Cultures of Savings: Tom Harkenrider at The Children’s Medical Center of Dayton

Tom Harkenrider is working with his team at The Children's Medical Center of Dayton to create a sustainable culture of savings. The Dayton area has seen its unemployment spike with the closing of major operating facilities for GM and its suppliers. While demand for Children's services hasn't decreased, the job losses mean many patients are making a permanent transition from private payor insurance to Medicaid. The hospital must absorb the loss in reimbursement.

As Director of Supply Chain Management, Tom has been given the task of eliminating more than $3 million from the hospital's supply budget. He shares with us his approach to the challenge of reducing expenses today and preparing his organization to remain lean for many years to come.

We hear Tom express a theme common among supply chain and finance leaders: they believe that supporting clinical care providers makes them part of a noble cause. Tom discusses how that guides his work to get clinical departments the supplies they need while he stays focused on getting the best price.

MediClick: What's your approach to working with clinical departments to reduce costs?

Tom Harkenrider: I'm married to a nurse, so I hear it 24-7. I know the importance of getting clinicians what they want. I see my role as understanding what they want and going to the market to get the best price we can for the items, leveraging whatever resources I can to get the best deal for the hospital.

In the military, I saw us say: this product is the best deal so this is what we're buying. But nobody would use it. The best deal in the world isn't worth much if your people refuse to use the product. And then people find ways around the system, so why not just be upfront?

We also go to the clinicians and say that we've found some market intelligence that shows they can replace an existing item. We think it's just as good, and we want you to try it. A lot of times they'll try it and find that it works. So we can save several thousand dollars here or there.

You don't strong arm, you try to build a vision with the people and stay focused on that vision. That's what I did with my buyers at St. Jude [Tom was with St. Jude Children's Research Hospital prior to joining Children's of Dayton], and that's what we're putting in place here at Children's.

You don't get everyone, and you don't get them all at once, but you eventually get most of them.

I also co-chair the clinical value analysis committee with a nurse from hospital operations. The committee gets together each month. Two days after our meeting, she meets with her unit clerks, the patient care givers – the people who are doing the real work – and she tells them about our plans.

They're the ones implementing the decisions we make, and they're also the ones that can see how it affects other things we're doing and give us ideas that might be useful as part of the initiative. They're on the floor seeing and hearing the hospital's clinical needs, and they've become a really good resource for the value analysis team.

Getting the information to the implementers quickly makes the process go so much faster.

MediClick: Are your clinicians responsive to being part of your culture of savings?

Tom: The clinicians here understand the financial issues affecting Children's. There's a lot of cooperation, so they're willing to look and listen to us more than they might be at other places. We've had luck with preference items where the physicians are willing to move to less expensive products.

Vendors have been more willing to participate in our savings initiatives, too. I tell every vendor that comes in here, hey, I need to save the money. And if I can't save the money than I won't be here tomorrow to do more business with you!

Our situation is not going to change. GM is gone, and so all the people that had company-provided healthcare benefits are now on Medicaid. It's not a short-term thing here.

We have to create a system that's going to endure.

MediClick: How has the economy affected Children's?

Tom: Last year my CFO came out and said our Medicaid patient population was up. We budgeted 44 percent and we were at 51 percent. Every 1 percent increase is a $1.2 million shortfall in our operating budget, so we were charged with taking nearly $10 million out of our expenses.

We had a reduction of force. We had to let 50 people go, and we're doing some things on the managed care side to help with the shortfall. But more than $3 million has to come out of supply chain costs. That's pretty big, especially considering that we don't have the kind of spend you would see in a large IDN.

Timing is everything. I'm not sure how we would have done it before putting in our current supply chain systems. But I've been able to spend the last few months getting all my contracts loaded and finding out that we weren't paying the correct contract price for a lot of purchases. So, I'm now using the tools to make sure we always buy at the right contract price.

Information is critical. Last year one of our departments signed a contract but didn't tell my group about it. Part of the deal was getting some of the items for free. Well, it turns out that the supplier was charging them for the free items and the department had no way of keeping track of that. We've since put in the MediClick Contracts & Analysis product which shows us anytime we're being charged a price different than our contract. By catching it in this specific case, we saved $140,000. We actually went and got our money back from the supplier.

Everybody was high-fiving and celebrating it. But finally my VP asked what we are doing to make sure it doesn't happen again. Well, because I have MediClick, I know I have the contract and know all the items on it. It's matched to my item master so anytime I get charged the wrong price, I know it. So I'm very confident, going forward, that we have a way to prevent this.

