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Confidential 2006 Owens & Minor Inc.
Managing the Clinical Supply Chainand Physician Preference Items (PPI)
Presented at CAPHMM SocietyOctober 24, 2007
Presented byJamie C. Kowalski ,MBA, FACHE, FAHRMM, FAAHC
Managing Director Business Development
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What is Being Managed?The Enterprise-Wide Supply Chain
Deliver toPoint of
Use
Evaluate,Select
Contract Order Ship ReceiveandPay
Inventoryand
Store
Pick
Customer Manufacturer
Distributor
Customer
Pick Use
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Total Supply ChainExpense As aPercentage Of Total HospitalExpense
Other
Hospital OperatingExpense
55% - 70%Total Hospital
Supply Chain
Expense
35% - 45%
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Supply expense is the fastest growingcategory
Expense Growth Rates
2002-2004
Source: The Advisory Board Company 2005, Healthcare Financial Management Association
Total
Operating CostSalary
Expense
Benefits
ExpenseSupply Expense
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25
15
15
100
45
Supply Chain Expense at 45-50%+,*exceeding Laboras # 1 Expense
Clinical &GeneralLabor
Supplies Logistics
&Distribution
Others Total
Total Cost incurred by Hospitals** Percent
** Figures are based on estimates of Healthcare Financial Management Association. Labor cost includes salaries, wages and benefits based onaverage of leading hospitals in the US and Others is inclusive profits to the hospitalsSource: S&P Industry Surveys: Healthcare Facilities; Healthcare Financial Management Association; industry reporting; Pipal Research analysis
Supply Chain Management
* Michael Parsons, COO, Triad Hospitals, Inc.
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Focus on Distributed Channel the fewestSKUs and smallest portion (20-30%) ofSupply Spend Compared to Clinical SupplyChain (PPI)
Distributed Products-20-30%
Direct
SpecialtyProducts45%
Direct
CommodityProducts
35%
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Total Supply Expense DriversImpact, Manageability
Patient acuity
Procedure volume
Patient care protocols/clinical paths
Technology
Product quality
Product brand
Price inflation
Procurement proficiency
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Supply Expense ManagementStrategies
Reduce product pricing Leverage total volume with single supplier
Utilization/renegotiation of corporate contracts
Assessment/reduction of value add costs
Utilization of bid process
Increase inventory turns Par Levels
Ordering frequency, volume
Product standardization Fewer items
Leverage to sole source
Increase budgetary accountability at department level
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Supply Expense Management
Strategies(cont inued)
Product utilization reviewPhysician PreferenceItems (PPI)
Use of clinical pathways
Quantity of items used Type of items used
Alternative procedure
Utilize a Value Analysis approach for productselection Based on matching (not exceeding) the quantity and
quality of resources to the required outcome
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Clinical Supply Chain and PPIPresent a Great Savings Opportunity
A typical 400+ bed hospital spends about$56M annually on Physician Preference
Items (PPI) On average, $6-10M (10-20%) could be
saved on these items on an annual basis.
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Performance Gaps with ClinicalSupply Chain
1st TimeOrder
Accuracy
Lines/Order
Turns Expiration
1.5
2.1x
5%
GAP
EDI%
25%
ChargeCapture
75%78.8%CSC Performance
98% 10 10 0.02% 95% 98%
Commodity SC Performance
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Finan
ce
Volume
Throughput
Outcomes
No CDM #;Not in Item Master2
Nursing overtime;Cost, Dissatisfaction,Retention, Turnover
6
Block time exceeded;MD Dissatisfaction,
departure.
5
Lost Revenue9
Price + Invoicediscrepancy
10
Not on case cart;Secondary chain
reqd nurses
must execute
3
Case delayed;Cancelled(?)Added LOS
4
Supply Chain Surgery RevenueCycle
Standardization,
Discount + rebateloss;
Staff unfamiliarity;Quality of care?
8
Hip Prosthesis;New Item Bypasses,Or, Standard Item
Order Failure
1
Item not billed,Billed late,incorrectly,
Wrongcharge/price.
Case takenelsewhere.
7
Projected AnnualExpense: $518,000Direct costs only.Source: Health Care Advisory Board OrthopedicsPracticum: Best Practices Demand-MatchingGuidelines
Supply Chain Ripple Effects - Clinical, Expense &Revenue
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Cardiovascular and OrthopedicSupplies (many PPIs) Driving Spend
Growth
Source: Frost & Sullivan U.S. Medical Device Outlook A662-54
2006 2011
Category $B
% of
Spend $B
% of
Spend
Annual
Growth
Cardiovascular 22.8 28% 42.1 30% 17%
Orthopedic 15.2 19% 31.0 22% 13%
Disposable Surgical 3.8 5% 12.1 9% 24%Wound Care &Endoscopy 4.3 5% 5.7 4% 6%
Total Spend 80.0 100% 139.8 100% 12%
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2007 Owens & Minor, Inc. All Rights Reserved
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OrderMgmt
Delivery
Service
Current State of Clinical Supply Chain
FulfillmentProcess
Customer,Physician?
