Benchmarking tool zeros in on supply chain ills and opportunities in health care

November 07, 2007

When it comes to cost containment in healthcare, supplies are a natural place to look. "Typically, 25 percent to 30 percent of a hospital's operating budget is in supplies," notes Bev Slate, associate vice president of QHR, a consultancy serving nearly 200 U.S. hospitals. Supplies make up the "second largest operating expense a hospital has," she continues. "The largest expense is personnel."

That said, those holding a hospital's wallet can't simply look for the lowest-cost providers. "Safety is a central consideration for us," says Gene Kirtner, chief operating officer of Resource Optimization and Innovation (ROI), the for-profit purchasing arm of some 20 hospitals plus clinics and other facilities run by the Missouri-based Sisters of Mercy Health System.

On top of that, there are "physician-preference" items -- those devices and supplies handpicked by doctors -- in the supply mix. Plus, there is constant innovation in the industry, bringing newer, pricier devices to the operating table. And, there are vast differences in the supply costs of specific procedures. That is, there is much more supply expense associated with a hip replacement than an infant delivery. These are just some of the details managers may dissect in analyzing healthcare's supply chain issues.

To get their arms around the supply chain octopus, benchmarking seems a natural move. However, it's been tough for hospital supply chain professionals to see how they stack up against similar organizations -- until now.

On October 15, the Association for Healthcare Resources & Materials Management (AHRMM) and the W. P. Carey School of Business launched SCMetrixTM, an online benchmarking tool. It aims to give hospital professionals a holistic view of supply chain performance and the factors contributing to it. For the healthcare industry, SCMetrixTM is what project lead Vicki Smith-Daniels calls "next-generation benchmarking." Smith-Daniels' collaborators, Julie Smith David from the W. P. Carey School's department of information systems and Stacey Whitecotton from the school of accountancy, brought the information systems and financial perspectives to the project.

Taking an exploratory look

Smith-Daniels is a W. P. Carey School professor of supply chain management, and she envisions SCMetrixTM as a way for healthcare to borrow a few known best practices from other industries, such as manufacturing and retail. She says these industries "have, for some time, done benchmarking, where they identify the factors contributing to performance." That hasn't been the case in healthcare.

According to Smith-Daniels, who has researched the field extensively, benchmarking in healthcare supply chain shops often starts and stops with gap analysis, where organizations identify the gap between potential and actual financial performance. That tells managers where they stand. It doesn't spotlight drivers of performance. SCMetrix TM strives to shine a little light on the latter.

To this end, the tool delves beyond supply costs into strategies, policies and relationships that affect expenditures. For instance, hospital staff filling in the SCMetrixTM questionnaire will be asked to share to what extent supply chain personnel have authority over contracts and physician-preference items, such as implants, pacemakers and drug-eluting stents.

For Sisters of Mercy facilities, ROI divides supplies into four categories, starting with commodity supplies, such as trashcan liners and tissues, followed by clinical commodities like bandages and needles. Up the chain a bit are "high-preference items," such as wound-closure supplies. "The highest level is the physician-preference items, which we call high-cost, high-preference," says ROI's president, Vance Moore. "drives in excess of $100 million in spend for us at Mercy. In fact, about 3 percent of our stock-keeping units make up about 40 percent of our spend."

Moore also notes that physician-preference items are, on a percentage basis, the fastest growing expense in the supply chain world. Smith-Daniels echoes that view: "They're growing at such a rate that they can be anywhere from 40 percent to 50 percent of the patient cost for some diagnostic codes," she says. Medicare may not even cover the cost of something like an artificial knee, she adds. "There are hospitals taking losses because materials are so high priced."

Often, physicians control the supplies and purchasing relationships. And, data from SCMetrixTM could be helpful to them, ROI's Moore notes. "Physicians are scientists, and scientists respond well to data," he says. "We need to make sure these data are credible because, if they're not, they're just more points on a graph that can be dismissed."

Advanced diagnostics

According to QHR's Slate, the big challenge in healthcare benchmarking has been that, "until a couple years ago, there wasn't a standard definition of what you put into supply expense." So, for instance, one hospital includes rebates from vendors in supply expense, thereby lowering costs. Another doesn't. Or a hospital might leave out the surgical-instrument trays customized to implant certain devices. Smith-Daniels notes that some hospitals even include food and linens in supply expense.

