Innovations in Healthcare Supply Chain Contracting, Part I

Hallmarks of Innovative Contracting

The final throes of the healthcare reform legislative drama wasn't pretty; frankly, I wasn't sure if I was witnessing landmark policy change or unbridled political blood-sport. It was easy to get caught up in the seamy soap opera theatrics and lose sight of the implications the new legislation has for our nation, our system of providing care, and the life work of people like you and me. I confess to being unsure still about what it means for the healthcare supply chain. I have, however, run across an excellent resource put out by the Kaiser Family Foundation (http://healthreform.kff.org/) that's helping make some sense of it all. I encourage you to check it out. It's long on the info and very short on the bias.

Was I "for" or "against?" Well, within the limits of my understanding I guess you should put me down as a "for." Not because the legislation fixes health care – or our national debt – but because it starts the process. And a start is better than nothing. Yes, I am dismayed that there is an unhealthy skew toward the benefit/entitlement side of the ledger, but I also believe that increased focus on cost reduction and efficiency will follow. Because it must. The directive to do more with less (and to do it better) has only intensified. The supply chain executive has a huge role to play. If ever there was a time for innovation, for thinking outside the box, for responsible disruption, it is now! Which is why I am pleased to introduce our next series on the Take Control blog: Innovation in Healthcare Supply Chain Contracting.

Over the next few weeks we will feature interviews with supply chain leaders of several IDNs that have chosen to approach contracting in their own ways, disrupting the status quo in the process and attracting the attention of others with their positive financial results.

Several common themes have emerged in our interviews, themes that we are coming to recognize as hallmarks of the best supply chain leaders. Here are some of them:

They pay attention to the wants and needs of the clinicians but understand when to stand their ground.

They know that the supply chain is an integral part of providing quality patient care, and their stature and authority is commensurate with that role. They work hard to understand what clinicians need to do their jobs and how they think. In an atmosphere of mutual respect, the effective supply chain leader is the recognized point of convergence for patient care and fiscal efficiency. Though seldom needed, the effective supply chain leader retains the power of "no."

They have a willingness to partner with key suppliers, achieving optimal pricing and delivering on committed levels of volume and market share.

These innovators recognize the value of empathy and transparency as a prerequisite for win-win business relationships. Each of the people we interviewed talked about the need to make (and keep) a compliance commitment to supplier partners. In return they expect the best possible price, often achieved by frank discussions of manufacturer profit margins and procedure reimbursements.

They have earned and maintain the support of their executive teams.

Each of the supply chain leaders we interviewed brought up this point several times. Without executive support, they said, it's nearly impossible to introduce any meaningful innovation to the contracting process. They each worked hard to earn the support of their organization's C-suite, and they each have become quite skilled at communicating results in a way that helps maintain that support.

They invest in the infrastructure needed to manage contracts effectively.

Supply chain innovators know it is impossible to manage change without the right supporting infrastructure in place. To run an effective contracting organization – one that brings significant reductions in overall supply costs – they invest in the right people and put them in the right positions, and they enable maximum focus on achieving meaningful, measurable results by equipping their staff with the best technology tools.

 

Enjoy these interviews in the coming weeks. As always, I would love to hear your own thoughts on ways to foster greater innovation and responsible disruption in the world of healthcare supply chain contracting.

Chuck Mauro at UNC Hospitals in Chapel Hill, NC: Redefining the Reputation of Materials Management

Chuck Mauro first joined the hospital business as warehousing supervisor in a hospital in New Brunswick, NJ, moving from industry to the healthcare field primarily because he felt there was something noble about working for a hospital.

He kept that noble feeling as he worked his way through supply chain roles in three different hospitals in New Jersey and Massachusetts before taking the director of materials management position at UNC Hospitals in Chapel Hill, NC, in 1999.

Having been without leadership for two years, much of the service the materials management department provided to the hospital developed a reputation for being unreliable and inconsistent. Additionally, for clinical staff, materials managers were seen as single-minded cost cutters who plowed through their initiatives without regard to clinicians or patients. There was a clear need for changing the hospital's mindset on the supply chain and developing more effective service delivery programs.

We sat down with Chuck to learn how he dealt with these issues at UNCH, what were some strategies employed to help develop a more clinically integrated supply chain, and how the relationship between physicians and materials managers improved.

MediClick: How are you working with the UNCH patient care providers to achieve your supply chain goals?