InventoryMgmt
Supplier,Trunk Delivery
CommonCarrier
Key issues:Abdication of responsibility No strategy/vision for improvement
Lack of visibility Intensive resource need
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Information Technology Lacking;
Fragmented, Overlaps, Gaps
Clinical
Charge
Isolated systems lackintegration
Overlapping functionality
Classification inconsistencies
Clinical staff left to manageexpensive, liable supplies
Little, if any, spend analyticsor contract monitoring
No vendor visibility
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Key Performance Indicators Needed
Monthly KPIs willreport on thefollowing by
department Owned inventory
Inventory turns Owned turns
Consigned turns
Cost per procedure Purchase vs. Usage vs.
Case Load
Increased chargecapture
Savings identified
$0
$50,000$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000
Oct'0
5No
vDe
c
Jan'06 Fe
bM
ar Apr
May Ju
nJul
Aug
Sep
Months
0
2004006008001,0001,200
Oct
'05 Nov Dec
Jan
'06 Feb Mar Apr May Jun Ju l Aug Sep
Cases
Total Purchases Usage Procedures
$200
$220
$240
$260
$280
$300
$320
$340
$360
$380
$400
Oct'0
4De
cFe
bAp
rJu
nAu
g
Oct'0
5De
cFe
bAp
rJun
Aug
Month
Usage/Procedure
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ADTBILLINGINTERFACE
Reduce/eliminate expiredproduct
Manage/monitor parlevels
Reduce overstocks
Manage freight &contracts
Utilizationdata
Clinical usedata
Electronic chargecapture increases
billing accuracy &accountability
In-Lab Use
Clinical
Staff
Lab Technician/
Inventory Manager
Receiving
Stocking
Ordering
MMISINTERFACE
Patient-
Payor
Billing
Finance
$2,478,703 $TBD $75,953
An Illustration of the Savings Opportunity-$8M Cath Lab
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Focus on Spend Analytics
Visibility of supply spend at the department level
Normalization of product data
Product Standardization analysis through UNSPSC
commodity codes Contract Management System Local and GPO contracts
Pricing inconsistencies
Tier level maximization
Non-Contract purchases
Rebate tracking
Unmanaged non-file purchases
Studies show effective spend management solutions result
in 1% to 4% savings in the average hospital.
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Visibility on purchasing activity across all facilities anddepartments within an entire healthcare organization
Contains report templates to address: Purchase History
Contract Utilization
Order Activity
Contracts Analysis
Standardization Analysis
Ad-hoc (custom) reporting capability Self-service environment to create your own reports with an iterative analysis
approach for Decision Support
Data>Information>Insight>Intelligence>Innovation
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Physician Preference Items IntensifyChallenge
30-40% of supply expense are
physician preference items
610% of operating expense
Preference items may or may not
be linked to outcomes/ performance
have associated contracted purchase price
be fully reimbursed
We had our firstphysician preference
contract negotiations tonarrow the number ofvendors down andguarantee 95% utilizationof one vendor throughengaging the physicians,resulting in an annualsavings of $300,000.- Mid Sized HospitalSurvey Respondent
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Physician
Supplier
Hospital
Minimal analysis of dataand financial impact
SupplyCosts
ProductVariability
Obsolescence
Revenue
Margin
PPI Decision ProcessCurrent State
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Physician
Suppliers
Hospital
Minimal analysis of dataand financial impact
Supply Costs
ProductVariability
Obsolescence
FutureState
Suppliers
Physician
HospitalThorough data
analysis and impact ofdecisions
Supply Costs
Product
VariabilityObsolescenc
Revenue
Margin
Revenue
Margin
PPI Decision ProcessFuture State
VATs
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Physician Engagement Required
Executive Process
Education
Communication
Data & Information
Persuasion
Negotiation
Motivation (Aligned Incentives)
Participation (Value Analysis)
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Physician Engagement Strategy-Their Role
Customer (of the Hospital, IDN)
Patient Advocate
Clinical Consultant
Vendor Relations
VA Process Champion
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Physician Engagement Strategy-Let Data Tell the Story
Supply Chain Data
Pricing
Usage
Terms
Contracts Regulatory compliance.
