Supply chain management in health care: New research focus

Eugene Schneller has been at the lead of research initiatives concerning the emergence of supply chain management in health care organizations. In this podcast, Schneller talks with KnowWPCarey about the ways supply chain management can positively impact the revenue cycle and how healthcare reform is driving change. The Health Sector Supply Chain Research Consortium (HSRC-ASU) is a research group within the department of supply chain management at the W. P. Carey School of Business. The consortium brings together health sector organizations and academic researchers to conduct research on topics related to the strategic management of the health care supply chain. Membership includes GPOs, suppliers, distributors, health systems and health IT companies.

Learn more:White paper — Supply Chain and Revenue Cycle Integration: Asset Management in the U.S. Hospital System


KnowWPCarey: We’re here today talking with Gene Schneller, and Gene has been doing a lot of research looking at hospital systems to better understand how they manage the links between the revenue cycle and the supply chain. Can you tell me a little bit more about that Gene?

Gene Schneller: Over the years we have been looking at the escalation of hospital costs across the United States, with a very special focus on the costs of supplies. It’s interesting that supplies are now the second largest cost to hospital after their human resources. As a matter of fact, there are projections that in the near future the cost of supplies may overtake human resources. A lot of this is driven by the new technologies that have entered the supply chain field, particularly implantables such as hips, knees, cardio defibrillators, and other kinds of technologies that mean for a large number of procedures that hospitals do, the cost of supplies is greater than half the total cost of that admission to the hospital.

KnowWPCarey: How does the supply chain manager connect with the people who are in charge of the revenue cycle?

Schneller: That’s an interesting question then. We didn’t know the answer to this when we started. Hospitals generally have a variety of kinds of information technology systems. One is that they generally have what is called an item master that lists the tens and sometimes over a hundred thousand items that a hospital may be utilizing. Depending on the complexity of a hospital system, a large academic health center, there may be as many as 30,000 active items within that item master. Some that are obviously not active.

They also have another system which is basically called a charge master, and within that charge master they just don’t have items but they basically have the costs of those items. First what a hospital needs to do just to track these products is to integrate the charge master and the item master. As a matter of fact Liz, our initial research started just looking at the interactions between those two information technologies. As we got deeper into this we found that it was much more complex and there were other issues that we needed to look at.

KnowWPCarey: Have you taken this to look at more of the strategic level?

Schneller: Yeah, exactly. It’s interesting to us that as healthcare reform has come about they’re constantly new ways to look at how hospitals account for their costs and new ways in which they’ll be paid. One of the most significant ways is the introduction of bundle payments. In the past, the hospital and physician were reimbursed separately. Under bundle payments, which is part of the whole health reform environment, the hospital and physician will be paid one lump sum. Within that lump sum not only will be the hospital’s costs but also the material cost within that hospital.

What makes this even more interesting I think is that the physician and the hospital will be able to share in the savings related to those bundled payments. It’s important not only to account for what is spent and what products are used and have accurate accounting of those products, but also to be able to look at their utilization and understand when we’re using the correct products, when perhaps we’re using too many products, and to have visibility into the utilization of that supply environment. So much of what we’re doing is looking at how that visibility is designed and how that visibility is managed within the hospital.

KnowWPCarey: So what I’m seeing or what I’m hearing you say is that there is a lot of co-management that’s going to be required as we go forward with all this?

Schneller: Well exactly. In the past, the physician and the hospital have seen themselves as being very separate. Certainly there are hospital systems where physicians are employed, but generally as you look across the United States, particularly physicians in these areas that we’ve talked about, orthopedics, cardiology, spine, those physicians tend to be separate from the hospitals; they are community-based physicians. Now the hospital is looking at ways to better integrate them.

Perhaps one of the more interesting parts of this is the relationship between the supplier companies; the companies that manufacture and sell supplies to hospitals, those individuals, as companies have generally seen the physician as their principal customer. As we enter this new environment of reimbursement increasingly, they’re beginning to see the hospital as the economic purchaser, the physician perhaps still as the clinical purchaser but the two of them being brought together in this new environment of change incentives to be able to work together, and the supplier really becomes part of that whole co-management environment. That’s really important if they’re going to be successful.