Chuck Mauro: It's very much a partnership between the clinicians and supply chain. It wasn't always so. That was quite frankly due, at least in part, to mistakes made on our side. People in my position would just try to plow ahead thinking we could save a couple of bucks without necessarily considering the clinical end.

So when I joined UNC, I saw the need to demonstrate to clinicians the value in procuring and utilizing products more cost effectively. One of the first big things we did was to convert our contract for infusion pumps. We were with a particular manufacturer for 20 years, and nursing was very comfortable with the product. When we looked at the market we felt that there was significant opportunity to upgrade our technology and reduce our overall spend for this product group. We therefore went out to bid, and we ended up going with another manufacturer. I'm really glad to say that that award has proven to be very valuable to the hospital both financially and clinically over the past nine years or so.

But the equipment conversion was not without a number of difficulties. The nursing staff was very comfortable with the existing product. Many nurses found fault with the new equipment and resisted the conversion. One approach we took with them was "I want you to work with me on this, and I need you to play a key role in helping me move through and improve this process." Some of them wouldn't help me. But enough did.

No product conversion, regardless of the perceived superiority of the new product, will be successful without clinical staff buy-in. With the help of clinicians and administrators, we demonstrated that saving isn't necessarily painful, and something new and different isn't always worse than what you've got.

MediClick: How is it that you might take a savings initiative on a Physician Preference Item (PPI) from start to finish and how would you engage the physicians along the way?

Chuck: We start off by comparing what we're paying for a PPI product group against what other hospitals are paying in general and getting round figures that are not hospital specific. This gives us an idea of fair market price based on our volume, which isn't always the lowest price we see nationally. This research tells us if our pricing is good or if it needs to be 5 to 8 percent better. We then set a CAP price for each of the various component parts of that product group. In other words, that CAP price is the most we'll pay for each product in that group.

We don't release the CAP pricing to the manufacturers until we have buy-in from the physicians. We want the docs involved to understand the process we're employing and that we are not restricting their ability to select a specific manufacturer, as long as that manufacturer agrees to abide by the CAP.

We then send the manufacturers the CAP letter, which when executed by them, becomes our contract. For the most part, this process plays itself out without too much difficulty and is effective in driving down our costs. We did have one situation with total joints where we sent the CAP letter to four manufacturers and three of the four we sent it to refused to accept the CAP price. The fourth, which didn't have business here, agreed to it.

Our chief of orthopedics, who supported our plan, was not about to compromise. He told his staff that they'd be trained on the fourth manufacturer if their existing manufacturer didn't agree to the CAP. It was because of his belief and dedication to the process that the three holdouts did finally sign off on the CAP contract.

I always enjoy telling the story about one of the manufacturers who was particularly adamant that UNCH would never get the CAP price we were asking for. When we told them "Without your signature, your product will be removed from the shelf by midnight on Friday," they agreed to sign. Once he did so, I recall him saying to me "I hope that there are no hard feelings." I said "Well I never have hard feelings, but I have to tell you I'm a little surprised. You told me that there is no way we'd ever get this pricing." He just chuckled and he said "Well, you're UNC we can't afford to lose you." To me, that clearly demonstrates that good and amazing things can happen when clinicians and materials managers work together.

He didn't think we were in a strong enough position to enforce the CAP. But when he found out that the head of orthopedics was unrelenting in his support for the program, the landscape changed for him.

MediClick: What's the tenor of the relationship between the materials department and the clinicians and physicians today?

Chuck: When I first started in this business it wasn't unusual for a doctor or a nurse to insist that they needed to use one and only one specific product. Over the years that mentality has changed because clinicians now understand that if we can select a product that is clinically acceptable from a field of competitors then we can contribute to a healthy bottom line. As an old boss of mine used to say, "no margin, no mission." If we can't reduce expenses on an on-going basis, then that will adversely affect their ability to care for their patients. There's much more of a "let's work together attitude" now.

The key to any effective partnership is understanding that problems will occur and believing that you will be able to work through and resolve them. Once our internal customers saw that we held ourselves accountable for the level of service we were providing and that we were committed to process improvements, a greater willingness to work with us on cost reduction projects surfaced. Just as there is no such thing as the perfect contract, there is no such thing as a mistake-free service. Another boss I once had – and I've been fortunate to have had many truly excellent supervisors who acted as teachers and mentors to me – said, if you don't make any mistakes, you're not doing any work. We therefore always strive to remain transparent in our activities and foster a spirit of openness and cooperation between us, the financial end of health care, and the people who treat and care for the patient.