Revenue Reimbursement Data
Procedure volumes
Patient charge
Revenue capture/reimbursement Finance, Decision Support,
Medical Coding Data
Admission rates
Coding
LOS Outcomes
Clinical Resource Data
Supply efficacy vs outcomes
Physician credentialing
Administration
Service line strategy
Physician relationships ,marketing and growth
strategy
Example
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Measuring Variability Within a DRG
50,904(1,182)3,4752,2933,6065,89913,0766.5184Total
18,165(1,609)4,8743,2656,6339,89822,25510.675Dr Smith
1,323(2,908)3,7718633,1894,05210,4535.547Dr Munoz
9,640(662)2,7012,0394,2056,24413,6107.148Dr Jones
Quarterly
Difference
Between VC
Per case and
Best Practice
50,904(1,182)3,4752,2933,6065,89913,0766.5184Total
18,165(1,609)4,8743,2656,6339,89822,25510.675Dr Smith
1,323(2,908)3,7718633,1894,05210,4535.547Dr Munoz
9,640(662)2,7012,0394,2056,24413,6107.148Dr Jones
Quarterly
Difference
Between VC
Per case and
Best PracticePhysician
Name
Cases
Length
Ofstay
G
rossRevenue/
C
ase
Expected
Payment/Case
Variable
Cost/Case
C
ontribution
M
argin
FixedCost
PerCase
NetMargin
* Sourc e: HFMA 2005 Supp ly Chain SurveySponsored by McKesson
Example
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Physician Engagement Strategy
Value of Time
Dont Compromise on Quality
Show Tangible Results of Their Efforts
Recognize.
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Physician Engagement Strategy
Recognize no oneMD represents the Medical Staff, orSpecialty Group
Identify Physician Champions, who have interest by
specialty/service line: identify practice patterns, attributes and services that
influence choice of vendor misaligned incentives within the physician peer
group that can: Drive a wedge between physicians
Derail development of strategy and consensus Caution about Relationships with suppliers; recent
Court Decision
Review of documentation to maximize reimbursement
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Physician Engagement Strategy
Develop annual review of PPI and the cost of caredelivery including:
Vendor pricing
Changes in reimbursement New technology
Reinvest a pre-determined and agreed upon portion ofsavings to support new technology and enhancements to
patient care
Utilize a team structure within theValue Analysisprocess to review individual PPI requests
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Selecting the lowest total cost supplies and services to be used in meeting(NOT exceeding) patient care needs
Standardized protocols for utilization, selection & sourcing decisions
Involvement & participation by all end-users & key stakeholders; orchestrate
physician involvement as needed Evaluations and analyses that focus on:
New product introductions (including PPI) new technologies
Expiring contracts
Existing supplies and services
Communications channels regarding activities & decisions
Standardization of supplies, services, and suppliers
Reduced total costs for supplies, services, and supply chain operations
Maximize use of contracts
Ensure contracts are developed, implemented and managed effectively
Value Analysis Objectives
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Value Analysis Teams (VAT)
Considerations
Physician role
Measurable target/goals Priorities
Linking expensive items to reimbursement
Culture Quality
* Sourc e: HFMA 2005 Supp ly Chain SurveySponsored by McKesson
Example
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VAT Roles and Responsibilities
Supply Chain Physician Champions
Actively participate in design meetings
Offer perspective of medical staff as toalternatives of current practices being considered
Participate in communication process to peersensuring that rationale behind the changes are
clearly communicated and understood
Example
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VA Scope, Focus
All Supplies (medical & non-medical)
All Purchased Services (clinical & maintenance)
Any related equipment (including capital)
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:
AnalyzeItem Master File
Benchmark pricing
Price Parity (standardize prices)
Category and Product Standardization
Utilization/tier maximization Contract to invoice audit
Analyze AP Supplier File
Contract Gap Analysis
Standardization/consolidation
Analyze Purchased Services spend
Benchmark pricing
Contract obligations and performance standards
Utilization and standardization
Make vs. buy comparisons
Analyze aggregate spend by manufacturer
Spend Analytics - OpportunityIdentification
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GL Mapping
Map all cost centers toValue Analysis Teams
Map spend categoriesand suppliers toappropriate ValueAnalysis Teams
Map potentialopportunities toappropriate ValueAnalysis Teams
Opportunitiesreviewed with VATChairs beforepresenting to VATmembers, as well assource documents
Pharmacy
$122,557,506
Lab $53,818,876
Patient Care $11,528,
Card/Rad $24,454,260
HR/FIN/MM $19,742,8Surgery $72,919,250
Support Services
$4,092,886
Value Analysis Opportunity &
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Value Analysis Opportunity &Results Tracking
Initiative
Team
Cost Center or Service Line
Procedure (Physician)
Aggregate Roll-Up
Per Period
FYTD
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Characteristics of a Successful VAProgram
Accountability - clearly defined roles, targets, & timelines
Effective structure - Work Teams by high-cost departments (VATs) withChairs from the user-departments and an Executive sponsored SteeringCommittee (VASC)
Representation - all users & stakeholders represented, and anorchestrated process to involve physiciansas needed
Resources - clinical and contract management support resources
Standard Protocol - consistent approach for conducting value analysisand making selection/decisions, with cost/benefit analyses and involvement
from Finance, Patient Finance, & Purchasing Consensus - effective and accountable decision-making (pre-determined
criteria)
Communication - formalized minutes, organization-wide communicationsstrategy, peer interaction
Focus all expenses and particularly PPI
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Physician Engagement Recap
Executive Process
Education
Communication
Data & Information
Persuasion Negotiation
Motivation (Aligned Incentives)
Participation (Value Analysis)
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Questions, Discussion, Conclusion