MediClick: You've only been at Children's about a year now. When coming into an organization, how do you get your new team behind you?

Tom: Focus. I learned this the hard way. My job has been about managing change, and to do that effectively you must build consensus. You have to paint a big picture of what you're trying to do, and that doesn't happen overnight. My message is to say, let's eat this foot-long sub-sandwich in little bites. Let's start with technology. Let's begin using EDI. Let's implement a stronger MMIS. Let's be sure we make good use of our contract portfolio.

You always have a carrot for them, but make sure they know there's a stick behind them, too.

MediClick: What lessons did you learn at St. Jude?

Tom: At St. Jude, we didn't have to worry much about money. The lesson I learned there was how to work with researchers who were awarded grant money and did not welcome much oversight of what they purchased. So it was critical to learn how to pick your battles. You needed to focus on what was truly important. I quickly learned to put my ego aside.

Having lots of money creates other problems. It can breed complacency. For example, when I got there in 2001, I managed a $1 million in-bound freight budget. Some of it was necessary (for example, the product was on dry ice, or it was radioactive, it had a half-life of 14 hours, etc.). But I used to stress to my buyers: if we can be more proactive, we can avoid a lot of these charges.

We ultimately got the freight bill below $800,000. I'll tell you, I'm not the smartest guy in the world, but I know how to work the system. Fred Smith was on our board at St. Jude's. He's the founder and CEO of FedEx, and so we got some really good FedEx rates. You've heard of programs like OptiFreight? We were doing that at St. Jude's in 2001. I was telling vendors that if they're charging me for freight, I'm going to reserve the right to determine how I'm going to pay it. And I paid it by using my FedEx account instead of their normal methods. We had great rates, so it reduced our costs quite a bit.

MediClick: I haven't heard you talk about methodologies. Do you subscribe to any of them?

Tom: I've dabbled in Lean a little bit. It looks really good in a text book. But it can get so academic because it tries to be the cure-all to everything.

To me, this is the perfect example of how Lean can work in a storehouse situation:

We looked at items that were on 80% of the orders to the nursing units. I asked why don't we put them together and put them in the front of the storehouse. Now someone can stand in a very small area and take 80% of the orders instead of walking all around the storehouse to collect items.

I don't subscribe to a single methodology. I take a more commonsense, pragmatic approach. Not everything in the world needs to be automated or have a label put on it. What we did in the storehouse was certainly Lean, but it was more about using commonsense.

MediClick: How is it you ended up at Children's Medical Center of Dayton?

Tom: I was a hospital administrator for 24 years in the Air Force. In my first supply chain job we were building a medical center at Wright-Patterson Air Force Base, and I managed all equipment requisitions. I liked it. You can see tangible outcomes for your work pretty quickly.

I was surprised to find that the skills I learned in the military applied very well to civilian healthcare. The only difference was this: no one worried about revenue at the Department of Defense. I can tell you in my first few months at St. Jude's Medical Center when they were talking about revenue I was wondering what I got into! So I was just quiet, did a lot of listening, and quickly came up to speed. Nobody ever knew the difference.

At St. Jude's, I discovered my passion was in pediatrics. Healthcare in itself is a very good mission, but pediatrics is just so noble. For me it's important to be part of something bigger than I am.

MediClick: Thanks Tom!

Cultures of Savings: Memorial Hospital & A Role for Innovation

What role does innovation play in establishing a culture of savings? We brought that question to Memorial Hospital & Health Systems of South Bend, Indiana. Phil Newbold (President and CEO) and Diane Stover (Vice President of Innovation Strategy) spent time with us last week discussing how their organization encourages a systematic approach to innovation to help reduce costs, increase revenue, and take better care of its patients. They share what they've gleaned from other industries and the benefits of engaging all their employees in the process.

It's worth noting the mixed opinions on what our healthcare system needs from its leaders. Philip Betbeze, a senior editor with HealthLeaders magazine, made the somewhat provocative suggestion last month that we need our hospital CEOs to be skilled operators and executors, not innovators. (See Hospitals May Need Operators, Not Innovators.) He believes this environment calls for CEOs to navigate with a heads-down approach to their operations.

What role do you see for innovation? I'm interested in your opinions here, so feel free to respond and share your thoughts. Regardless, I'm confident you'll find what Phil and Diane have to share as both interesting and educational. Enjoy!

