Affairs, few orthopedic surgeons are aware of the economic value of the devices they regularly implant in their patients. In fact, while more than 80 percent of the same group believes cost should be “moderately,” “very,” or “very” essential in the device selection process, 36 percent of physicians and 75 percent of residents assess their understanding of device pricing as “poor” or “below average.”

As the survey demonstrates, there is still work to be done to bridge the gap between physicians and the medical device supply chain. Attending physicians only accurately estimated the cost of a gadget 21% of the time, according to the research, which was conducted among 503 physicians.


Despite this, the cost of medical devices is increasing, albeit slowly. According to the Advanced Medical Technology Association, medical device spending reached $156.3 billion in 2010, accounting for 6% of total national health expenditures. From 1989 to 2010, national medical device spending increased somewhat as a percentage of total national health expenditures, rising from 5.3 to 6%.

Despite the increased prices along the supply chain, Gartner Research highlights some bright news. Its research shows that by using improved ways to monitor and regulate goods and services purchasing, suppliers can save five to fifteen percent. Such figures and research highlight the need for supply chain executives to move quickly to arrange their companies so that hospital personnel, not only physicians, have greater access to—and understanding of—medical equipment and other supplies.

“If you leave purchasing to the clinical staff, they will overstock to risk not having a product to give patient care,” explains MD Buyline’s Luis Martinez. “While that is understood, the supply chain manager’s role is to ensure that there is enough stock on hand to avoid any supply problems.”

The acceptance of the idea or concept of change in learning new supply chain processes is one hurdle for those physicians. The general cooperation of suppliers is also a challenge. “They’re usually all in it for the money,” Martinez explains, “so keeping rates high and volume up is vital to them.” “However, finding strategic ways to interact with hospitals and supply chain departments is a never-ending struggle.”

Other issues, such as healthcare protocols, can also make better collaboration difficult. “In the trauma implants arena, there’s one large market shareholder,” Martinez explains. “It doesn’t shift, change price, or consign because it owns the market and has held it for so long.” It’s difficult to persuade doctors to utilize something else in the situation. It’s also difficult to persuade the supplier to collaborate more strategically because it has the negotiating advantage.”

Hospitals are adopting technologies to assist collect vital supply chain data in order to keep inventory low and increase efficiency. Martinez explains, “Inventory management has become more sophisticated.” “Because data is captured electronically, technologies like bar coding become a bigger factor within hospitals.” When it comes to cutting costs, technology aids in data collection, but better planning is easier.”

Supply chain data can also be streamlined as a result of the advent and growth of systems integrator businesses. Barcoding Inc., situated in Baltimore, for example, offers end-to-end automated data capture and mobile solutions to companies ranging from manufacturing to healthcare. While automatic identification and data capture (AIDC) is not the “central” solution for the supply chain, according to company president Shane Snyder, it can help healthcare providers manage the balancing act more proactively and effectively.

“First, AIDC technology decreases the amount of capital investment in clinical equipment required to perform services,” Snyder continues, “and allows healthcare providers better management over their assets, current use rates, and location.” “A lack of control in these three areas can lead to healthcare providers overbuying assets in order to ensure that product is available when patients or staff require it.” As a result, both capital and operating expenditures rise.

“Alternatively, if healthcare professionals do not overbuy, they may not have the assets they require to offer proper care for their patients,” he says. “This, of course, has a detrimental impact on client satisfaction scores.”

Other AIDC asset management systems, such as tracking patient valuables, can have a direct impact on customer experience and satisfaction.

“Patients frequently bring precious goods to the hospital, such as jewelry and money,” Snyder notes. “It is therefore the responsibility of the hospital to remove, track, and preserve these items.” Hospitals used to manually organize and inventory goods, or use a simple spreadsheet. Both approaches require a lot of time and are prone to errors. Hospitals can deliver the same cataloging and inventory process more efficiently and precisely by employing AIDC technology.”


Through cloud technologies, a number of healthcare technology companies, including Louisville, Colorado-based Global Health Exchange (GHX), assist hospitals in gaining improved visibility and transparency to the data they need to understand their costs. Because of the numerous mergers and acquisitions within hospital systems, Tina Vantanka Murphy, vice president of global markets at GHX, which was founded in 2000 by GE, Johnson & Johnson, Abbott, Baxter, and Medtronic, explains that one major area for improvement is data capture, particularly in disparate systems.

