Benchmark Study

SynopsisThis paper summarizes benchmarking metrics and industry perceptions based on HFMA’s 2005 Supply Chain Benchmarking Survey.

Sponsored through an educational

grant by McKesson

HFMA’s 2005 Supply ChainBenchmarking SurveyManaging Resources to Achieve Improved Economic Outcomes and High-Quality Care

healthcare financial management association

July 2005

Summary

BackgroundA growing number of environmental concerns have led to increased focus on the healthcare supply chain: a growing uninsured population, labor shortages and costs, reimbursement and payer trends, challenges related to reimbursement for new treatments and technologies, and escalating utilization. Progressive materials and purchasing leaders are succeeding in aligning economic interests with those of physicians and clinicians, and achieving targeted expense reduction. But to make more significant progress in this area, organizations must lift systemic barriers and align goals to maximize supply chain effectiveness. Fortunately, the effectiveness of supply chain operations has assumed a higher priority among senior-level management. As a result of this increased attention, the role supply chain leaders play in the success of an organization has become more recognized and respected.

This paper highlights findings of HFMA’s 2005 Supply Chain Survey, made possible through an educational grant by McKesson. Based on the feedback of 225 respondents, the study identified recent successes, future opportunities, and benchmarking metrics; it also includes specific examples of respondents’ successes. Furthermore, recent OIG commentary on gainsharing is highlighted in order to present potential opportunities to align incentives and thus increase physician buy-in.

The survey builds on the findings of a 2002 study, which delineated the state of supply chain management and identified best practices. Made possible by an educational grant from McKesson, the 2002 study provided the perspectives of 600 financial executives and supply chain leaders (www.hfma.org/FeaturedTopic/resource_management.htm).

This paper also compares the findings from the 2005 survey to findings from 2002.

Respondents indicated that supply chain initiatives reduced their supply chain budget by 1.25 percent per year over the past two years (median). Looking forward, respondents estimate twice as much opportunity to improve supply savings.

Top opportunities exist in physician and clinical buy-in, information technology investments, and value analysis. Developing buy-in was the most prominent concern, with many respondents indicating that true collaboration is essential for success. Investments in information technology were noted to provide more significant opportunities in the 2005 survey compared to 2002 results. At the same time, 2005 respondents found significantly fewer opportunities in automation compared to 2002. The leading opportunities in standardization and order management include clean and comprehensive supply item master, purchasing controls/processes/structure for preference items, and cultivating awareness and understanding of metrics.

The survey’s findings reveal that although almost all hospitals have undertaken a standardization initiative and most are using value analysis teams, physicians possess relatively low awareness of these initiatives. The study also highlights examples of clinical and financial outcome variations by product line and by physician as a way to encourage physician involvement in identifying best practices.

Overview

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Areas of Greatest OpportunitySurvey respondents were asked where they saw the greatest opportunities for improvement in their organizations over the next two years, based on the impact of potential initiatives in supply chain management.

Respondents indicated that the highest opportunity can occur in physician and clinical buy-in, information technology investment, and value analysis.

Exhibit 1. Percent Indicating “High” or “Tremendous” Opportunity By Improvement Area

Percent Indicating “High” or “Tremendous” Opportunity By Improvement Area

Overall Opportunity 56%

Physician /Clinical Buy-In 65%

IT Investments 64%

Value Analysis 64%

Reduce OR Expense 62%

Improve Efficiencies 49%

GPO 42%

Demand Forecasting 38%

Central Supply 25%

Automation 23%

Larger hospitals—that is, those with patient revenue greater than $315 million—were more optimistic about opportunity overall. Respondents in this classification were most likely to indicate “tremendous” or “high” improvement opportunity in information technology investments.

Exhibit 2. Percent Large Hospitals Indicating “High” or “Tremendous” Opportunity By Improvement Area

* Large Hospitals > $315M Patient Revenue

Percent Large Hospitals* Indicating “High” or “Tremendous” Opportunity By Improvement Area


IT Investment 80%

Value Analysis 70%

Physician/Clinical Buy-In 68%




GPO 37%

Central Supply 31%

Automation 31%

Areas with Low Perceived OpportunityMost respondents viewed minimal opportunity in automation.

