Managing Chemical Supply Chain

Managing the Clinical Supply Chain and Physician Preference Items (PPI)
Presented at CAPHMM Society October 24, 2007

Presented by Jamie C. Kowalski ,MBA, FACHE, FAHRMM, FAAHC Managing Director Business Development
Confidential 2006 Owens & Minor Inc.
What is Being Managed? The Enterprise-Wide Supply Chain
Evaluate, Contract Select
Order
Pick
Ship
Receive Inventory and and Store Pay
Pick
Deliver to Point of Use
Use
Customer
Manufacturer Distributor
Customer
2
Confidential Copyright 2007 Owens & Minor Inc.
Total Supply Chain Expense As a Percentage Of Total Hospital Expense
Other Hospital Operating Expense
55% - 70%
Total Hospital Supply Chain Expense
35% - 45%
3
Supply expense is the fastest growing
category
Expense Growth Rates 2002-2004
Total Operating Cost
Salary Expense
Benefits Expense
Supply Expense
4 Source: The Advisory Board Company 2005, Healthcare Financial Management Association
Supply Chain Expense at 45-50%+,* exceeding Labor as # 1 Expense

Total Cost incurred by Hospitals** Percent
100 15 15
25
45
Supply Chain Management
Clinical & General Labor
Supplies
Logistics & Distribution
Others
Total
* Michael Parsons, COO, Triad Hospitals, Inc.
** Figures are based on estimates of Healthcare Financial Management Association. Labor cost includes salaries, wages and benefits based on average of leading hospitals in the US and Others is inclusive profits to the hospitals Source: S&P Industry Surveys: Healthcare Facilities; Healthcare Financial Management Association; industry reporting; Pipal Research analysis
Focus on Distributed Channel the fewest SKUs and smallest portion (20-30%) of Supply Spend Compared to Clinical Supply Chain (PPI)
Direct
Commodity
Products 35%
Direct
Specialty
Products 45% Products20-30%
Distributed
6
Total Supply Expense Drivers Impact, Manageability

Patient acuity
Procedure volume Patient care protocols/clinical paths
Technology
Product quality Product brand Price inflation Procurement proficiency
7
Supply Expense Management Strategies

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

8
Supply Expense Management Strategies (continued)

Product utilization reviewPhysician Preference Items (PPI)
Use of clinical pathways Quantity of items used Type of items used Alternative procedure
Utilize a Value Analysis approach for product selection

Based on matching (not exceeding) the quantity and quality of resources to the required outcome
9
Clinical Supply Chain and PPI Present 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.
10
Performance Gaps with Clinical
Supply Chain
Commodity SC Performance 98% 10 10
0.02% CSC Performance
95%
98% 75%
GAP
78.8%
2.1x 1.5 5%
25%
1st Time Order Accuracy
Lines/ Order
Turns
Expiration
EDI%
Charge Capture
11
Supply Chain Ripple Effects - Clinical, Expense & Revenue

Supply Chain Finance 8
Standardization, Discount + rebate loss; Staff unfamiliarity; Quality of care?
Surgery 6 Cost, Dissatisfaction,

Retention, Turnover
Nursing overtime;
Revenue Cycle 9 Lost Revenue

Item not billed, Billed late, incorrectly, Wrong charge/price. Case taken elsewhere.
Volume
Hip Prosthesis; New Item Bypasses, Or, Standard Item Order Failure
Block time exceeded; MD Dissatisfaction, departure.
Throughput
Case delayed; Cancelled(?) Added LOS Not on case cart; reqd nurses must execute
3 Secondary chain
Outcomes
2
10
No CDM #; Not in Item Master
Projected Annual Expense: $518,000

Direct costs only.
Source: Health Care Advisory Board Orthopedics Practicum: Best Practices Demand-Matching Guidelines
Price + Invoice discrepancy
12
Cardiovascular and Orthopedic Supplies (many PPIs) Driving Spend Growth

2006 Category Cardiovascular Orthopedic Disposable Surgical Wound Care & Endoscopy Total Spend
Source: Frost & Sullivan U.S. Medical Device Outlook A662-54
2011 $B 42.1 31.0 12.1 5.7 % of Spend 30% 22% 9% 4% 100%

Annual Growth 17% 13%
$B 22.8 15.2 3.8 4.3 80.0
% of Spend 28% 19% 5% 5%
24% 6% 12%
13
100% 139.8
Current State of Clinical Supply Chain
? Receiving
Inventory Mgmt
Customer, Physician
Receiving
Supplier, Receiving Trunk Delivery
Common Receiving Carrier
Order Mgmt
Fulfillment Process
Delivery Service
Key issues: Abdication of responsibility No strategy/vision for improvement Lack of visibility 14 Intensive resource need Confidential Copyright 2007 Owens & Minor Inc. 2007 Owens & Minor, Inc. All Rights Reserved
Information Technology Lacking; Fragmented, Overlaps, Gaps