“When a patient visits an emergency room, the hospital gathers all of that patient’s information,” she explains. “However, if the patient is transported to a surgery center or an other portion of the hospital, the data is lost.”

“There is a tremendous gap in interoperability across these hospital systems because what happens in the emergency department has to be moved throughout the supply chain to provide the greatest patient care,” Murphy adds. “It’s also a significant difficulty for a hospital trying to figure out how much it costs.”

GHX collaborated with a significant Midwest health system, according to Murphy. One supplier was being used by the hospital 60 times per day. “By just allowing visibility, the hospital was able to agree on a more fair order velocity, which resulted in significant cost savings for both parties,” she explains.

DATA RATIONALIZATION Cloud technology aids in the connection of data sources and allows hospitals to better rationalize data. It also makes it possible to display information to the user in an efficient manner. “Hospitals, wholesalers, and manufacturers must be able to deliver data that has been accurately rationalized across all of those parties,” says Murphy.

Karen Conway, GHX’s director of industry relations, adds, “There is so much change relating to items utilized in healthcare.” “The price of a product varies based on who is buying and selling it. “In some circumstances, contracts with group purchasing groups might result in tens of thousands of modifications per day,” she explains.

Because such a large number of enterprises cannot store all of this data on their own systems, many are turning to the cloud. “Instead of trying to preserve data in systems that are physically at the hospital or at the supplier,” Conway continues, “the cloud is a place where data can be maintained virtually—a virtual item master.”

However, as Murphy points out, data can be harmful to patient care. “If a healthcare provider is reimbursed based on the quality of treatment it provides, the data is crucial,” she says. “They require that information in order to comprehend their complete cost.” Providers must consider more than just the cost of the pacemaker; they must also consider the outcome, according to Murphy.

“When a doctor implants a pacemaker in a patient, the hospital must know what percentage of the time the patient is readmitted and account for infections since that’s how it’s reimbursed,” she explains. “The data is excellent, but hospitals need to have access to it much more.”

Hospitals can use cloud-based technology to capture data and use it to synchronize prices across their supply chain, allowing them to drive order, consolidation, and data and process standardization.

“Other industries, such as retail, have been able to drive supply chain reform,” Smith notes. “That isn’t available in healthcare.” Thought leaders that are putting in the effort to encourage cooperation and look at new engagement methods are how healthcare has been driving transformation.”


Growing an organizational structure to manage hospital employees is another option that incorporates better collaboration and cost savings. One vice president in the HIDA healthcare leadership report states that when doctors must pick between decreasing labor, capital, or supply expenses, they will always choose supply. Reevaluating hospital labor, according to some supply chain specialists, has actual worth.

“We observed that the workforce that supports the floors for a number of hospitals is substantially more than we anticipated,” says Brian Murphy, business development director of Menlo Worldwide Logistics, a San Francisco-based third-party logistics supplier. “In any hospital, there is no uniformity.” We’re figuring out how to create a well-defined procedure.

“Let me give you an example. “One of the hospitals we work with requested us to go to an existing distribution facility it had acquired to simulate two hospitals that shared the same infrastructure and labor for seven,” Murphy recalls. “By tackling the material flow and waste inside the hospital, we were able to drive improvements.”

James Liter, a senior principal at West Monroe Partners who oversees the firm’s pharmaceutical supply chain and operations clients, discusses the most significant changes in the pharmaceutical warehousing. He argues, “Regulatory compliance is a significant concern.” “For example, it becomes more necessary to ensure that the supply chain has been appropriately classified than it is to ensure product safety.”


The more significant change in the supply chain is the continuous alertness of tracking and tracing capabilities in the life sciences sector, which includes more than pharmaceuticals.

“A lot of technologies involving bar-coding and RFID tags have been used throughout the entire life sciences supply chain,” Liter explains. “Track and trace is crucial because it allows us to get to the bottom of any harmful product and figure out how to get it out of the supply chain as soon as feasible.”

While technology and organizational solutions are at the forefront of facilitating supply chain traceability, experts believe that more effort has to be done to improve collaboration across all medical sector participants.

“It was promising and scary at the same time,” Rooney says of the Healthcare Supply Chain Association and Healthcare Industry Supply Chain Institute, which brought together educational programs for suppliers, GPOs, and executives. All stakeholders are working in isolation, positioning themselves as specialists in UDI, medication serialization, and electronic medical records in healthcare. But the silos haven’t communicated with one another yet.”