Exhibit 3. Percent Indicating “None” or “Minimal” Opportunity By Improvement Area

Percent Indicating “None” or “Minimal” Opportunity By Improvement Area


Automation 52%

Central Supply 38%

GPO 36%


IT Investment 19%

Physician /Clinical Buy-In 15%



Value Analysis 9%

Survey Responses

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Change in Focus over the Past Three YearsIn the area of information technology, respondents indicated greater opportunity in 2005 vs. 2002. At the same time, they see less opportunity in automation, demand forecasting, and processes in central sterile supply than they did three years earlier. They view continued opportunity in physician involvement and the use of GPO contracts.

Exhibit 4. Opportunities 2002 Versus 2005

Percent of Respondents

65%

67%Physicians

64%

55%IT

42%

43%GPO

38%

46%Demand

Forecasting

25%

37%Central Supply

23%

47%Automation

20052002

Recent Reductions and Future Opportunity

Respondents were asked to estimate the financial benefit of supply chain initiatives over the past two years.

Annual Cost Reductions over Past Two YearsRespondents indicated that supply chain improvement initiatives generated 1.25 percent annual reduction in supply costs per year (median). Comparatively, VHA sees significant opportunity. They estimate that healthcare organizations implementing best practice processes in the supply chain can save between 15 and 30 percent of related supply costs. 1

Exhibit 5. Annual Cost Reductions- All Respondents

3.25%25th percentile

1.25%Median

.53%75th percentile

Cost reductions were similar considering the size of the institution.

Exhibit 6. Cost Reduction – By Hospital Size

Cost Reduction (% of Supply Budget)

1.29% 1.33%1.25%

Larger Hospitals (>$315M)

Mid-Sized Hospitals($125–315M)

Patient Revenue

Smaller Hospitals(<$125M)

* Annual percent of supply budget per year over past two years.

1 VHA 2004 Research Series, Taking Control of Your Supply Chain: The Buck Starts Here.

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Opportunity over Next Two YearsLooking forward, respondents were asked to estimate the opportunity to improve supply costs over the next two years. The median response for future opportunity doubled past reductions: 2.50 percent compared to 1.25 percent.

Exhibit 7. Future Opportunity – All Respondents

3.57%25th percentile

2.50%Median

.96%75th percentile

Smaller hospitals—that is, those with less than $125 million in patient revenue—note higher opportunity compared to mid-sized and larger hospitals. While past successes in smaller hospitals were 1.25 percent (median), they anticipate greater opportunity in the future.

Exhibit 8. Future Opportunity – By Hospital Size*

Opportunity (% of Supply Budget)

2.11% 2.08%

3.50%

Larger Hospitals (>$315M)

Mid-Sized Hospitals($125–315M)

Patient Revenue

Smaller Hospitals(<$125M)

* Annual percent of supply budget per year over next two years.

Standardization

In 1996, The Efficient Healthcare Consumer Response Study identified nearly $11 billion in process savings opportunities.2 Order management improvements represented more than half of the anticipated opportunity. While healthcare organizations and others involved in supply chain have continued to focus on improved processes, the relative opportunity is similar today. It is not surprising that respondents indicated the greatest opportunity for savings can be achieved through standardization, which involves purchasing controls, value-based selection, and physician buy-in. All areas are impacted by selection and order management.

Exhibit 9. EHCR Supply Chain Process Savings Opportunities

$ Billions

$0 $1 $2 $3 $4 $5 $6 $7

Transportation

PhysicalDistribution

InventoryManagement

OrderManagement

The top specific opportunities in standardization and order management identified by respondents include:• Continually focusing on a clean and comprehensive

supply item master • Creating purchasing controls and processes for

preference items—which include physician buy-in, participation, and leadership—and related processes and structures for continuous evaluation of new items

• Increasing awareness and understanding of metrics

2 HFMA White Paper, Resource Management Update: Healthcare Supply Chain, Westchester, IL, 2001.

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Clean and Comprehensive Supply Item Master

Due to the sheer volume, complexity, and dynamic nature of supply data, many hospitals’ item masters have errors, redundancies, and outdated information. Additionally, many high-end items and preference items are not included in the item master. Commonly encountered data problems are included in Exhibit 10. While challenging, constant focus on a clean and comprehensive item master can improve purchasing processes and increase the ability to evaluate product data and benchmarks. Improved reporting and analysis can lead to reduced variability in pricing for the same product as well as improved contract performance.

Exhibit 10. Commonly Encountered Data Problems with the Supply Item Master

• Incomplete vendor and/or product information

• Nonstandard vendor names

• Vendor product numbers with missing information or additional characters

• Overly abbreviated product descriptions

• Product descriptions that are not normalized or may have missing attributes

• Unclassified products

Processes for Physician Preference Items and Physician Buy-inPhysician preference items, including medical devices, account for about 40 percent of a typical supply budget.3 To reduce supply costs, physicians must be involved stakeholders in standardization and utilization efforts. There must also be a flexible and reasonable process for preference items.