Isolated systems lack integration Overlapping functionality Classification inconsistencies Clinical staff left to manage expensive, liable supplies Little, if any, spend analytics or contract monitoring No vendor visibility
16
Clinical
Charge
Key Performance Indicators Needed

Monthly KPIs will report on the following by department
Owned inventory Inventory turns
Owned turns Consigned turns
Oct '05 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Nov Dec Jan '06 Feb Mar Apr May Jun Jul Aug Sep 1,200 1,000 800 600 400 200 0
'0 5
ay
ar
ov
Fe b
'0 6
ec
Ap
Ju
Au
Ju
O ct
Ja
Months
Total Purchases
Usage
Procedures
Cost per procedure Purchase vs. Usage vs. Case Load Increased charge capture Savings identified
Usage/Procedure
$400 $380 $360 $340 $320 $300 $280 $260 $240 $220 $200
Fe b
Fe b
Ju n
ct '0 4
ct '0 5
Au g
Ju n
ec
Ap r
ec
Ap r
Month
Au g
Se
17
Cases
An Illustration of the Savings Opportunity -$8M Cath Lab

Lab Technician/ Inventory Manager MMIS INTERFACE Clinical Staff Finance
Receiving
Stocking Ordering In-Lab Use
PatientPayor Billing
ADT BILLING INTERFACE
Reduce/eliminate expired product Manage/monitor par levels Reduce overstocks Manage freight & contracts
Utilization data Clinical use data
Electronic charge capture increases billing accuracy & accountability
$2,478,703
$TBD
$75,953 Confidential Copyright 2007 Owens & Minor Inc.
18
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.
20
Data>Information> Insight>Intelligence>Innovation
Visibility on purchasing activity across all facilities and departments 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
21
Physician Preference Items Intensify Challenge

30-40% of supply expense are physician preference items 610% of operating expense
We had our first
Preference items may or may not be linked to outcomes/ performance have associated contracted purchase price be fully reimbursed
physician preference contract negotiations to narrow the number of vendors down and guarantee 95% utilization of one vendor through engaging the physicians, resulting in an annual savings of $300,000. - Mid Sized Hospital Survey Respondent
28
PPI Decision Process Current State
Physician
Supply Costs
Hospital
Supplier Minimal analysis of data and financial impact
Product Variability Obsolesce nce Revenue Margin
29
PPI Decision Process Future State
Physician
Hospital Suppliers Future State
Physician VATs
Supply Costs Product Variability Obsolescence
Minimal analysis of data and financial impact
Revenue
Margin
Supply Costs Product Variability
Suppliers Thorough data analysis and impact of decisions Hospital
Obsolescence Revenue Margin
30
Physician Engagement Required

Executive Process
Education Communication Data & Information Persuasion
Negotiation
Motivation (Aligned Incentives) Participation (Value Analysis)
31
Physician Engagement StrategyTheir Role

Customer (of the Hospital, IDN)
Patient Advocate Clinical Consultant Vendor Relations VA Process Champion
32
Physician Engagement StrategyLet Data Tell the Story

Supply Chain Data Pricing Usage Terms Contracts Regulatory compliance. Revenue Reimbursement Data Procedure volumes Patient charge Revenue capture/reimbursement Clinical Resource Data Supply efficacy vs outcomes Physician credentialing Administration Service line strategy Physician relationships , marketing and growth strategy
Finance, Decision Support,

Medical
Coding Data Admission rates Coding LOS

Outcomes
33
Example
Measuring Variability Within a DRG

Gross Revenue/ Case Expected Payment/ Case Contribution Margin
Quarterly Difference Between VC Per case and Best Practice 9,640 1,323 18,165
Dr Jones Dr Munoz Dr Smith Total
8 7 5
7.14 5.54 10.67
13,610 10,453 22,255
6,244 4,052 9,898
Variable Cost/ Case
Physician Name
Length Of stay
Cases
4,205 3,189 6,633
2,039 863 3,265
2,701 (662) 3,771 (2,908) 4,874 (1,609)
84
6.51
13,076
5,899
3,606
2,293
3,475 (1,182)
Net Margin
Fixed Cost Per Case
50,904
* Source: HFMA 2005 Supply Chain Survey Sponsored by McKesson
34
Physician Engagement Strategy

Value of Time
Dont Compromise on Quality Show Tangible Results of Their Efforts Recognize.
35

Recognize no one MD represents the Medical Staff, or Specialty 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
36

Develop annual review of PPI and the cost of care delivery including: Vendor pricing Changes in reimbursement New technology
Reinvest a pre-determined and agreed upon portion of savings to support new technology and enhancements to patient care Utilize a team structure within the Value Analysis process to review individual PPI requests
37
Value Analysis Objectives

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
38
Value Analysis Teams (VAT)

Considerations Physician role Measurable target/goals Priorities Linking expensive items to reimbursement Culture Quality
* Source: HFMA 2005 Supply Chain Survey Sponsored by McKesson
42
Example
VAT Roles and Responsibilities

