Managing the medical supply chain: A tale of two hospitals

If, as healthcare experts say, supplies gobble up 30 percent of a typical American hospital's annual budget, then upgrading the medical supplies system is a sensible investment. At a recent conference sponsored by the Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business, Sisters of Mercy Health System's vice president of performance consulting, Marita Parks, and Thomas Macy, CEO of Nebraska Orthopedic Hospital, described two different approaches to the supply chain challenge.

All 18 acute-care hospitals in the Sisters of Mercy Health System used to order their own supplies, using separate computerized programs. As is common among U.S. hospitals, Mercy procurement employees worked with group purchasing organizations from outside the system — frequently not consulting their own doctors and nurses — to decide which brand of scalpels and how many newborn packs to order, at what price.

For Mercy, this was an unwieldy and fractured way of doing business: expensive, unpopular with clinicians and staffers alike, plagued by inefficiency and waste. Mercy's vice president of performance consulting, Marita Parks, said leaders at the St. Louis, Missouri-based hospital system began brainstorming solutions way back in 2002.

Parks was speaking at a conference sponsored by the Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business where research findings were disseminated. A year later, they formed Mercy ROi ("Resource Optimization innovation"), designed to handle all supply chain functions for the whole system. One early task was establishing a centralized storage and distribution center in Springfield.

Another was streamlining contract terms and whittling down the number of vendors supplying the system's hospitals. Soon, ROi decision-makers had eliminated one-third of the existing vendors, which quickly lessened the chaos and gave them increased bargaining leverage with those remaining. Another winning ROi initiative was the introduction of "Mercy Meds," an in-house, bar-coding program to repackage medications streaming into the centralized distribution center in Springfield.

After repackaging, the coded meds are distributed to hospitals, where they are stocked in computer-controlled drug cabinets on nursing floors. Nurses use hand-held scanners at the patient's bedside to match the identification number on the patient's wristband to the bar-coded medication.

This ensures the nurse is giving the right medication, in the correct dose, at the prescribed time, to the designated patient. The Mercy Meds software is programmed to alert the nurse if she's giving a drug erroneously, preventing "hundreds of potential medication errors," Parks noted.

Automating supply chain from A-Z

After researching the latest software on the market, ROi administrators settled on Lawson Software's supply chain management suite, which automated everything from planning to warehouse functions. If, as healthcare experts say, supplies gobble up 30 percent of a typical American hospital's annual budget, second only to personnel costs, then upgrading supply chain software is a sensible investment.

But to make the unified supply chain work, plenty of other changes — mostly re-engineering workflows — were necessary. In an ambitious moment, ROi administrators decided to implement the new Lawson IT components at all 18 hospitals on the same day in 2007, making it the largest single-day implementation in the software maker's history. It was a huge task requiring months of planning and training before go-live day, but it worked out — with minor glitches — as planned.

Most recently, ROi has developed a private-label product line focused on medical items that Mercy clinicians recommend. The line is called "Mercy — The Mark of Quality," and was launched in last year. Initial benchmarking indicates the program nets savings of 5 to 30 percent on private-label products used by Mercy hospitals and physician offices.

Results: instead of being a cost center, Mercy's supply chain now produces incremental revenue averaging $153 million annually. Parks said that in fiscal 2007, the organization's return on investment for ROi was 7.4 to 1, with a profit of $24 million. Even better, by leveraging their new technology and re-engineering the workflows that go along with the Lawson system, ROi has hugely reduced the incidence of patient-harming medication errors.

As Parks noted, "we directly linked improving our supply chain to improving our patient care." And once again, it comes down to building personal relationships Yes, the Lawson software was expensive — and implementing it system wide meant that more than 3,500 users had to learn new commands, menus, screens, etc.

But Parks said the most important accomplishments contributing to the ROi initiative's success boiled down to two, non-technical, communication-oriented tasks: fearlessly involving clinician "stakeholders" in the overhaul and securing the support of senior administrators. When lobbying for buy-in from doctors, Parks taught her team to couch initiatives in light of the physicians' most frequent question: "What's in it for me?" She said, "The biggest secret to this is explaining your initiative so that it makes sense to people.

