MANAGING CHEMICAL SUPPLY CHAIN

7/28/2019 MANAGING CHEMICAL SUPPLY CHAIN

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Confidential 2006 Owens & Minor Inc.

Managing the Clinical Supply Chainand Physician Preference Items (PPI)

Presented at CAPHMM SocietyOctober 24, 2007

Presented byJamie C. Kowalski ,MBA, FACHE, FAHRMM, FAAHC

Managing Director Business Development


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Confidential Copyright 2007 Owens & Minor Inc.

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What is Being Managed?The Enterprise-Wide Supply Chain

Deliver toPoint of

Use

Evaluate,Select

Contract Order Ship ReceiveandPay

Inventoryand

Store

Pick

Customer Manufacturer

Distributor

Customer

Pick Use


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Total Supply ChainExpense As aPercentage Of Total HospitalExpense

Other

Hospital OperatingExpense

55% - 70%Total Hospital

Supply Chain

Expense

35% - 45%


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4

Supply expense is the fastest growingcategory

Expense Growth Rates

2002-2004

Source: The Advisory Board Company 2005, Healthcare Financial Management Association

Total

Operating CostSalary

Expense

Benefits

ExpenseSupply Expense


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5

25

15

15

100

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Supply Chain Expense at 45-50%+,*exceeding Laboras # 1 Expense

Clinical &GeneralLabor

Supplies Logistics

&Distribution

Others Total

Total Cost incurred by Hospitals** Percent

** Figures are based on estimates of Healthcare Financial Management Association. Labor cost includes salaries, wages and benefits based onaverage of leading hospitals in the US and Others is inclusive profits to the hospitalsSource: S&P Industry Surveys: Healthcare Facilities; Healthcare Financial Management Association; industry reporting; Pipal Research analysis

Supply Chain Management

* Michael Parsons, COO, Triad Hospitals, Inc.


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Focus on Distributed Channel the fewestSKUs and smallest portion (20-30%) ofSupply Spend Compared to Clinical SupplyChain (PPI)

Distributed Products-20-30%

Direct

SpecialtyProducts45%

Direct

CommodityProducts

35%


7/39Confidential Copyright 2007 Owens & Minor Inc.

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Total Supply Expense DriversImpact, Manageability

Patient acuity

Procedure volume

Patient care protocols/clinical paths

Technology

Product quality

Product brand

Price inflation

Procurement proficiency



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Supply Expense ManagementStrategies

Reduce product pricing Leverage total volume with single supplier

Utilization/renegotiation of corporate contracts

Assessment/reduction of value add costs

Utilization of bid process

Increase inventory turns Par Levels

Ordering frequency, volume

Product standardization Fewer items

Leverage to sole source

Increase budgetary accountability at department level



9

Supply Expense Management

Strategies(cont inued)

Product utilization reviewPhysician PreferenceItems (PPI)

Use of clinical pathways

Quantity of items used Type of items used

Alternative procedure

Utilize a Value Analysis approach for productselection Based on matching (not exceeding) the quantity and

quality of resources to the required outcome



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Clinical Supply Chain and PPIPresent a Great Savings Opportunity

A typical 400+ bed hospital spends about$56M annually on Physician Preference

Items (PPI) On average, $6-10M (10-20%) could be

saved on these items on an annual basis.



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Performance Gaps with ClinicalSupply Chain

1st TimeOrder

Accuracy

Lines/Order

Turns Expiration

1.5

2.1x

5%

GAP

EDI%

25%

ChargeCapture

75%78.8%CSC Performance

98% 10 10 0.02% 95% 98%

Commodity SC Performance



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Finan

ce

Volume

Throughput

Outcomes

No CDM #;Not in Item Master2

Nursing overtime;Cost, Dissatisfaction,Retention, Turnover

6

Block time exceeded;MD Dissatisfaction,

departure.

5

Lost Revenue9

Price + Invoicediscrepancy

10

Not on case cart;Secondary chain

reqd nurses

must execute

3

Case delayed;Cancelled(?)Added LOS

4

Supply Chain Surgery RevenueCycle

Standardization,

Discount + rebateloss;

Staff unfamiliarity;Quality of care?

8

Hip Prosthesis;New Item Bypasses,Or, Standard Item

Order Failure

1

Item not billed,Billed late,incorrectly,

Wrongcharge/price.

Case takenelsewhere.

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Projected AnnualExpense: $518,000Direct costs only.Source: Health Care Advisory Board OrthopedicsPracticum: Best Practices Demand-MatchingGuidelines

Supply Chain Ripple Effects - Clinical, Expense &Revenue



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Cardiovascular and OrthopedicSupplies (many PPIs) Driving Spend

Growth

Source: Frost & Sullivan U.S. Medical Device Outlook A662-54

2006 2011

Category $B

% of

Spend $B

% of

Spend

Annual

Growth

Cardiovascular 22.8 28% 42.1 30% 17%

Orthopedic 15.2 19% 31.0 22% 13%

Disposable Surgical 3.8 5% 12.1 9% 24%Wound Care &Endoscopy 4.3 5% 5.7 4% 6%

Total Spend 80.0 100% 139.8 100% 12%



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2007 Owens & Minor, Inc. All Rights Reserved

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OrderMgmt

Delivery

Service

Current State of Clinical Supply Chain

FulfillmentProcess

Customer,Physician?