Supply Chain Physician Champions
Actively participate in design meetings

Offer perspective of medical staff as to alternatives of current practices being considered
Participate in communication process to peers ensuring that rationale behind the changes are clearly communicated and understood
44
VA Scope, Focus
All Supplies (medical & non-medical)
All Purchased Services (clinical & maintenance) Any related equipment (including capital)
52
Spend Analytics - Opportunity Identification

:
Analyze Item Master File Benchmark pricing Price Parity (standardize prices) Category and Product Standardization Utilization/tier maximization Contract to invoice audit Contract Gap Analysis Standardization/consolidation Benchmark pricing Contract obligations and performance standards Utilization and standardization
Analyze AP Supplier File
Analyze Purchased Services spend
Make vs. buy comparisons

54
Analyze aggregate spend by manufacturer
GL Mapping
Map all cost centers to Value Analysis Teams Map spend categories and suppliers to appropriate Value Analysis Teams Map potential opportunities to appropriate Value Analysis Teams Opportunities reviewed with VAT Chairs before presenting to VAT members, as well as source documents
Surgery $72,919,250 Lab $53,818,876 Card/Rad $24,454,260
HR/FIN/MM $19,742,862
Patient Care $11,528,77
Support Services $4,092,886
Pharmacy $122,557,506
55
Value Analysis Opportunity & Results Tracking

Initiative
Team Cost Center or Service Line
Procedure (Physician)
Aggregate Roll-Up Per Period FYTD
56
Characteristics of a Successful VA Program

Accountability - clearly defined roles, targets, & timelines Effective structure - Work Teams by high-cost departments (VATs) with Chairs from the user-departments and an Executive sponsored Steering Committee (VASC) Representation - all users & stakeholders represented, and an orchestrated process to involve physicians as needed Resources - clinical and contract management support resources Standard Protocol - consistent approach for conducting value analysis and 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 communications strategy, peer interaction

Focus all expenses and particularly PPI
57
Physician Engagement Recap

Executive Process
Education Communication
Data & Information

Persuasion
Negotiation
Motivation (Aligned Incentives) Participation (Value Analysis)
58
Questions, Discussion, Conclusion
59

Managing Chemical Supply Chain

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Managing Chemical Supply Chain

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Managing the Clinical Supply Chain and Physician Preference Items (PPI)

Presented at CAPHMM Society October 24, 2007

Confidential 2006 Owens & Minor Inc.

What is Being Managed? The Enterprise-Wide Supply Chain

Evaluate, Contract Select

Receive Inventory and and Store Pay

Deliver to Point of Use

Total Supply Chain Expense As a Percentage Of Total Hospital Expense

Other Hospital Operating Expense

Total Hospital Supply Chain Expense

Supply expense is the fastest growing

Expense Growth Rates 2002-2004

Total Operating Cost

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

Supply Chain Management

Clinical & General Labor

Logistics & Distribution

* Michael Parsons, COO, Triad Hospitals, Inc.

Confidential Copyright 2007 Owens & Minor Inc.

Total Supply Expense Drivers Impact, Manageability

Supply Expense Management Strategies

Increase inventory turns

Increase budgetary accountability at department level

Supply Expense Management Strategies (continued)

Utilize a Value Analysis approach for product selection

Clinical Supply Chain and PPI Present a Great Savings Opportunity

Performance Gaps with Clinical

Commodity SC Performance 98% 10 10

0.02% CSC Performance

1st Time Order Accuracy

Confidential Copyright 2007 Owens & Minor Inc.

Supply Chain Ripple Effects - Clinical, Expense & Revenue

Surgery 6 Cost, Dissatisfaction,

Revenue Cycle 9 Lost Revenue

Block time exceeded; MD Dissatisfaction, departure.

No CDM #; Not in Item Master

Projected Annual Expense: $518,000

Price + Invoice discrepancy

Cardiovascular and Orthopedic Supplies (many PPIs) Driving Spend Growth

2011 $B 42.1 31.0 12.1 5.7 % of Spend 30% 22% 9% 4% 100%

$B 22.8 15.2 3.8 4.3 80.0

% of Spend 28% 19% 5% 5%

Confidential Copyright 2007 Owens & Minor Inc.

Current State of Clinical Supply Chain

Supplier, Receiving Trunk Delivery

Common Receiving Carrier

Information Technology Lacking; Fragmented, Overlaps, Gaps

Key Performance Indicators Needed

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

ADT BILLING INTERFACE

Utilization data Clinical use data

Electronic charge capture increases billing accuracy & accountability

$75,953 Confidential Copyright 2007 Owens & Minor Inc.

Focus on Spend Analytics

Normalization of product data

Contains report templates to address:

Ad-hoc (custom) reporting capability

Physician Preference Items Intensify Challenge

Confidential Copyright 2007 Owens & Minor Inc.

PPI Decision Process Current State

Product Variability Obsolesce nce Revenue Margin

PPI Decision Process Future State

Supply Costs Product Variability Obsolescence