MediClick: What role does innovation play in a tough environment for healthcare?

Diane Stover: Hospitals have a choice of hunkering down or being innovative with their operations. Over the past 18 months, most have decided to lay low and cut staff. That may protect you from the existing storms, but it won't get you out of the hole.

We see a lot of potential in harnessing the power of our 3,800 people. We depend on them to contribute to the solution when times are toughest. We don't have people hiding under their desks.

Innovation projects help us differentiate ourselves from competition. One of our key focuses is avoiding the commoditization track so common in healthcare. For example, we started a bariatric program despite heavy competition. We decided we would market it as more than a simple surgery-fix. Our program works with patients to help them root out the causes of the problem and address the broader issues. It's turned this into a successful product line.

Phil Newbold: Here's one good example of how our innovation methodology helped us hit a homerun because of the tough conditions of this economy. We always encourage our staff to go out and look for the silver lining.

Last October, our CFO was on a conference call with his peers across the country. They were talking about ways to make the best of this meltdown. He learned from another hospital that, if you have particular variable rate notes, there's a great opportunity to buy them back at a discount. You have to act quickly on these things, and so he pulled together a team to make it happen, got a sponsor (me), got board approval and began buying back our debt. First, he bought back a $54 million bond for 57 cents on the dollar. From the moment he got the idea to pulling the trigger, it took a total of six days!  This was a huge boost to our balance sheet, and he went back and found another opportunity to buy back an outstanding $80 million bond for 49 cents on the dollar.

The point is, we have a specific methodology and it allows us to find good opportunities and act quickly on them.  We refer to it as "Innovation Everywhere." Develop everyday innovators of all staff members.

We also know we don't have to develop all solutions ourselves, and it pays to go outside of healthcare to leverage the experience of other industries. We worked closely with Behavioral Science Technologies (BST) to develop our approach to patient safety initiatives. BST helped NASA after the shuttle disasters, and their experience helped accelerate our own innovations in patient safety.

MediClick: We've found that an important part of creating a culture of participation is engaging your people. How do you make sure your people always have their minds in gear looking for opportunities for innovation and savings?

Diane: Our innovation initiatives started 10 years ago when Leland Kaiser (a mentor to Phil) issued a challenge for us to show how hospitals make meaningful R&D investments. For the most part, they don't! So, we started a program of "Inno-visits" where we took executives, clinicians, physicians, and other members of our staff on visits to various companies and college technology transfer departments to observe and learn. Over the years, we've taken nearly 100 of these trips.

Among many things, we've learned that organizations have two major approaches to introducing innovation. First, there's the "smart man theory" where you lock a few people in a room and put them in charge of all the innovative ideas. And second, there's the "every man theory." It teaches that everyone is capable of contributing to the process of innovation. Obviously, we went with the latter and constantly work to engage the innovative natures of our people.

We adopted language of innovation to communicate ideas and expectations. We identified tools that gave us a methodology to follow. We chose Tom Peter's "WOW!" approach because it had the best tools, most flexibility, and offers real passion behind the ideas. We require our management to go through training in the WOW! program. And, we've made a heavy commitment to it.

MediClick: Many hospitals engage in savings or innovation programs only to see them lose focus. Those that have dropped the programs tell us 98% of the ideas contributed were low-value or frivolous. How do you protect against that?

Diane: Yeah, we've talked with a lot of hospitals that have dropped their programs. They're curious about how it is we've succeeded for over 10 years.

First, your program criteria must be tight and well-communicated. The system you put in place can't just be a suggestion box. You must allow people to talk themselves out of bad ideas. We have a web portal that incorporates elements of WOW! and Lean Six Sigma. When people submit ideas, they must estimate the value of the proposal, its impact, and tell us how passionate they are about seeing the idea work.

Second, there can be no stray dogs.  What I mean is, they aren't allowed to throw an idea out then cut and run. They have to hold the leash. This forces commitment and cuts down on frivolous suggestions.

Phil: Management has to assign projects and hold people responsible for them. You simply can't allow too many small projects with minimal impact. They have to be key to the future.

But sometimes an idea comes before its time.  It may not work today, but that doesn't mean you just discard it. For instances like this, we have a "cryo-tank" where we store older ideas that may not have succeeded on the first go-around, but have the merit and may be worth trying again. We had a bottled water project with Baxter that didn't work at first, but it's come around.

MediClick: How has your program helped your supply chain?