While 65 percent of HFMA survey respondents indicated “tremendous” or “high” opportunity in involving physicians, according to a separate VHA study, only 35 percent of physicians are involved in standardization and utilization programs, and more than 40 percent were unaware as to whether their hospital even sponsored such programs.4 This is surprising considering AHRMM’s finding that more than 90 percent of hospitals have undertaken a standardization initiative over the past 12 months and 57 percent use value analysis teams.5 Thus, potential opportunities exist to improve physician awareness and increase buy-in for standardization initiatives.

Physicians seem to value these efforts. Of the physicians surveyed in the VHA study, almost two-thirds found standardization effective and more than half found utilization programs to be effective at balancing clinical care and financial outcomes.6 Recent commentary from the OIG regarding gainsharing may present additional opportunity to increase physician buy-in.

A recent HFM article identifies the following strategies:• Stay focused on the big opportunities • Make vendor dealings fair and transparent: physicians

are more likely to support a process that is transparent and that focuses on vendor inclusion

• Be sure there is a process for prospectively evaluating new or incrementally improved products 7

3 Rand Ballard, “Strategic Supply Cost Management, Physician Preference Without Deference,” Healthcare Financial Management, April 2005, pp 78-84.4 “VHA Study Shows 64 Percent of Physicians Believe Hospital Supply Standardizations Are Effective,” VHA/ Surgicenteronline.com,

Posted on 04/07/2005, Phoenix, AZ.5 “2004 Performance Indicators Study on Healthcare Surgery Supply Chain Management: 2004,” Association for Healthcare Resource and

Materials Management and BD Consulting. Chicago, IL.

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Gainsharing

Recently, the OIG has issued several advisory opinions approving gainsharing arrangements in which hospitals agree to pay private practice physicians a portion of the cost-savings directly attributable to their adoption of certain cost-saving protocols. These opinions represent a significant development given the OIG’s historical reluctance to approve gainsharing arrangements in any form and the recent federal court decision striking down a CMS gainsharing demonstration project in New Jersey as illegal.

Following is an excerpt from the February 25, 2005, OIG Advisory Opinion:

“Arrangements like the proposed arrangement are designed to align incentives by offering physicians a portion of a hospital’s cost savings in exchange for implementing cost-savings strategies. Under the current reimbursement system, the burden of these costs falls on hospitals, not physicians. Payments to physicians based on

cost savings may be intended to motivate them to reduce hospital costs associated with procedures performed by physicians at the hospitals.”

“Properly structured, arrangements that share cost savings can serve legitimate business and medical purposes. Specifically, properly structured arrangements may increase efficiency and reduce waste, thereby potentially increasing a hospital’s profitability. However, such arrangements can potentially influence physician judgment to the detriment of patient care. Our concerns include, but are not limited to, the following: (i) Stinting on patient care; (ii) ‘Cherry picking’ healthy patients and steering sicker

(and more costly) patients to hospitals that do not offer such arrangements;

(iii) Payments in exchange for patient referrals; and (iv) Unfair competition (a ‘race to the bottom’) among

hospitals offering cost savings programs to foster physician loyalty and to attract more referrals.8 ”

HFMA’s Compliance Officer’s Forum offers the following summary:9

Exhibit 18. Compliance Officer’s Action Grid: Gainsharing

Issue Importance What OIG Says Action Required

GainsharingArrangements

The civil monetary penalty provisions set forth in Section 1128A(b)(1) of the Social Security Act prohibit a hospital from knowingly making a payment directly or indirectly to a physician to induce the physician to reduce or limit items or services furnished to Medicare or Medicaid beneficiaries under the physicians’s direct care.

There is no requirement that the prohibited payment be tied to a specific patient or to a reduction in medically necessary care.

Any hospital incentiveplan that encourages physicians through payments to reduce or limit clinical services directly or indirectly violates the statute.

Gainsharing arrangements can also implicate the antikickback statute if the cost-savings payments are used to influence referrals.

The antikickback statute will be implicated if a hospital offers a cost-sharing program with the intent to foster physician loyalty and attract more referrals.

Government scrutiny is particularly likely where arrangements permit a physician to reap benefits over an extended period of time that exceeds the time necessary to achieve savings or receive cost-savings payments unrelated to action taken by the physician.