KnowWPCarey: It sounds like it’s going to be a huge shift though; a culture shift for physicians and organizations.

Schneller: Well, it is a huge shift, because they’re not used to thinking together. Generally they’ve thought mostly about the price. What’s really important in health reform is that the focus becomes not just on price but it becomes focused on patient outcomes and it becomes focused on the performance of the hospital overall. The extent to which supplies contribute to that is really interesting. But our ability to manage that and understand that is only at the stage of infancy.

For example, in the supple environment, another part of health reform, is the issue of comparative effectiveness research; looking at what procedures work better than other procedures. Embedded in many of those procedures are supplies. It’s only the beginning of an attempt to understand how one again begins to deploy a better mix of supplies, specific supplies, specific items to achieve some of those outcomes.

Those outcomes, when we begin to think of the kinds of implants that we’ve discussed, hips and knees and other kind of implants, are really important because we don’t want to go back in and take those out. It’s very difficult to do revisions in those kinds of areas. Certainly they’re not things that contribute to great patient care. So the primacy of the supply environment is really what’s happening within health reform.

KnowWPCarey: There must be a large IT component of this. What about electronic medical records and the other IT systems that are needed to coordinate all this?

Schneller: Hospitals traditionally have had many IT systems and many of them working very independently of each other. They tend to be very siloed. The charge master, the item master, the hospital’s ERP system, the hospital’s materials management system, they’ve not been well-integrated. Clearly, if we’re going to be able to take advantage of this new environment these systems are going to have to begin to talk to each other. As we look at the development of electronic health record and it’s a tremendously important development.

The electronic health record in most cases is not being designed to integrate the business side of the health care environment with the clinical side of that healthcare environment. One of the things that we’ve tried to do, as a research group, is to advocate for better integration of those sets of clinical information systems.

KnowWPCarey: What about the human resources that are going to be needed as we move through this phase. What, will there be new professions that will be needed? Is there retraining of personnel that are already on the ground? What’s ahead for us there?

Schneller: Over the last six or eight years our research group has been looking at the transformation of supply chain within the American hospital. It’s interesting that as you look at leadership in the area of supply chain, frequently those who became directors of supply chain in hospitals across the United States were promoted up from the loading dock. These are people who had an in-depth understanding of how products were ordered, how products got delivered and they were the sort of the natural targets for doing that. But when you looked at supply chain in the hospital it was generally in the basement. It was sitting perhaps sometimes next to the morgue and sometimes next to where they prepared food; not a really appealing set of hospital functions to be next to. Medical records was in the basement, too; it’s interesting.

Over the years what we begin to see is the elevation of these functions; medical records into the area of electronic health records; information technology into having vice presidents for information technology within hospitals and also the elevation of the supply chain function. As a matter of fact, over the last few years we’ve done a number of studies, some of those can be found on our website, looking at the evolution of supply chain management into the executive suite.

What we’re seeing is the major systems going out and looking for more individuals who have MBAs as well as some understanding of the supply chain. But what’s even more interesting in many instances, the search firms that are out looking for these vice presidents for supply chain are having to go outside of the healthcare environment to bring in new people. As a matter of fact, a number of graduates from the W. P. Carey School’s supply chain program, who really weren’t in health care, had been pulled out of other industries to manage the supply chain within major healthcare systems within the United States. Perhaps one of the most prominent is the University of Pittsburgh Medical Center where Jim Szilagy, who’s a graduate of our supply chain department is the Chief Supply Chain Officer at UPMC, one of the most progressive and leading systems in the country.

KnowWPCarey: Would you say that the health care industry is in kind of a catch up mode as compared to other industry sectors in applying supply chain concepts to their enterprise or not?

Schneller: Yes, I think that’s a fair comment. It’s interesting that one of the aspects that distinguishes supply chain purchasing in the United States is the use of group purchasing organizations. Most hospitals and hospital systems belong to large group purchasing organization, several of who are actually represented on the board of our research consortium, Novation Premier Healthcare Purchasing Group and Yankee Alliance. Those organizations represent hundreds of hospitals. They go to market for a group of hospitals and bring them in. That’s really different from what other industries do in terms of their purchasing.