Another change that makes the job easier today than it was 15 or 20 years ago is the creation of the clinical materials analyst position – a position within materials management staffed by a registered nurse who acts as a liaison between the business side and the clinical population. She speaks their language. She knows about patient care, but she's also an advocate for good business practice.

Before this position, I had to beg a nurse manager to give me a few minutes of her time; what I wanted was usually very low on her list because she had tons of other things to do. Now the clinical materials analyst is able to work directly with the staff and really move on things like product trials and contract conversions.

MediClick: What are your challenges for UNCH in 2010?

Chuck: It gets a little tougher every year to find savings and to make money; we spend more on indigent care every year. We're up to about $300 million a year just on uncompensated care. That figure is likely to keep growing too. All of the revenue and expense trends are unfavorable to us.

So if we're going to remain a viable institution with a healthy bottom line we have to be more creative, we have to work harder, we have to really push the envelope in order to remain healthy.

That's why when I saw C&A [MediClick for Contracts & Analysis], I knew I was really going need it because, although I'm doing ok now, I'm not always going to be able to rely on the tools that I have now to take me where I need to go. I need to get out of my Volkswagen and get into a starship, and I think C&A is that starship for us.

With the help of C&A, we as the buyers finally have our hands on tools and information that are as sophisticated as the sellers. I've always felt that the vendors have had a leg up on us because they were able to spit out information much more easily than we ever could. That information helped them with their negotiating strategy because they knew information that we didn't.

With the implementation of MediClick for Contracts & Analysis, I often feel like I'm creating a new religion. I'm not normally taken to hyperbole, but I truly believe that the C&A tool opens up a whole new dimension on how we can do our business. It gives us not just information we've never had before, but it adjusts the way that we work and negotiate significantly. It changes our whole buying strategy and the contract landscape to the point where we see things with new eyes now. It's like we have these supercharged glasses and our whole vision has been substantially improved.

For example, prior to implementing C&A, we thought our master files had been pretty clean. Boy did we find out otherwise. C&A showed us that there were all kinds of funky stuff going on in there. In my mind that was all good. Everything we discovered that we thought was not a problem, all of the sudden we're finding that it needs to be fixed. It was extremely valuable to be able to – during the implementation –uncover things that we really didn't even know were going on with our own databases.

Bob Barbier at University Hospital in Louisville, Ky.: Advancing Medical Technology While Managing Costs

Working at an academic teaching hospital, Bob Barbier is dedicated to the facility's mission of helping advance the practice of medicine. An important job of the supply chain, he believes, is supporting that mission by making sure clinicians have the tools and equipment they need to develop and test new medical technologies.

Despite his passion for high-tech healthcare, Bob doesn't work on the clinical side of medicine; he's in charge of making sure the hospital can pay the bills for it. As Senior Vice President and CFO at University Hospital, part of University of Louisville Health Care in Louisville, Ky., it's Bob's job to keep the bottom line in check while making sure the hospital keeps up with the best medical advancements.

"There is some remarkable technology being used in medicine today," Bob explains. "It's the kind of industry this country needs to sustain. Our ability to do research and development needs to continue in order to improve the practice of medicine."

With dwindling hospital margins and an increasing indigent patient population, Bob admits it's a challenge. But he is determined to win that battle. We sat down with him to find out how he balances rising supply chain costs with those of the ever changing medical advances.

MediClick: How do you balance your mission as an academic teaching hospital with the need to control supply costs?

Bob Barbier: Technology will continue to change. In an academic environment you at least get to see some of those changes as they happen. Our ability to do research and development needs to continue because you don't want to be lagging in the market.

We take medical technology for granted now. Think back to medicine 20-30 years ago; we didn't even have MRI back then. And medicine will be much different in another 20 years.

The process of medicine will advance, too. Today, surgeons can perform hip replacements without cutting through the muscle. Through a laparoscopic approach, physicians make a tiny incision and work their way to the bone without damaging muscle. You can walk a whole lot faster because your muscles aren't being torn.

At University Hospital, we want our physicians to be aware of these new things. Some of our physicians actually work with companies around the world to develop new technologies and supplies. So they're going to use a bit of new stuff along the way, which kind of moves the whole practice forward. We recognize we're going to have to pay for some of that.