Gainsharing arrangements may also implicate the Stark law.

Consider structuring cost-saving arrangements to fit within the personal-services safe harbor whenever possible.

Payments to Reduce or Limit Services: Gainsharing Arrangements

6 “VHA Study Shows 64 Percent of Physicians Believe Hospital Supply Standardizations Are Effective,” VHA/ Surgicenteronline.com, Posted on 04/07/2005, Phoenix, AZ.

7 Rand Ballard, “Strategic Supply Cost Management, Physician Preference Without Deference,” Healthcare Financial Management, April 2005, pp 78-84.8 Department of Health and Human Services, February 2005, OIG Advisory Opinion No. 05-06. http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0506.pdf9 HFMA Compliance Officers Forum, April 2005, http://www.hfma.org/forums/ActionGrid.pdf

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Metrics

Traditional supply chain measurements are included in the benchmarks that follow. In addition to these measures, many healthcare organizations have shifted their focus from “reducing costs” to a combined approach that identifies mutually beneficial goals aimed at improving clinical outcomes and financial performance.

Exhibit 11. Sample Product Line Evaluation

Quarterly Gross Expected Variable Fixed Difference Between Physician Length Revenue Payment Cost Contribution Cost Net VC per Case andName Cases of Stay per Case per Case per Case Margin per Case Margin Best Practice

8 7.14 13,610 6,244 4,205 2,039 2,701 (662) 9,640

Dr. Smith 7 5.54 10,453 4,052 3,189 863 3,771 (2,908) 1,323

Dr. Brown 6 7.33 15,325 5,404 3,414 1,990 2,617 (627) 2,484

Dr. Garcia 5 10.67 9,898 6,633 3,265 4,874 (1,609) 18,165

Dr. Chen 5 5.33 8,225 4,884 3,000 1,884 2,391 (507) —

Others 53 5.92 12,059 5,685 3,364 2,501 3,620 (1,119) 19,292

Total 84 6.51 13,076 5,899 3,606 2,293 3,475 50,904

DRG 89 (Simple Pneumonia), Variability of Physician Variable Costs First Quarter 2004 10

Smaller institutions reported 85 percent contract purchases whereas larger institutions reported lower compliance, with 70 percent of purchases made on contract.

Supplies as Percent of Operating BudgetMedian medical/surgical supply cost is 15 percent of operating budget.

Exhibit 12. Medical Surgical Supply Cost as a Percent of Operating Budget

12%25th percentile

15%Median

18%75th percentile

Measuring and reporting differences in mortality, length of stay, costs, and revenue demonstrate variations. This type of data can compel physicians to examine related process variations and stimulate opportunities to improve care and costs. One example of reporting is included in Exhibit 11, which demonstrates variation by physician within a product line.

Variability of supply costs per procedure can differ greatly. For example, this variation is almost 400 percent for DRG 79 (Respiratory Infections) and DRG 250 (Cervical Spine Fusion without CC) .1 1 Identifying and implementing best practices in care can impact both clinical and financial outcomes. Similarly, demonstrating cost as well as margin may increase sensitivity to financial issues.

Benchmarking and MetricsRespondents shared key performance metrics, which are summarized below.

Percent of Contract PurchasesSeventy-seven percent of purchases are contract purchases, according to survey respondents. This is up from 75 percent in 2002 (median).

10 Steven H. Berger, “10 Ways to Improve Healthcare Cost Management,” Healthcare Financial Management, Westchester, IL, August 2004, pp 76-80.1 1 Rand Ballard, “Strategic Supply Cost Management, Physician Preference Without Deference,” Healthcare Financial Management, April 2005, pp 78-84.

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Larger hospitals indicated that medical/surgical supplies represented a higher percentage of their operating budgets.

Exhibit 13. Supplies as a Percent of Operating Budget

13% 13%

15%

Small (<$35M)

Mid-Sized/Small

($35–125M)

Mid-Sized($125–315M)

17%

Large(>$315M)