InventoryMgmt

Supplier,Trunk Delivery

CommonCarrier

Key issues:Abdication of responsibility No strategy/vision for improvement

Lack of visibility Intensive resource need



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Information Technology Lacking;

Fragmented, Overlaps, Gaps

Clinical

Charge

Isolated systems lackintegration

Overlapping functionality

Classification inconsistencies

Clinical staff left to manageexpensive, liable supplies

Little, if any, spend analyticsor contract monitoring

No vendor visibility



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Key Performance Indicators Needed

Monthly KPIs willreport on thefollowing by

department Owned inventory

Inventory turns Owned turns

Consigned turns

Cost per procedure Purchase vs. Usage vs.

Case Load

Increased chargecapture

Savings identified

$0

$50,000$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000

Oct'0

5No

vDe

c

Jan'06 Fe

bM

ar Apr

May Ju

nJul

Aug

Sep

Months

0

2004006008001,0001,200

Oct

'05 Nov Dec

Jan

'06 Feb Mar Apr May Jun Ju l Aug Sep

Cases

Total Purchases Usage Procedures

$200

$220

$240

$260

$280

$300

$320

$340

$360

$380

$400

Oct'0

4De

cFe

bAp

rJu

nAu

g

Oct'0

5De

cFe

bAp

rJun

Aug

Month

Usage/Procedure



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ADTBILLINGINTERFACE

Reduce/eliminate expiredproduct

Manage/monitor parlevels

Reduce overstocks

Manage freight &contracts

Utilizationdata

Clinical usedata

Electronic chargecapture increases

billing accuracy &accountability

In-Lab Use

Clinical

Staff

Lab Technician/

Inventory Manager

Receiving

Stocking

Ordering

MMISINTERFACE

Patient-

Payor

Billing

Finance

$2,478,703 $TBD $75,953

An Illustration of the Savings Opportunity-$8M Cath Lab



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Focus on Spend Analytics

Visibility of supply spend at the department level

Normalization of product data

Product Standardization analysis through UNSPSC

commodity codes Contract Management System Local and GPO contracts

Pricing inconsistencies

Tier level maximization

Non-Contract purchases

Rebate tracking

Unmanaged non-file purchases

Studies show effective spend management solutions result

in 1% to 4% savings in the average hospital.



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Visibility on purchasing activity across all facilities anddepartments within an entire healthcare organization

Contains report templates to address: Purchase History

Contract Utilization

Order Activity

Contracts Analysis

Standardization Analysis

Ad-hoc (custom) reporting capability Self-service environment to create your own reports with an iterative analysis

approach for Decision Support

Data>Information>Insight>Intelligence>Innovation



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Physician Preference Items IntensifyChallenge

30-40% of supply expense are

physician preference items

610% of operating expense

Preference items may or may not

be linked to outcomes/ performance

have associated contracted purchase price

be fully reimbursed

We had our firstphysician preference

contract negotiations tonarrow the number ofvendors down andguarantee 95% utilizationof one vendor throughengaging the physicians,resulting in an annualsavings of $300,000.- Mid Sized HospitalSurvey Respondent



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Physician

Supplier

Hospital

Minimal analysis of dataand financial impact

SupplyCosts

ProductVariability

Obsolescence

Revenue

Margin

PPI Decision ProcessCurrent State



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Physician

Suppliers

Hospital

Minimal analysis of dataand financial impact

Supply Costs

ProductVariability

Obsolescence

FutureState

Suppliers

Physician

HospitalThorough data

analysis and impact ofdecisions

Supply Costs

Product

VariabilityObsolescenc

Revenue

Margin

Revenue

Margin

PPI Decision ProcessFuture State

VATs



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Physician Engagement Required

Executive Process

Education

Communication

Data & Information

Persuasion

Negotiation

Motivation (Aligned Incentives)

Participation (Value Analysis)



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Physician Engagement Strategy-Their Role

Customer (of the Hospital, IDN)

Patient Advocate

Clinical Consultant

Vendor Relations

VA Process Champion



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Physician Engagement Strategy-Let Data Tell the Story

Supply Chain Data

Pricing

Usage

Terms

Contracts Regulatory compliance.