You have to be careful not to challenge the physicians on everything. Probably 89% of what they do is perfectly fine. Those are the times when we simply try to negotiate the best price for their supplies.

Other times, we explore the new technology. That's when we have to get the conversations going with physicians. We recognize there is a high level of sensitivity around the whole quality topic. So we need to ask a number of questions. What is the recovery period? How does the patient deal with this type of implant or process? Is it a week in the hospital or three days? What is the infection rate? Is there a recall?

MediClick: As CFO, what are some of the challenges you see University Hospital face as it provides quality care to its patients while you maintain the margins?

Bob: I think folks want what a good delivery system for the science that healthcare can provide. You want your family to have the best healthcare experience with a fast recovery and no infections.

But healthcare is more transactional rather than a cohesive system. If you're feeling bad you go see a doctor. He sends you to a specialist, who sends you to get an MRI and blood drawn. It's very transactional. If you're sick or injured, you come to the hospital; but if you're feeling fine, you don't think about us.

This thing people call a "system" is actually an amazing array of technology, education, science, art form, experience, preference, bias, competence, with an overlay of an administrative nightmare.

Our job is to provide quality healthcare that makes people healthy and productive. However, if we're not treating sick people, we're not bringing in any money. So it's a double-edged sword.

Plus we have a steady 30% indigent care patient population. Last year, that number rose slightly. An outside service reviews our uninsured patients and works to get them on Medicaid or disability. They have moved about 5% of that 30% to a government-based system, bringing in a little more than $20 million in collections on accounts.

MediClick: What role does the supply chain play in University Hospital?

Bob: At the University of Louisville, we created an executive level position for the supply chain because utilizing supplies is a big cost driver. Physically moving all of the supplies is difficult. Simply being able to get the appropriate pharmaceuticals in and distributed is a big trick. You have to order it, get it here and deploy it to nine floors of clinical space. That's in addition to all of the other non-clinical supplies we have throughout the house.

We've already moved to an inpatient robot in the pharmacy to perform unit dose distribution. A pneumatic tube system picks up the drugs and drops them off where they are needed. We also went to a low unit of measure format here recently so we could shut down our warehouse. Now supplies come in and move directly to the floors.

To help facilitate communication between buyers and payers, we've combined our purchasing and accounts payable groups under one executive. Have you ever ordered something on one side of the building and paid for it on the other? Getting the two sides to communicate is a huge task.

Together, buyers and AP clerks have created efficiencies in invoice discrepancies, which has saved us a great deal of money. We don't want to pay the wrong price and have to go find it later.

MediClick: Is there anything University Hospital has done in the past 18 months to reduce costs or to tighten the belt in response to the economy?

Bob: We're an incredibly thin organization with a lean staff. Not only do we have the hospital with the emergency room, but we also have an outpatient cancer center, a world-renown radiation oncology department and an accredited stroke center.

In a new building on the University of Louisville campus, we installed an outpatient surgery area with a full array of radiology, pharmacy and lab in support of 8-9 floors of physician practices. Unfortunately the economy flipped when we had this big capital project and cash going to debt services. Demand fell off.

At that time the hospital execs went to the management to gather savings ideas. We stopped non-essential travel, eliminated unnecessary office expenses, cut back in some of our computer replacements. We adjusted our contracts where we could.

The hospital successfully created a nurse staffing model that eliminated the expense of our outside nurse staffing agency. We want to have nurses at the bedsides, we just don't want to have too many.

We picked targets, looked at them with the docs and did what was best for the care of the patients. We're not quite at a clinical utilization model where we can use statistical analysis to determine patient outcomes with each product, but we're getting there.

The bottom line is we want to make sure we're advancing the practice of medicine in the right way. So we're hoping to implement some type of medical supply committee to vet some of these new wonderful ideas. That way, we have enough useful information to work with the doctors to cut costs.

Charlie Miceli at Fletcher Allen: Meaningful Informatics Leading the Way

Having worked for and with Airborne Rangers, an elite light infantry special operations force of the U.S. Army, Charlie Miceli learned the importance of performing recon before every mission. The motto "Rangers lead the way" became his battle cry.

That credo still guides him today as Vice President of Supply Chain for Fletcher Allen Health Care (FAHC) in Burlington, Vt.