Exhibit 14. Supply Expense per Adjusted Patient Day

25th 75th Percentile Median Percentile

All $194 $259 $326

>$314M 244 315 369

$125–$315M 243 271 301

<$125M 140 196 244

Rural 164 211 298

Exhibit 15. Supply Expense per Adjusted Discharge


All Respondents $769 $1,014 $1,299

>$315M 1,114 1,360 1,601

$125–$315M 933 1,198 1,211

<$125M 459 669 883

Rural 594 818 1,198

Rural <$125M 581 766 905

Exhibit 16. Pharmaceutical Expense per Adjusted Patient Day


All 46.2 $51.5 $97.5

>$325M 52.9 66.2 52.9

$125–$325M 47.6 49.7 51.6

<$125M 45.6 50.5 101.5

Significant variation in response

Exhibit 17. Pharmaceutical Expense per Adjusted Discharge


All $182.8 $216.5 $280.3

>$315M 214.2 272 401.4

$125–$315M 184.3 213.9 238.0

<$315M 122.6 186.1 238.0

Significant variation in response

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Metrics Viewpoint

Jamie C. Kowalski, MBA Vice President, Practice & Market Development McKesson Provider Technologies Wheeling, Illinois

Supply chain management has many important and interdependent components, which have been described in these survey results. Specific, selected measures provide data that can help drive decisions, identify areas of vulnerability, and determine the overall effectiveness of supply chain operations. Therefore, despite executive calls for a single metric for measuring supply chain management performance, distilling these components into one metric is not beneficial.

The metrics selected by an organization should be meaningful to all stakeholders (executives, customers, supply chain team), measurable (preferably via automation), and manageable (able to help the team make changes that will improve performance). Furthermore, such metrics must track all outcomes of the supply chain: service/customer satisfaction, quality/effectiveness, resource productivity/efficiency, and financial results.

Benchmarks can be synonymous with best practices, or lead to them. They can be based on internal levels (for example, one patient care unit has achieved inventory turns of 33 times per year; all patient care units are expected to achieve that) and/or external sources (a hospital/IDN in the peer group has achieved supply expense as a percentage of total hospital operating expense of 14.3 percent). But caution is required when using “national benchmarks” because ensuring that the metrics are actually reporting and measuring the same items, in the same manner, may be impossible.

What is most important is to continue striving for improvement to reach best practice levels of performance. Throughout that process, organizations must be sure to recognize and celebrate positive performance. But at the same time, caution should be exercised about intensity and timing. If the pace is too slow, it will be difficult to reach and maintain momentum. This can lead to morale problems, but even worse, can be quite costly to the organization from a financial perspective. For example, if the goal is to reduce annual operating expenses by $1 million through supply spending, every month that the target level is not achieved costs the organization $83,000 that could have been avoided. Thus, a bit of impatience can be a good thing.

Best practices in the use of metrics include:• Support from senior executives (CEO, CFO, CNO,

etc.), including providing attention and coaching, and developing accountability for staff roles

• Supply chain management metrics that cover the scope of the supply chain (see Exhibit below); each major component can and should be measured

• Metrics that are customized for, reported to, and tracked by all stakeholders: executives, customers, supply chain leaders, and team

• Appropriate measurement of performance at the individual employee level (e.g., productivity, quality)

• Recognition, rewards, and as indicated, sanctions• Accountability for performance at the point of control—

For example, if a service department fails to reduce supply spending or exceeds supply budgets, holding the supply chain leader and team accountable is not appropriate, unless the products used by that department are being purchased for noncompetitive prices. Consumption is the responsibility of the consumer.

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Examples of Supply Chain Metrics are shown below:

Area Metric Comment

Financial Supply Expense as % of Total Operating Expense

Indicator of the impact of supply optimization: supply costs should drop at a greater rate than overall costs. Also provides assurance that supply standardization does not increase costs in other areas.

Supply Expense per Adjusted Patient Day

Most commonly used supply chain indicator for measuring cost.

Supply Expense per Adjusted Discharge Can track/trend cost variation across patient types and severity

Best System Price Price management to ensure lowest available price is paid within your healthcare enterprise

Best Market Price Price management to ensure lowest available price is paid within your market

Pricing Variance Constant pricing changes can have a detrimental effect on assuring best price

Non-contract spend – $ Measures compliance with purchases through a GPO contract

Off tier losses total $ Measure of losses as a result of not achieving tier levels

Non consolidated tier losses Measure of losses as a result of not achieving tier levels

Loss due to vendor selection Dollars associated with off contract purchases

Item Standardization Rebate Loss Dollar lost as a result of not meeting rebate thresholds by product category

Vendor Standardization Rebate Loss Dollars lost at a result of not meeting rebate thresholds at the vendor level

On-hand Inventory Value Measures how much cash is tied up in inventory and unavailable for other uses

Value of Consignment Inventory Tracks the value of consigned inventory; important to monitor vendor management

Outcomes Price infl ation index (market basket)