I think really the other part of the infancy is the use of information technology and having visibility into spend. This specific research that we’ve done on revenue management begins to look at supplies as assets. In many other industries, just think of Dell Computers or others, every chip at Dell is thought about as an asset. In the hospital frequently they think of supplies as liabilities. And for the first time, I think we’re beginning to see the importance of managing supplies within the framework of an asset environment in which everything that you use becomes important and you ask not just is it something that’s a disposable but to what extent does it contribute to patient care. Does it help us get the patient through the hospital more quickly? Is this a product that can contribute to the reduction of infections? Is this a product that will fail and therefore we’ll have more readmissions? And, under health reform, the hospital is penalized for things like readmissions. The hospital is penalized if patients have infections that acquired within the hospital. Therefore, the supply environment and its contribution to that becomes an interesting area for inquiry.

KnowWPCarey: Okay. You mentioned your study into issues surrounding the revenue cycle. Do you want to talk a little bit about how that study was structured, who the participants were?

Schneller: Yeah. That study was actually initiated by one of our research members, Craneware. Craneware is a company that specializes in managing the item master as well as the charge master for hospitals. Working with them we were able to identify a number of companies that we thought has progressive practices in those areas. We interviewed across a large number of companies major supply chain managers asking them how they managed the relationship between the item master or the charge master and more general revenue recovery issues.

I think it’s noteworthy that in the past, by and large the payors, and this would include Medicare, have paid in bundled payments. They haven’t asked for detailed cost accounting. The supplies have been part of a lump payment that goes to the hospital. If you ask the hospital for any one procedure to what extent supplies contributed to the cost of that procedure, frequently they didn’t have the right answers. So we’re seeing an environment in which the people we’ve talked to, who we think are the more progressive systems are beginning to get into much more detail of cost accounting to understand the contribution of those supplies. We’ve looked at a number of very progressive systems in this.

One of our collaborators in this, we did a webinar on this for the healthcare financial management association, has been the Mercy Healthcare System in Missouri. Interesting about Mercy is that they’ve become a system that’s taken total ownership of their supply chain. In doing that they engage in their own purchasing; they engage in their own distribution. They’re very interested in how cost is accounted for across that system as it relates to supply. So again, it’s an overview — it’s a systemic view across a large number of hospitals, not just asking what price did we pay, but what’s the total cost of ownership of a product; to what extent, again, does a product contribute to our clinical goals and, thus, our overall organizational goals.

KnowWPCarey: The white paper is available on your website?

Schneller: Yes it is. It’s available on our website and we will be doing another presentation of that data for the Healthcare Financial Management Association this spring in Connecticut, and we’re very excited about that. The podcast is just gonna be terrific for bringing this to a larger number of people.

KnowWPCarey: I understand that the consortium is making efforts to bring these best practices that you’re learned about to industry by offering executive education opportunities. Can you talk a little bit about that?

Schneller: Sure. One of the areas that we’ve identified as a key important area is change management within the healthcare supply chain. Many of the current managers in major systems across the country are being asked to lead change not just around supply chain management but the integration of various aspects of information technology of the clinical environment. And supply chain is often thought about as the place to lead that.

What we’ve done is brought together a large number of supply chain managers here at ASU and have developed a number of case studies to engage them to become masters of change. That’s a real goal that we have. We’ve offered this to some of the consortium companies such as Novation, which is one of the large group purchasing organizations, and now intend to spread out that training in change management particularly focused on healthcare to a larger number of organizations.

KnowWPCarey: Can you give me a concrete example of the issues that these supply chain managers are facing?

Schneller: Okay. One of the real challenges in this healthcare materials environment has been having solid accountability for materials. The problem here is that for materials there really no uniform device identifiers across products within the supply chain. You know, you can go into Walmart and basically when you checkout there’s a bar code on everything you buy; that bar code gets scanned. Not only does the manufacturer have an identification piece within that bar code; they know it’s from Walmart; they know which store it’s at; they know where it was sold. We don’t have those kinds of uniform devices identification opportunities in health care.

KnowWPCarey: That’s amazing. That’s very surprising.