Proactive by nature, Charlie is not one to wait for a savings mandate from the CEO or CFO before he leaps into action. Instead, he and his team build the supply chain goals and objectives for themselves upon four key pillars: customer service, cost management, enhancing business processes and meaningful informatics.

"We are constantly using meaningful informatics tools to monitor spending trends and to establish target opportunities for cost management. We're telling people what we're doing before they can bring it up to us."

We talked to Charlie recently about how this aggressive mentality has served him in the supply chain world at FAHC.

MediClick: As someone who always wants to set the goals rather than have them be set for you, what do you feel is the appropriate role of the supply chain at Fletcher Allen?

Charlie Miceli: Supply chain is resource management more than anything else. Rather than managing just supplies, we provide support in managing the entire spend—whether it's a bandage, capital equipment or business processes.

Fletcher Allen had this infrastructure in place before I got here. As a team we are just taking a good system and making it a great system. The executive support helps because our leaders have given the supply chain the ability to work as a team with departments to find opportunities for resource savings.

That means we need to keep our team multi-dimensional. So we're developing our next tier of leaders within our team. Our director of purchasing, contracting and value analysis is an example. She's a newbie in the supply chain business, but she's already been recognized by ERCI.org for using meaningful informatics to eliminate a pricing error that reduced our costs by over $177,000.

MediClick: What tools do you have that ensure that your supply chain team is being as effective as possible?

Charlie: The key to supply chain management is meaningful informatics: using the right tools to look at supply chain spending so we can identify clear savings opportunities.

I believe you should always have analytics tools that provide meaningful informatics. That's why we have as many tools working in synergy as we can. Even if the tools are sometimes redundant, something always differentiates one from another.

Using MediClick, for example, we have expanded the general ledger in the med-surg world from about seven or eight codes to about 19 or 20 using an UNSPSC-type mythology. The purpose is to get more stratified within the groups.

We used to look at our OR spend, which is almost $3 million a month, and see it broken up among only seven codes—two of them were over a million dollars each with a large number of transactions in them. There was no significance except that it's a considerable amount of money.

Now, we've become more granular, expanding to 19 codes. So we have better detail to start peeling apart layers using MediClick to differentiate what was spent on meshes, sutures, platforms and all types of stuff. So we can see exactly where the high supply chain expenses are.

When we put in MediClick, we ran it as a transactional system, which it does very well. But it's also very intuitive as a strategic tool. I set the strategy with it and then teach the supply chain staff how to break out the data and analyze it—from acquisition to getting money out the door.

MediClick: In the Culture of Savings Series, we're always interested in how supply chain executives leverage the power of the people to find savings opportunities. Have you found any interesting approaches to do this?

Charlie: Every member of the hospital staff can make a difference to the bottom line. I saw this first hand when I worked at Newton-Wellesly Hospital in Newton, Mass. We had a cost management/margin enhancement program that provided recognition bonuses for staff who provided effective cost-saving ideas.

Some members of our front-line staff who worked in linens were on a team that recommended and implemented the in-sourcing of our linen cart makeup. We examined their suggestion, implemented it and reduced our costs by more than $100,000 per year. These team members each received a one thousand dollar check right before Christmas as a reward for their efforts.

When we asked for their help, we let all ideas come in. You have to move fast and grab onto the great opportunities, but you also have to be able to know when to set aside the "parking lot" ideas that may be useful in the future.

That same philosophy holds true here at FAHC. We go out and engage folks as members of our team. We have active value analysis committees that cover the major supply expense areas of the hospital. Our mission is very collaborative. That's the kind of culture we have here.

MediClick: Is it an important part of your strategy to build relationships outside of the hospital staff?

Charlie: We maintain a strong relationship with our distributor because we do a large chunk of business with him. We try to be a good customer who tries to help him meet his goals, too. For example, our distributor has deliveries for us every day. We have given him the option to queue our orders so he can send less than five trucks up here per week. This action gives our supplier an opportunity to reduce costs; that has become as valuable as the transactional nature of the relationship.

If we are engaging a supplier to lower his unit costs, and we are not doing anything to help reduce his operating costs, then that's not fair. But if we can help by changing our operations to remove waste, redundancy in business processes, etc., without increasing our expense, that's reasonable.

We present an advocacy model where we strive to understand and accommodate the business requirements of our supplier so we can mutually take unnecessary costs out of the supply chain like rush deliveries, use of EDI transactions, managing pay terms, quarterly reviews, etc.