Cost per PO Productivity meaure; effi cient management of orders should result in lower cost per PO

Accounts Payable $ on hold pending invoice discrepancy resolution

Potential for lost revenue increases; time spent on resolving discrepancies results in higher management costs

% purchases without invoice discrepancies Measures the results of invoicing practices

Available Rebates not collected(TBD) Measures results of effective rebate management

GPO holdbacks

Number of vendors used Measures the results of vendor standardization; the fewer the vendors, the more likely to take advantage of volume purchases and rebates

Number of Ortho used Measures the resutls of Ortho vendor standardization

Number of Cardio used Measures the results of Cardiology vendor standardization

Rebate Index Indicator of the results of contract compliance efforts and tier achievements

Stock-outs Measure of the results of managing PAR levels and stocking protocols

Throughput PO Lines per paid hour Monitors the effi ciency of supply distribution

Distribution Lines Picked per paid hour

Monitors the timely distribution and stocking of supplies within the organization

Inventory Turns A measure of accurate stocking and PAR levels and helps to reduce carried inventories. Most effective when tracked at the product category level.

Volume and Capacity

Requisitions processed electronically Tracks the volume of requisitions processed and the effectives of e-supply management

% purchase transactions via “e-commerce” Tracks the volume of requisitions processed electronically compared to total transactions

Noncontract as % of total spend Monitors the rate of purchases that occur from a noncontract vendor; increases in noncontract may indicate new products or rogue buying

Non-compliant purchase Monitors the dollars associated with noncontract purchases

LOC Activation

LOC Activation %

Total Inventory $/Average Patient Days

% of Consignment Inventory High dollar, complex products, such as implants and orthopedics require signifi cant investment to stock in an institution. Consignment helps with inventory management but must be monitored for reimbursement and product availability.

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When asked to describe recent projects that have led to the greatest improvements, respondents most frequently cited the following:• GPO utilization and pricing• Centralization of supply chain functions• Investments and utilization of information technology• Revising structure, adding staffing, developing teams• Increasing value based selection • Revising and standardizing item master• Developing physician/clinical buy-in• Developing reporting and metrics

Successes Achieved

GPO utilization and pricing

“We reviewed all contracts and suppliers used in the past 18 months to improve efficiencies and identify cost savings through GPO contracts. Reduced overall supply costs by approximately 10 percent.” —Mid-sized Hospital Respondent

“Reduced contract pricing for orthotics. Continue to review make-up of packs and alter components as required.” —Mid-sized Hospital Respondent

“We re-bid services to bring down cost of telephone and other services. Continued standardization of supplies. We have a committee to limit the number of companies we work with. This increases the volume at each company and leads to better pricing.” — Mid-sized Hospital Respondent

“Negotiating a new contract on urinary stents. Should save us 30 percent. Also, going to consignment on cardiac stents. Previously we purchased in bulk in order to get a reduced price. Didn’t prove successful, so we went to consignment.” —Small Hospital Respondent

“Use of online requisitions tied into our MMIS system. User sees items they need, materials management doesn’t need to re-enter information. Non-stock items automatically produce PO’s.” — Mid-sized Hospital Respondent

Revision and standardization of the item master

“We undertook a formal 18-month Strategic Sourcing engagement that has involved 17 cross-functional teams to examine and improve our spending in clinical and non-clinical categories. We looked at about $300 million in spending and produced over 28 million in documented annualized savings. It also has changed the way our organization views the role of procurement and strategic sourcing.” — Hospital Respondent

Centralization of supply chain functions

“Materials management staff has taken over distribution of I.V. tubing from the pharmacy. This removes one ‘hand-off’ in the process. Savings are not yet determined. Materials management took over the ordering and stocking of the OR department. This reduced overstocking and improved lines of communication reducing overall inventory.”— Hospital Respondent

“We migrated our purchasing and A/P functions to a centralized supply chain environment in March 2001. At this point, the operation is working very well. Chain in top leadership went from last to first in customer satisfaction in 15 months.” —Mid-sized Hospital Respondent

“Identified supply chain manager for operational oversight of purchase order throughput, receiving dock flows, charge capture of various floor stock/patient charge items and floor stocking/ordering. We call him our control tower manager, having impact of all facets of supply chain status. Priceless—from user satisfaction and elimination of ‘surprise situations’.” — Hospital Respondent

Information technology projects

“We installed perpetual inventory this has improved control on supply use and charge capture.”“Installed automated replenishment system in CSD. Reduced inventory by 30 percent by eliminating duplicating inventory in storeroom and on exchange carts.” —Mid-sized Hospital Respondent

In Your Words…What’s Worked, What Hasn’t?