Phil: Our innovation programs led to a partnership with Wal-Mart where we helped develop their first urgent care centers. They do supply chain better than anyone, and we made it a point to learn from them. (And by the way, they were very willing to share their experiences. I guess it's because we're a hospital. I'm sure they're much less open to commercial organizations.) We've taken some of those ideas and put them into practice both in our supply chain and in our information technology department.

MediClick: Final thoughts?

Phil:  Innovation is about being curious and nimble. If you're not curious by nature, you're not going to do so well with innovation initiatives. If you are curious, and you identify good ideas through your tools, you'll benefit and be able to act quickly.

Cultures of Savings: Q x A = E

Ah, the power of vision. As we have learned from recent events, the lack of vision can bring down large multi-national corporations as well as lofty political campaigns. On the other hand, organizations that drive a compelling vision across their enterprise have become "game changers" in their respective fields or markets (see "Sisyphus or the Flywheel" for more on that). With any business we expect our leaders to share a vision and communicate it effectively. Otherwise, how can we decide whether to follow them?

This week, Nick Toscano suggests that hospitals and health systems need to develop a shared and compelling vision for implementing supply chain improvements. We're pretty good at figuring out how to make our operations better, but we continue to struggle at making some of the cultural adjustments needed to "hold the gains" or sustain the improvements. These are the qualitative elements of creating cultures of savings, and Nick believes they're just as important to drive sustainability as those things we traditionally measure.

Nick shared his thoughts on the Clinically Integrated Supply Chain last week. This is the second of his two-parts in MediClick's Culture of Savings series.

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The supply chain has a natural quantitative bent to it. We prefer thinking in terms of numbers whether it's the algorithms of a logistics calculation or the debits and credits of an accounting statement. It's part of our nature, and that's a good thing. Our jobs require a certain analytical rigor, and there's no better way to demonstrate success (or lack thereof) than hard numbers.

But as with everything, our quantitative side must be balanced by a healthy respect for more qualitative variables. These are often dismissed as the "touchy-feely" parts of our job. Perhaps there's some truth to that, but when it comes to instilling cultures of savings in our hospitals, these attributes become imperatives.

Here's a formula I refer to frequently: "Q x A = E". (By the way, it's not lost on me that there's some irony that I'm using an equation while making the case for using non-quantitative elements. I guess you can't stray too far from your natural tendencies!)

What does it mean?

Starting at the end, "E" stands for effectiveness. It's the business result you're pursuing. For example, your goal may be to build a supply chain that is both patient-centered and keeps supply expenses below 15 percent of net patient revenue. Now, how do you get there?

"Q" is quality of solution or the technical aspects of making a change. It's the systems and processes we use to reach our desired outcome. It's the easiest part to define, so we tend to be most comfortable with "Q" variables because we can measure the impact we get from hiring good people, installing excellent processes, investing in the right information systems, etc. Consequently, we spend most of our time working on the "Q".

"A" is the acceptance of the change by the people who will make it happen (or prevent change from occurring), and it's much more difficult to measure. We spend a small percentage of our time working on the "A". Invariably, I spend much of my time talking with health systems about their need to focus more of the work on these elements of "A":

• Creating a shared need. What is your reason for making a change? Once you determine it, whether it's driven by threat or opportunity, you must work hard to communicate the message and instill it within the organization.
• Shaping a vision. Let your team, your executives, and your clinical departments understand the desired outcome of your proposed changes. Make sure it is clear, legitimate, and widely embraced.
• Mobilizing commitment. Who do you need to get onboard and how will you do it? Make sure all participants in the change are committed to making it work, and come up with a plan for countering resistance when it emerges.

I often ask health systems to use a scale of 1-10 to rank themselves on how well they do with "Q" versus "A." It's not too surprising that I see a lot of 8s and 9s associated with Qs. It's a comfort zone for us. But when I question their ability to accept meaningful change, they have far less confidence in their "A" success. I get many 2s, 3s, and 4s there, drastically reducing the overall effectiveness score ("E") of change initiatives.

Health systems are highly complex entities comprised of many people, some of whom share similar agendas but many of whom don't. As supply chain leaders, we've been trained with a structured, quantitative mindset that likes well-defined processes and systems. They help us organize the chaos inherent to the hospital setting.

But as we're creating cultures of savings, we will find our initiatives cut across multi-disciplinary departments, forcing us to pay strict attention to how people (our colleagues) impact the success or failure of our work. This is where we must be leaders, creating a sense of shared need, building a common vision, and ensuring we have the commitment of all the right people to achieve our goals.