As we progress in this model, our goals are to use meaningful informatics and advocacy to maintain aggressive stewardship of our resources and ultimately reduce costs in our supply chain.

MediClick: Thanks Charlie!

Tony Johnson at Novant Health: Everyone Has a Seat at the Table

As a U.S. Army officer specializing in health care logistics for 20 years, Tony Johnson's discipline kept the military supply chain moving in health clinics, combat units and military hospitals in Europe, the United States and Africa.

Tony's military-style command catapulted his career into supply chain roles in hospitals stateside. He quickly learned that the authoritative approach to materials management he used in the military was less effective in the traditional hospital setting.

But he's ok with that! In fact, he's adapted quite well to Novant Health System's collaborative philosophy. As Senior Vice President and Chief Supply Officer of the 13-hospital, Winston-Salem-based health network, Tony builds relationships that keep supply chain costs in check.

He says this teamwork—backed by the skills of his strategic sourcing group—has netted $65 million in cost reductions in fewer than two years. Tony believes that success breeds success. The more his team reduces costs, the more folks from all over the health system want to join him.

This collaborative environment is due in part to a model of cooperation that Novant uses during strategic sourcing events. ARCIE, as the model is called, ensures that everyone—from executives to physicians—is involved in finding the best solutions to the supply chain issues.

We sat down with Tony to talk about Novant's collaborative culture and how the company's commitment to the supply chain impacts savings.

MediClick: What is the role of the supply chain at Novant?

Tony Johnson: The supply chain is integrated across the entire Novant system and is completely accountable for all supply-related costs. That means we're moving the supply chain into all areas of the hospital.

Some time ago, the operating rooms had a spike in costs that no one could explain. When the CFO asked me why, I told him that supply chain doesn't control what they do with supplies inside the OR. He said, "You're the chief supply chain officer, I don't care where the supplies are, you are accountable for them."

That was our catalyst to move into the operating rooms in our smaller facilities. Today, we're moving into the OR in our larger facilities, too. We want an end-to-end visibility of what happens in the operating room: who's buying what supplies and what supplies are actually stored there. Our next target is the cath labs.

In addition to being accountable for supplies, any contract for goods or services also comes through supply chain—from the C-suite on down. That enables us to receive standard supply chain pricing across all of Novant's facilities.

In fact, the supply chain group actually sourced a general contractor along with engineering for three new hospital projects. Then the Novant Strategic Sourcing Group purchased materials that the contractor would have traditionally purchased and marked-up. And for supplies that the contractor did need to purchase, we looked at the market price and collaborated with the contractor to get a better one.

MediClick: Supply chain managers are good at the process sides of change, but there's also an enormous cultural side of creating a vision, communicating it and building support. How do you go about creating a vision and building support for it at Novant?

Tony: Nothing beats having a great vision from the beginning. You've got to get the blueprint right, it has to be viable, and it has to be something that will make a change. Before I even joined Novant, the supply chain executive was senior in the organization. This vision enables us to easily communicate with anyone, from the highest levels of the executive team all the way down to the operating room.

Novant's chief medical officer is an advisor for strategic sourcing. He's the one who recommends the experts who we should be using as a resource. It's like having a direct connection with all the physicians all of the time.

Now certainly you have to earn their trust, but you can build those relationships and put that vision out there and sell it.

But it's not the supply chain person out there preaching; the company believes in it so the executives at the highest level are stepping forward and being the voice. It makes our jobs a lot easier.

MediClick: One of the main issues that divides supply chain managers and care providers is physician preference items. What is Novant's philosophy on physician preference items and how does that impact the way supply chain earns the trust of physicians?

Tony: Novant's culture, at its core, is very collaborative. So instead of strong-arming physicians, we build relationships with them. We also let them know that our goal is to not limit their product choice in any way. Instead, we go after what we think is an aggressive best in class price in the market.

Our process is very structured. First we analyze the market and learn everything we can about the supplier. Next the staff in our contracting department spends time with physicians to evaluate products, look at the market and explain costs differences.

Then these physicians sit at the table with us to negotiate contracts. Most vendors market their product directly to the physicians. By bringing physicians into the negotiations on our side of the table, we effectively eliminate the vendor's divide and conquer techniques.

We recently had a vendor who stuck with a premium price after we told them the price we were willing to pay. So we put the vendor on notice that we won't pay them a premium just for the privilege of using their product, which is no different than the others. We told them to conform to our pricing requirements or they have to go.