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“Installation of automated purchasing/inventory system two years ago. Began value analysis within purchasing and materials assessment and accountability for waste compliance within our purchasing contracts.” —Large Hospital Respondent

“Improved automation of managed care authorizations process. Contractual allowances for unauthorized services denials have decreased dramatically.” —Mid-sized Hospital

Restructuring, adding staff, or developing teams

“We have an MM team, composed of MM, clinical, and financial personnel. Our first project was to review in depth the MM item list. As a result of this, we identified a number of items that were obsolete and we have developed a standardized process of ‘naming’ so we know what we are talking about.” —Large Hospital Respondent

“Development of director of Inventory Management program. Reduced imaging supply costs by 25 percent .” —Mid-sized Hospital Respondent

“We used our GPO’s special services to gain a team (SG leader, MM leader, senior management, pharmacy leader) who would work together to lower implant costs. By working together and networking with other hospitals, we were able to achieve a capitated contract with two vendors.” —Hospital Respondent

Value-based selection

“Have started to utilize a new system for laparoscopy equipment. We reduced disposable and equipment repair costs. Improved physician satisfaction because equipment is in better condition. Led to savings of $100,000. Also, our pharmacy went from IV to PO for certain drugs.” —Mid-sized Hospital Respondent

Physician/clinical buy-in

“We had our first physician preference item contract negotiations to narrow the number of vendors down and guarantee 95 percent utilization of one vendor through engaging the physicians, resulting in an annual savings of $300,000.” —Mid-sized Hospital Respondent

“We engaged general surgeons to select one vendor for spinal implants, which led to an average per case reduction of 15 percent.” —Hospital Survey Respondent

“Current project to ensure that all parties involved in use of the supply item have input and buy-in to the product selected. This process has resulted in five of our high-use items being standardized throughout the facility. Not only saving on the product but the amount of items that we need to keep in stock.” —Large Hospital Respondent

“Developed an employee supply saving bonus, which rewards qualifying employees for ideas leading to supply savings. Bonus varies depending upon ultimate savings to the hospital.” —Large Hospital Respondent

Metrics and objectives

“Addition of clinical resources (RN) to MM staff. Developing physician profiles—working on cost and reimbursement profiles.” —Mid-sized Hospital Respondent

“We have instituted monthly departmental metrics for linen, distribution, receiving, and mailroom to better track our own performance. Ultimately it will serve as a source of whether we are moving things in the right direction in terms of efficiency.” —Small Hospital Respondent

Extensive review of supply chain processes

“Undergoing a supply chain study currently. We have identified one-time savings of $600,000 to $1 million in inventory reductions and potential savings in product standardization and best price practices.” —Mid-sized Hospital Respondent

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Advice based on past projects

Feedback centered on a handful of themes:• Ensuring buy-in before product launch• Building review of item master into major projects• Preparing information technology; specifically, ensuring

clean data and building time and budget for training and ramp-up.

Buy-in

Developing buy-in was the most prominent concern. Most indicated that early buy-in and true collaboration are essential to success:

“We struggled with doctor buy-in. At first we focused on reducing supply costs. We replaced this with a more open forum. In this, we discuss top issues from both administration and from doctors. Helped us surface key issues from both sides. The open exchange has really helped us rebuild the culture.” —Large Hospital Respondent

“We really wanted to go to one vendor but doctors wanted more flexibility and choice. We compromised and went with two vendors.”—Hospital Respondent

“Too many ‘workarounds’ were allowed in the system that was designed and the core process was not well defined and syndicated.” —Mid-sized Hospital Respondent

“In our capitated ortho knee program, one ‘outlier’ was recently approved by administration (with our intense involvement) at a higher price.” —Mid-sized Hospital Respondent

“Suture/endo product conversion. Ask if they are even interested in the thought of switching otherwise, doomed from the beginning.” —Hospital Respondent

“Point-of-use supply management. Nursing compliance is not where it should be—they don’t own this yet. Advice: VERY worthwhile but it takes a lot to get buy-in. Challenges are getting accountability at department manager level and not just in mm.” —Hospital Respondent

Review of Item Master

Standardization involves a thorough review of the item master file:

“We have tried to manage our item file master much better and put a lot of emphasis on this. However, we realized that not having items like implants from the vendors we use in the item file does not work. Now we are adding them all to have better information both for utilization management and cost/charge capture.” —Mid-sized Hospital Respondent