You need to be able to demonstrate what you're talking about, and have the other person say, 'Why wouldn't I do this?' Everyone, including doctors, is going in a million different directions. Offer them a new way of doing their job that saves time, money and improves patient safety and improved clinical outcomes, and they will do it." As for administrator buy-in, she continued, "We have something called the CEO's council, composed of the chief executive officers of each Mercy hospital.

They meet once a month, for a whole day, and ROi is always, always on the agenda. We bring them up to date on ROi projects; if they agree to our recommendations, we give them a to-do list." The to-do list is sometimes just talking points or a FAQ (frequently asked questions) list the CEO can use while talking to employees. "Doctors will actually be knocking on their doors asking questions, and this way, they're prepared," she added.

Their impressive metamorphosis has drawn plenty of industry attention. Administrators from other hospitals frequently visit Mercy facilities, eager to learn from ROi's success and adopt their supply chain techniques back home. The Council of Supply Chain Management named ROi "innovator of the year in 2006," marking the first time a healthcare organization was recognized.

Outsourcing the supply chain

Since opening its doors in 2004, Nebraska Orthopedic Hospital — a partnership between Nebraska Medical Center and 23 orthopedic surgeons and investors — has spent between $5 million and $6 million on information technology. The specialty hospital, like most recently built medical facilities, went all out in terms of IT spending for a simple reason: it pays off big time, in dollars, patient safety, physician retention and customer satisfaction.

Chief executive officer Thomas Macy ticked off the various "best of breed" systems that automate the building: an electronic medical record system made by Clarus that includes an encoder, transcription, credentialing and a chart-tracking mechanism; physician documentation software by ProVation Medical that produces detailed operating notes, complete with compliance coding, within minutes of the surgery; a picture-archiving communication system that stores X-rays, CT scans, MRIs and other images from Cedara Software; and sophisticated anesthesia-monitoring software.

But when it came to choosing a top-of-the-line system for medical supplies, Macy and his team opted to outsource rather than buy. The outsourcer: Owens & Minor, one of the largest medical suppliers in the U.S. "[Owens & Minor] owns much of the inventory, and they basically provide us with comprehensive services like stocking and ordering. This means we have almost no inventory, which was one of our big issues," he explained.

Macy said a small but increasing number of hospitals with strong in-house IT departments are outsourcing supply chain functions as a strategic move. For instance, Nebraska Medical Center outsources its supply chain functions to Cardinal Health. In terms of costs, Macy said his facility's contract with Owens & Minor is comparable with what other hospitals pay for the same functions. "We aren't looking to be the cheapest — it's more like we try to stay in the middle of the pack" in terms of cost.

The Owens & Minor software records charges for supplies to the patient's bill as they are used, which helps cut down on uncollected revenue, a common problem in the hospital environment. And because the outsourcing company takes care of most inventory, all the facility has to stock is bone chips, tendons and, of course, pharmacy supplies.

Bottom Line:

• The Sisters of Mercy Health System has more than 4,000 licensed beds in 18 acute-care hospitals in Missouri, Oklahoma, Arkansas and Kansas, as well as ministry services in Louisiana, Texas and Mississippi. Approximately 4,000 physicians and 30,000 non-physicians work for Mercy, the ninth-largest Catholic healthcare system in the U.S. based on net patient-service revenue.
• Doctors at Nebraska Orthopedic Hospital handled 6,027 surgical cases in 2007, 80 percent outpatient. Ninety-nine physicians work at the hospital, including 43 orthopedic doctors.
• Nebraska Orthopedic spent $11.3 million last year on medical supplies; $5.7 million of that total went for artificial joints.
• In fiscal 2007, Mercy's return on investment for ROi was 7.4 to 1, with a profit of $24 million, Parks said.