The vendor saw this as a bluff because they had already developed a good relationship with the physicians. They waited until two weeks before the deadline to give us the prices we wanted.

That was a huge contract. It was about $30 million worth of purchases. Initially, the physicians were uncomfortable with this type of negotiating. But since we brought them to the table, they trusted us. They looked at us as partners.

MediClick: With your organization being so collaborative, what is your process for strategic sourcing?

Tony: I have a fairly robust staff in the strategic sourcing group. We made the decision to invest in recruiting team members from various industries because that's where we found the skills we needed. So we've got folks from Ford Motor Company, Ingersoll Rand, General Electric. The typical profile of our sourcing manager is an MBA who is Six Sigma and Lean certified.

The result has been phenomenal. We started recruiting these professionals in 2006 and from August 2006 to the end of 2008, the cost reduction that group has brought us was $65 million, but they haven't done it alone.

We involve all of the stake holders in each sourcing event using what we call an ARCIE model [Approve, Recommend, Consult, Inform and Execute]. That means for every project, an executive approves it, a group recommends the solution, a group consults the stakeholders, a group informs the audience and a group executes the solution.

When we put our projections out there, folks know they can trust our numbers and they see what's happening on their balance sheet. Success breeds success. The more successful we are with our numbers, the more people want to work with us as part of the process.

MediClick: Cost reduction is a very controversial term in that it can be measured in a variety of different ways. What do you mean by cost reduction?

Tony: When our accountants validate savings for supplies, they consider cost savings as the old price, minus the new price and only when it is purchased. We do not book things in advance.

When we wrote a contract for orthopedics, the estimate was initially $5.5 million below the old contract. We didn't take $5.5 million savings; we go implant by implant, screw by screw as they're purchased and we add them up every month. We only take them for one contract cycle.

So if the contracts are written for three years, we count those reductions each month for three years. When those contracts run out we can't claim that anymore. We have to start over at that current price.

The reason we do this is because integrity in what we report is paramount. The CFO is looking for money that actually came out of the expense column.

I've been in this business a long time. Believe me, it's satisfying when you get a call from one of the hospital administrators and they say "Oh my gosh! I've been looking at my financials and the supply costs are really down."

MediClick: Thanks for the insights, Tony!

Kerry Gillespie at Ardent Health: It All Starts With Quality

MediClick met with Kerry Gillespie a few weeks ago at HFMA's ANI Conference in Seattle. Kerry is CFO at Ardent Health, a for-profit network with 11 acute care hospitals in Oklahoma and New Mexico.

For Ardent, establishing a culture of savings starts with a focus on quality. Ardent always talks with its clinicians about how to improve quality and patient outcomes before discussing cost reductions. Kerry says this shows his clinicians that Ardent shares their priorities, and it helps align the interests of the clinical staff with the teams responsible for driving costs out of the supply chain.

Kerry also argues that medical device suppliers need to hold themselves to a higher quality standard: If they're increasing prices 20, 30, 40 percent and justifying it with claims that their new technology is generating better patient outcomes, give us the proof. Show us how quality outcomes have improved at least as much as you've increased the costs to our hospitals.

Below, we talk with Kerry about how his organization fosters and benefits from a culture of savings.

MediClick: How do you involve your clinicians with Ardent's culture of savings activities?

Kerry Gillespie: We rarely talk with clinicians about cost without talking first about quality. That resonates with them. If all they hear is "cost, cost, cost", they think all you care about is process and money. But if they hear "quality and cost; quality and cost", then they know this is an organization that cares about me and cares about my obligations to the patient. They know we're focused on doing the right things.

Managing costs in a quality organization is easier than managing costs in an organization where your nurses and other clinical staff don't think you care about quality. It affects their willingness to participate in your savings initiatives.

There's a business purpose to quality, too. At Ardent, we know we have to stay healthy from a patient volume perspective. It's really easy to manage out your costs when your volumes are there, but it's tougher to manage costs out as volume drops. There's a circular nature to it: we believe that in driving quality up, we'll keep the volumes coming in. If the volume comes in, we're more confident we can manage the costs.

MediClick: Physician preference items present an ongoing struggle for hospitals trying to rein in costs. What is Ardent's approach to the challenge, and what results have you seen?