Revenue Reimbursement Data

Procedure volumes

Patient charge

Revenue capture/reimbursement Finance, Decision Support,

Medical Coding Data

Admission rates

Coding

LOS Outcomes

Clinical Resource Data

Supply efficacy vs outcomes

Physician credentialing

Administration

Service line strategy

Physician relationships ,marketing and growth

strategy

Example


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Measuring Variability Within a DRG

50,904(1,182)3,4752,2933,6065,89913,0766.5184Total

18,165(1,609)4,8743,2656,6339,89822,25510.675Dr Smith

1,323(2,908)3,7718633,1894,05210,4535.547Dr Munoz

9,640(662)2,7012,0394,2056,24413,6107.148Dr Jones

Quarterly

Difference

Between VC

Per case and

Best Practice

50,904(1,182)3,4752,2933,6065,89913,0766.5184Total

18,165(1,609)4,8743,2656,6339,89822,25510.675Dr Smith

1,323(2,908)3,7718633,1894,05210,4535.547Dr Munoz

9,640(662)2,7012,0394,2056,24413,6107.148Dr Jones

Quarterly

Difference

Between VC

Per case and

Best PracticePhysician

Name

Cases

Length

Ofstay

G

rossRevenue/

C

ase

Expected

Payment/Case

Variable

Cost/Case

C

ontribution

M

argin

FixedCost

PerCase

NetMargin

* Sourc e: HFMA 2005 Supp ly Chain SurveySponsored by McKesson

Example


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Physician Engagement Strategy

Value of Time

Dont Compromise on Quality

Show Tangible Results of Their Efforts

Recognize.


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Recognize no oneMD represents the Medical Staff, orSpecialty Group

Identify Physician Champions, who have interest by

specialty/service line: identify practice patterns, attributes and services that

influence choice of vendor misaligned incentives within the physician peer

group that can: Drive a wedge between physicians

Derail development of strategy and consensus Caution about Relationships with suppliers; recent

Court Decision

Review of documentation to maximize reimbursement


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Develop annual review of PPI and the cost of caredelivery including:

Vendor pricing

Changes in reimbursement New technology

Reinvest a pre-determined and agreed upon portion ofsavings to support new technology and enhancements to

patient care

Utilize a team structure within theValue Analysisprocess to review individual PPI requests


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Selecting the lowest total cost supplies and services to be used in meeting(NOT exceeding) patient care needs

Standardized protocols for utilization, selection & sourcing decisions

Involvement & participation by all end-users & key stakeholders; orchestrate

physician involvement as needed Evaluations and analyses that focus on:

New product introductions (including PPI) new technologies

Expiring contracts

Existing supplies and services

Communications channels regarding activities & decisions

Standardization of supplies, services, and suppliers

Reduced total costs for supplies, services, and supply chain operations

Maximize use of contracts

Ensure contracts are developed, implemented and managed effectively

Value Analysis Objectives


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Value Analysis Teams (VAT)

Considerations

Physician role

Measurable target/goals Priorities

Linking expensive items to reimbursement

Culture Quality

* Sourc e: HFMA 2005 Supp ly Chain SurveySponsored by McKesson

Example


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VAT Roles and Responsibilities

Supply Chain Physician Champions

Actively participate in design meetings

Offer perspective of medical staff as toalternatives of current practices being considered

Participate in communication process to peersensuring that rationale behind the changes are

clearly communicated and understood

Example


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VA Scope, Focus

All Supplies (medical & non-medical)

All Purchased Services (clinical & maintenance)

Any related equipment (including capital)


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:

AnalyzeItem Master File

Benchmark pricing

Price Parity (standardize prices)

Category and Product Standardization

Utilization/tier maximization Contract to invoice audit

Analyze AP Supplier File

Contract Gap Analysis

Standardization/consolidation

Analyze Purchased Services spend

Benchmark pricing

Contract obligations and performance standards

Utilization and standardization

Make vs. buy comparisons

Analyze aggregate spend by manufacturer

Spend Analytics - OpportunityIdentification


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GL Mapping

Map all cost centers toValue Analysis Teams

Map spend categoriesand suppliers toappropriate ValueAnalysis Teams

Map potentialopportunities toappropriate ValueAnalysis Teams

Opportunitiesreviewed with VATChairs beforepresenting to VATmembers, as well assource documents

Pharmacy

$122,557,506

Lab $53,818,876

Patient Care $11,528,

Card/Rad $24,454,260

HR/FIN/MM $19,742,8Surgery $72,919,250

Support Services

$4,092,886

Value Analysis Opportunity &


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Value Analysis Opportunity &Results Tracking

Initiative

Team

Cost Center or Service Line

Procedure (Physician)

Aggregate Roll-Up

Per Period

FYTD


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Characteristics of a Successful VAProgram

Accountability - clearly defined roles, targets, & timelines

Effective structure - Work Teams by high-cost departments (VATs) withChairs from the user-departments and an Executive sponsored SteeringCommittee (VASC)

Representation - all users & stakeholders represented, and anorchestrated process to involve physiciansas needed

Resources - clinical and contract management support resources

Standard Protocol - consistent approach for conducting value analysisand making selection/decisions, with cost/benefit analyses and involvement

from Finance, Patient Finance, & Purchasing Consensus - effective and accountable decision-making (pre-determined

criteria)

Communication - formalized minutes, organization-wide communicationsstrategy, peer interaction

Focus all expenses and particularly PPI


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Physician Engagement Recap

Executive Process

Education

Communication

Data & Information

Persuasion Negotiation

Motivation (Aligned Incentives)

Participation (Value Analysis)


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Questions, Discussion, Conclusion

MANAGING CHEMICAL SUPPLY CHAIN

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