Schneller: It is amazing and it’s frightening because when it comes to recalls for example, when it comes to finding out that a product’s out of date, nobody really knows what’s happened to those products in a methodical, disciplined and prudent kind of way. So the FDA has mandated the implementation of uniform device identification particularly starting with what are called class three products. Those are the implantables that we’ve talked about already, hips, knees and other aspects, so that we know where those are, we know if there’s a recall what’s happened. As you know, there have been recent recalls of devices from both the orthopedic and the cardiology aspects here in the United States.

This makes it tremendously difficult because manufacturer A may have their own branded number on a product and manufacturer B, which has an equivalent product, may also have a very different set of numbers. One may be numerical and as a matter of fact the others might be an alphabet-related kind of identification. Therefore, even within a charge master and an item master, as we discussed those earlier, you may have very similar products but they’re very different. When a manufacturer changes a product what used to be a 1029 and now becomes a 1350, they may be the same product and now they’re in there twice, and how one tracks those and where they are.

Therefore, there’s a huge effort going on across the United States to begin to develop common technology -- first a common nomenclature, which is perhaps most important for uniform device identification. One of the major leaders in this is GS1, Global Standards 1, which provides the bar codes. In a sense, they are a bar code vendor; they are standard bar code vendor across the world, not just the United States. So if you buy something here versus if you buy it in Europe, you can identify it, you can trace it, you can track it.

The vendors across the United States are all adopting and being challenged to adopt those uniform bar code identifications to put onto their products. It’s not without cost. Actually, it’s quite costly to begin to think about repackaging, renumbering. But, the opportunities posed by having that are then tremendous. Because not only can you track and trace what a product is for recalls, you can also put into the patient’s electronic health record. Therefore, when the patient leaves the hospital you know that patient’s left the hospital with a certain product. It’s not in a written form in a surgical suite where it’s kept, but nobody really knows it there, and we can begin to develop what’s perhaps most important in this is registries, so that we can track and understand how a product is performing across a population of patients over time; not just once.

KnowWPCarey: What role then do doctors play in all of this change?

Schneller: Liz, as you know, Natalia Wilson is co-director of the healthcare supply chain research consortium, and Natalia trained at both Georgetown and Vanderbilt. She’s an amazingly well-trained internist. Natalia will tell you as she came to work for us that a medical education there has been absolutely no attention to the materials environment. If you train at Georgetown you might use product A; if you train at Mayo Clinic you might use product B, but there’s no place where people really come together to look at which products work better in which situations. There’s really what I would say no attempt to be reflective about the product environment in medical education.

We’ve begun to think about the ways that you bring clinicians together to become much more active in this. Obviously, if you think about the bundled payment environment and those changes that we looked at before in an environment where outcomes are really key and products contribute, there needs to be a stronger clinical engagement within this. Part of what we see in the evolving co-management projects that hospitals are undertaking with physicians, there’s a greater awareness of physicians of that environment.

As a matter of fact, some of the major hospital system have put physicians into key roles within supply chain management; paying a physician to be attentive to the supply chain and across product lines if you think of a hospital being broken up into different product lines such as cardiology, orthopedics and others. Having physicians being in the role of identifying new products, being advocates as well as analyzers for new and evolving technologies that come into the hospital, but in the past that has not been a well-orchestrated area. Part of what we want to do in our executive education is not just begin to train supply chain managers to be better product managers, but we want to train physicians to be much more reflective of the ways in which the products they use contribute to the outcomes for better patient care.

KnowWPCarey: And I know we’re well-positioned to do that kind of education here because we have a history, a tradition of physicians being part of our graduate programs in healthcare management. Isn’t that true?

Schneller: Yeah, that’s absolutely correct. Over the years — I came here in 1985 as director of what was then the health management program here at ASU, and we’ve had a number of physicians over the years come into that program. What’s even more interesting, at this point, we have physicians who are in a program at Mayo Clinic getting their MBA here at the W. P. Carey School of Business. Those physicians are taking courses for the first time in health care supply chain management.

KnowWPCarey: Excellent.

Schneller: And that’s exciting, okay, because hopefully they’re going to take that back to Mayo; they’re going to take that back as they become academic physicians. Many of them will go into those kinds of roles and they’ll much more reflective about that environment.

KnowWPCarey: Okay, great. Well this has been really, really interesting. Thanks a lot for spending time with me today.

Schneller: Oh, you’re welcome. It’s been a pleasure.

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