Kerry: We've come to realize that vendors try to sell us a lot of extraneous supplies, especially for total knees, total hips, and cardiac services. For example, they insist on selling us high-end catheters even when a lower cost product would produce the same quality outcomes.

These vendors are driving the cost factors through our physicians and taking control away from the hospitals. The medical device companies put their reps on aggressive commissions, so they go out and build these great relationships with the doctors. Before you know it, you're using stuff in your operating rooms you didn't have a clue were being used. It's a ton of money, and it's driving up the costs of your services.

So, we're working hard to address this.

We're part of the Acute Care Episode [ACE] Demonstration project through CMS which allows us to work with our physicians to reduce costs. It lets them participate in the up-side of cost reductions through gainsharing. We're able to substantially improve their payments on individual cases.

In terms of engaging physicians, if you can give them an appropriate economic incentive that includes an enhancement to the quality of care delivered, they will work with you every time. We're exploring this through the ACE Demonstration project. 

We also stay very focused on the top 20 most expensive med/surg items in all of our facilities. The individual hospital's CFO, materials manager and department heads have conversations with the physicians about utilization and alternative items they might use. Our regional materials managers are ultimately responsible for reducing costs on these items and they report monthly to the corporate office. It's part of our ongoing supply chain operational review.

This process has been very successful. In 2008 alone we took almost $4 million out of supply costs.

MediClick: Does Ardent blaze its own trail, or do you subscribe to a particular process improvement methodology?

Kerry: We recently introduced Lean to our revenue cycle management and realized we had significant waste in our upfront registration processes. We're going to take out 60 percent of the steps and 30 to 40 percent of the costs associated with registration.

We're beginning to bring Lean into our clinical departments, too. Right now we're building a value stream map of the emergency room of one of our biggest facilities, and we'll implement Lean processes there soon.

For people who say Lean works well in manufacturing but not in the patient care setting, I see that as an excuse. It's true that every patient is different, and we're not making simple widgets. But you can use the same principles: pull out the steps that don't add value, reduce the variability, etc. All those things make complete sense in any environment, not just manufacturing.

As I've mentioned, quality is a critical part of the equation. The interesting thing is that when you reduce cost and reduce variability, you improve quality. It's a Six-Sigma concept, and while we haven't implemented that specific methodology, we're borrowing heavily from its ideas. It's making us considerably better and improving our quality metrics.

MediClick: There's been a lot of talk lately about Harvard Business School Professor Clayton Christensen's The Innovator's Prescription. It has renewed dialogue about the true definition of "integrated delivery network." Tell us about Ardent's approach to providing integrated healthcare.

Kerry: I'm familiar with Dr. Christensen and his works, and we're trying to follow a true integration model.

For example, Ardent has a pretty good-sized health plan in our Albuquerque market with about 40 percent market share. We've developed the program so we can sell insurance to organizations at a significantly reduced cost. We pass that cost down to the hospitals, so they're motivated to reduce their costs in order to continue to maintain their budgets.

Albuquerque represents a single market inside of Ardent. It includes the hospitals, the health plan, and all the other services we provide. These are all rolled up into an overall market budget with an earnings target. A significant portion of compensation for the managers is tied to the success of the entire market as well as their individual business units. So it creates aligned incentives. They're motivated to make the health plan successful by containing costs, and they're also responsible that the hospitals keep costs in check.

We don't own physician practices, so the doctor side of it can be a challenge. But everything else is integrated very well.

MediClick: What challenges do you see for the future of the healthcare supply chain? 

Kerry: If the industry is really going to reform itself, the suppliers have to come along. They have to participate and sacrifice, too, or reforms are going to be real problematic and put too heavy a burden on the hospitals.

There's something wrong with a medical device company making a 40 percent gross margin on their business and we're doing well to be at seven percent. What's wrong with that picture?

Every time I turn around there's a new pacemaker or new defibrillator. I can't keep a lid on hips and knees because all these joints are always getting a new tweak and being marked up more each time. The device manufacturers are pushing them on the doctors saying they provide better care for their patients. So the doctors are bringing the new products into the hospitals, and we don't have a say in the matter.

The hospitals have to ask: do the innovations improve outcomes at the same rate their prices increase? I'm not seeing new devices producing 20, 30, 40 percent better outcomes. Then how can we justify their prices going up at that rate? We must look at effectiveness when addressing rising costs.

MediClick: Thanks for sharing, Kerry!

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.

---

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.

---

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.