We will be much more effective as change champions as we improve our ability to drive acceptance in our hospitals. This will require us to change our own leadership imperatives to truly spend more of our time working on the "A".

Culture of Savings: The Clinically Integrated Supply Chain

Nick Toscano dropped by the MediClick offices the other week to discuss the future of the healthcare supply chain. Much of that conversation circled around how we create and sustain cultures of savings in our hospitals and health systems.

Nick has walked the walk. He helped facilitate the 1999 merger of the largest health systems in Southern New Jersey and became vice president for strategic support services for the combined entity. Nick instituted a model (some might say a philosophy) that has come to be known as the "Clinically Integrated Supply Chain." This collaborative model is now considered an industry best practice for high performance and cost efficiency.

Today, Nick works as a strategic advisor to the C-suite and senior supply chain officers of some of the largest IDNs in the country, helping them implement key tenets of the Clinically Integrated Supply Chain. This week and next, Nick shares with us his thoughts on cultures of savings.

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This economy has provided a real wake-up call to our providers' C-suite. Endowment portfolios have taken a major hit, and charitable contributions are down dramatically. This means that, for the first time in many years, our hospitals must cover their costs with revenue generated from patient services. We're forced to put our operating costs under a microscope and scrutinize our expenses for every opportunity to reduce costs.

We must bring non-labor expenses into focus. These supplies and purchased services can represent up to 45 percent of all hospital operating costs, and they're inflating faster than four times the rate of our labor expenses.

That's not a sustainable trend. But if we allow it to become a catalyst for elevating our approach to the healthcare supply chain, it can become a real opportunity to establish the cultures of savings that MediClick talks about.

Cultures of savings must start at the top. When I led an IDN's shared service organization, the role was one of a single executive-level position that had full responsibility for all non-labor expenses. You might call it the Chief Resource Officer (CRO). For CEOs and CFOs, it meant one source of accountability when non-labor costs are challenged. But more importantly, it forces an integrated approach to managing your cost structure, supplier agreements, and optimization opportunities. It provides a leader who is part of the C-suite and in whom the senior executives have vested their trust and authority to make the changes needed to move the organization toward a Clinically Integrated Supply Chain.

What do I mean by Clinically Integrated Supply Chain? Generally speaking, it's a model that is strategically and operationally aligned with the clinical and business goals of the IDN. It makes the supply chain a partner in the clinical process; not simply a series of transactional processes. It means reducing costs through standardizing and rationalizing expensive preference items and services but avoiding the rules and bureaucracy that can create antagonism between physicians and the supply chain staff. These goals might sound divergent (can you really reduce costs and keep physicians happy?), but I can tell you they're not contradictory. It just takes passionate leaders, a complete commitment to enhancing the patient experience, full multi-disciplinary teamwork and hard work from all to get there.

At our IDN, for example, we created Clinical Resource Teams. They were led by clinicians that reported into the supply chain organization. It was their full time job to find enough savings each year to justify the costs of funding the group five times over. Not cost avoidance. They had to produce actual budget reductions that our CFO could document. It was a lofty goal, but one that has been working for years now. Why?

First, we put the Clinical Resource team members into the departments and service lines to work side-by-side with the clinicians. This allowed them to identify savings opportunities, recognize how any initiative might affect the ultimate goal of maintaining a high level of patient care, and develop relationships with the clinicians upon whom they would later ask for support in additional initiatives.

Second, during clinical integration projects, we assigned the Clinical Resource team members to physicians to engage them on both cost and clinical outcomes. I recognized early in my supply chain career that doctors don't particularly enjoy hearing from materials managers and hospital finance staff about what products they should consider using in their procedures. Properly trained clinicians, however, have credibility when approaching physicians with evidence-based data about which items can produce the right outcomes at a more effective cost to the hospital.

Third, we made sure the clinicians participated in the benefits of their work. For each project, we earmarked a portion of the savings to go back to the departments or services lines in the form of capital for equipment improvements or funding for continuing education for the staff. This helped align the physicians' and clinicians' interests with the success of the projects.

Establishing a Clinically Integrated Supply Chain is no easy task. To succeed at it, an organization must make a top-to-bottom commitment. In my recent work with IDN executives, I'm seeing that this economic environment can be a catalyst to induce our hospitals to get more innovative about controlling non-labor costs. It just might be the right opportunity to focus on creating cultures of savings.