Centralized Functions

A handful noted concerns about centralized purchasing functions without planned involvement:“Consolidated purchasing through parent corporation. This has yet to yield expense decrease, only increases.” —Small Hospital Respondent

“Do not allow a regional office to dictate all improvements. End users and physicians MUST be involved.” —Small Hospital Respondent

Preparing for New Technology

And adequate preparation for new technology was a noted learning from past projects:

“We needed better training before system install. Led to confusion and slow start up.”—Hospital Respondent

“Supply chain software installation was problematic. We should have had a sufficient implementation team to plan (back fill). I’d advise taking time to build a comprehensive master file. START with clean data.” —Hospital Respondent

Additional Advice from Respondents:

“Tried to move to reprocessing in the hospital. There is still a lot of concern. No progress has been made.” —Hospital Respondent

“As an organization, we partnered with one distributor for all nine of our regions. The distributor was not capable of bringing the entire organization on at one time. Better due diligence.” —Hospital Respondent

Top Practices• Inform and train to build buy-in from the back office to

the boardroom• Select metrics and benchmarks that the clinical staff,

physicians, administration, and others value • Integrate physicians in evaluating programs through a

review of variations in clinical and financial outcomes by program and by physician

• Establish a continual focus on a clean and comprehensive item master

• Evaluate technologies to improve and integrate information for decision-making

• Continually examine processes and structures for review of preference items

• Evaluate opportunities to improve asset tracking• Continue focusing on core supply chain management

functions and structure, such as purchasing control, inventory control, transportation, and GPO utilization

• Celebrate successes to build awareness and collaboration• Interact and share best practices with peers

Additional HFMA Resources

• HFMA Education — Conferences, Seminars, Audio Webcasts and the

Annual National Institute http://www.hfma.org/education/national_education_calendar.htm

— HFMA Chapter/ Local Education http://www.hfma.org/education/chapter_education_calendar.cfm

• HFMA e-Learning lessons: http://commerce.webinservice.com/hfmacommerce/

• Newsletters — HFMA’s Supply Chain Solutions Newsletter

http://www.hfma.org/publications/Supply_Chain_Solutions_Newsletter.htm

— HFMA’s Managing the Margin Newsletter http://www.hfma.org/publications/newsletters/managing_the_margin/index_2.htm

— HFMA’s Executive Insights Newsletter http://www.hfma.org/publications/newsletters/executive_insights/index_2.htm

— HFMA’s Revenue Cycle Strategist Newsletter http://www.hfma.org/rcs

• HFMA Membership http://www.hfma.org/join

• HFMA’s Comprehensive Guide to Cost Control http://www.hfma.org/resource/cost_control.htm

Exhibit 19. Response by SizeSize Responses

Less than 35M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5335-125M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47125-315M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50315-750M. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30>750M . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

(Survey organization matched to 2003 Medicare Cost Report)

Representation of Rural HospitalsRural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

(Survey organization matched to AHA demographic data using AHA QuickDisc 2004)

About HFMAHFMA is the nation’s leading membership organization for more than 34,000 healthcare financial management professionals employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and long-term care facilities, physician practices, accounting and consulting firms, and insurance companies. Members’ positions include chief executive officer, chief financial officer, controller, patient accounts manager, accountant, and consultant. HFMA offers educational and professional development opportunities; information on key issues affecting healthcare financial managers; resources, such as technical data, checklists and research reports; and networking opportunities—all of which provide our members with the practical tools and ideas they need to ensure career and organizational successes. For more information, visit HFMA’s website at www.hfma.org.

About McKessonTo truly optimize all areas of your business–clinical, operational and fiscal–you must evaluate the efficiency of your processes and the performance of your staff, while building in the flexibility to handle all of those “contributing issues,” those emergencies and last-minute changes that derail your strategic business objectives and put further pressure on your staff. McKesson’s Resource Management solutions specifically focus on uncovering opportunities to improve operational efficiency, clinical effectiveness, and fiscal viability. We offer an outcomes-based approach to solving your business performance objectives. Our comprehensive solution set includes advanced operational, financial and clinical analytic tools, and specialized departmental software and process improvement experts committed to achieving your organizations’ business initiatives. To learn more about McKesson, please contact us at 800.861.9801 or http://infosolutions.mckesson.com.

Survey Response

Two hundred twenty-five CFOs, financial leaders, and materials management leaders responded to the survey.

Documents

Benchmark Study