AHRMM, which is a member group of the American Hospital Association, tackled the issue in 2004, when the organization commissioned a task force to narrow the industry definition of supplies. Around the same time, Smith-Daniels, Smith David and Whitecotton were studying metrics and benchmarking on behalf of the Healthcare Supply Chain Consortium at W. P. Carey School of Health Administration and Policy. Eventually, the two groups crossed paths, and they decided to collaborate on a research study. SCMetrixTM is, in part, the data-gathering end of that study.

Using the standardized definitions of supply items provided by AHRMM, the tool requires users to log in, enter supply data and answer questions about their organizations. Through these, the SCMetrixTM researchers hope to replicate the success other industries have had in pinpointing drivers of supply performance.

According to Smith-Daniels, if the research can answer what is contributing to expenses, it should then deliver line-of-sight recommendations for improvements.

"One of the practices we assess is the degree to which the supply chain strategy of a hospital is integrated with the hospital strategy," she continues. "In manufacturing supply chains, research shows that the more integration there is between manufacturing and supply chain strategies, the stronger performance will be."

To discern this link, the researchers ask hospital participants a handful of questions delving into how much communication of strategy exists and whether efforts are made to align departmental strategies to hospital ones. A golf-loving physician might love that ceramic-on-ceramic hip implant chosen for the legendary Jack Nicklaus, but does a 95-year-old couch potato need the same pricey implant as the Golden Bear, who wasn't even age 60 when he had his hip-replacement surgery?

"A supply chain strategy helps people understand cost tradeoffs and clinical considerations -- and how they relate to each other," Smith-Daniels says. Traditional benchmarking in the healthcare field doesn't probe such strategies and their effects. SCMetrixTM does.

Along the same lines, SCMetrixTM looks at vendor-management policies. Does the hospital have site-access policies in place? Is there a formal manual that tells vendors what they can and can't do on-site? Are vendors allowed in operating rooms? Must they sign in? Are they credentialed?

Such details make a difference. According to Smith-Daniels, manufacturers have found that formal vendor-management policies "centralize and formalize supply chains. As a result, both clinicians and physicians tend to work more closely with supply professionals." That, in turn, gives the supply chain pros more power to control costs.

Financial fine-tuning

QHR's Slate will tell you that today's benchmarking standards "don't provide a good measurement tool for supply chain performance" in healthcare. "It has two numbers in it," she says. "Supply expense and net revenue. If there are issues with your net revenue -- such as a change in reimbursement -- it can make your supply-expense indicator look bad when it's not."

Similarly, traditional methods don't allow hospitals to measure supply expense as it relates to similar facilities. ROI's Moore says he does benchmarking today, but it is limited to the hospitals within his own network. He's keen on the idea of comparative metrics that tap multiple hospitals and healthcare networks, because they'll raise the level of objectivity he can bring to his evaluation and management efforts.

Slate sees similar benefit: "If I know that my cost per case is higher than that of my peer group, it means I need to look at that," she says. Or, as ROI's Kirtner says, "This is industry knowledge that will help us focus our efforts, identify where changes need to take place and then take action on those opportunities."

Precision in the benchmarking tool comes from its flexibility. SCMetrixTM not only allows users to compare their performance to that of other organizations, it allows users to limit the comparison group to hospitals with a similar number of beds, the same specialty -- such as cardiac-- or other details that affect supply expense. "It will be one of the first metrics out there that tries to tie the operational, financial and clinical pieces together," Moore maintains. "It will allow us to look at performance in a more holistic manner than just looking at the price of a widget."

Although he's hopeful the tool will deliver valuable insight, Moore also notes that SCMetrixTM will only be "as good as the data that's loaded into it." To make sure good data gets included, AHRMM and the W. P. Carey School team are recruiting hospitals to participate in the program. Hospitals will pay nothing for their participation until December 2008, when a small fee might apply.

In exchange for entering information, users will have keyboard access to the tool's dashboards and analytic results. The research team hopes to enroll 500 or more hospitals in this program, and they hope to have results -- real evidence of supply-expense drivers -- early in 2008. If all goes well, the tool may give hospitals some guidance on how to cut expenses that, ultimately, affect us all.

Bottom Line:

  • Supply expense is the second highest operational cost in hospitals, but traditional healthcare benchmarking doesn't pinpoint factors that contribute to supply-expense performance.
  • Current healthcare benchmarking also doesn't encompass reliable and valid comparisons between organizations.
  • A team from the W. P. Carey School of Business and a hospital trade association joined forces to create a benchmarking tool that will show medical facilities how they compare to other institutions, what drives their expenses and where to improve.
  • Researchers are now recruiting hospitals to participate in this benchmarking study. Participation costs hospitals nothing at this time.