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The Cure for Ailing Hospital Supply Chain Metrics | |||||||||||||||||||||||||
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Hospitals today spend $140 billion on supplies, which includes everything from medical/surgical supplies, physician preference items such as implants, pharmaceuticals, blood products, food, laundry and cleaning supplies. As a percent of operating expenses, supplies consume on average 20 percent and typically represent the 2nd largest expense for a hospital after labor costs. Hospital CFOs and supply chain executives know supply costs are rising. The challenge is to understand why this is happening and what can be done to address the situation – before hospitals sustain further negative impact to their bottom lines.
When faced with flawed metrics and risky benchmarks, where does a hospital executive look? In this article, we will explore new ways of thinking about metrics, benchmarks and important new comparisons.
The Issue For years executives have had access to tools that guide decision making for operational areas such as salary and staffing expenses, revenue cycle performance and even quality indicators. However, within the subject of supply expenses there is a black hole – a void that causes confusion and is a source of frustration for most facilities. Even in the absence of a tool, supply chain executives are looking to benchmark information that is outdated and often simply wrong.
Hospitals today find it difficult to quantify supply expenses, explain variances from one time period to another and prioritize savings that are credible and actionable. As a result, supply costs are often ignored until the aggregate spend is in crisis.
Baptist Health System in Birmingham, Alabama’s vice president of supply chain. Michael Louviere, abides by the theory that if hospital executives don’t know what they spend on supplies, they don’t know where to look for savings. He believes that measurement is crucial in a competitive market, especially for systems that strive to be among the best in the country.
The solution might seem simple, yet measurement of supply cost performance is an area in which many hospitals have long struggled and are still far from mastering. The key to success in supply cost management will be determining, for the first time for many hospitals, the true cost of supplies, benchmarking these costs against appropriate industry metrics and, finally, implementing a plan for supply chain and operational improvement.
The Missing Link Traditional supply expense performance metrics have been based on a percentage of hospitals' revenue, expense, or as a ratio to the number of adjusted patient days or discharges. With these metrics come implicit flaws that the supply chain has an impact on the denominator, such as net revenue, operating expense, or length of stay. Given regional differences in reimbursement and other operating expenses, particularly labor costs, the use of these metrics for benchmarking is risky. Of course, meaningful benchmarking requires an ‘apples to apples’ comparison. Another challenge with the traditional methods is the mechanism used to adjust for a hospital’s unique patient mix: the Medicare Case Mix Index (CMI). It is broadly accepted that benchmarking to hospitals with a similar patient population is critical. However, for purposes of comparing supply expenses, CMI just doesn’t work. Case weights are designed to measure overall resource consumption, (labor, technology, etc.) not just supplies. Therefore as an indicator to measure where a hospital’s supply spend should be, a CMI-adjusted metric is irrelevant.
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WATCH MEDASSETS SERVICE LINE ANALYTICS VIDEO DEMO
SERVICE LINE ANALYTICS DRIVES BUSINESS INTELLIGENCE TO CONTROL AND REDUCE SUPPLY COSTS
CONTROL SUPPLY COSTS WITH SERVICE LINE ANALYTICS
HOSPITAL SUPPLY COSTS TO HIGH?
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CMI “NORMALIZATION” DOESN’T WORK To truly understand the limitations of CMI, consider these examples. These MSDRG have the same case weight but extremely different supply costs.
What has been lacking from CMI, as well as other traditional methods of benchmarking supply expense, is a methodology that (a) allows an evaluation of supply expense based on the specific cases at a particular hospital and (b) allows for ongoing evaluation of a hospital’s supply expense relative to the changes in a hospital’s patient population. Without this information, hospitals are often comparing “apples to oranges” when trying to benchmark and are unable to successfully measure performance on an ongoing basis.
Supply Intensity Metric (SIM): Behind the Scenes One proven methodology to help providers understand if their supply spend is appropriate is the Supply Intensity Metric or SIM
SIM is different from traditional supply expense performance metrics because it reflects the supply intensity of a patient population, which does not always correlate with the clinical severity or highlevel resource utilization that are parts of the traditional methods of looking at supply costs. It does this by targeting a hospital’s projected supply expenses based on the actual mix of patients seen and procedures performed. It then compares a hospital’s overall supply expense profile to that of similar facilities to gauge cost performance versus best practice.
SIM answers key questions for hospitals, such as:
Once SIM has created a metric to indicate the “supply intensity” of a facility, that metric is then used to create better benchmark groups. In addition, the same standard supply costs per DRG that are used to calculate the SIM are used to calculate a target total supply spend for the facility:
EXAMPLE HEALTH SYSTEM SIM ANALYTICS. Supply expense is increasing, but the gap between Supply Expense and SIM targets is decreasing.
Using insights from SIM, a hospital can observe changes in supply expense over time that would result from changes in supply intensity, such as increases in the number of total joint replacements or oncology admissions involving expensive chemotherapy, and decreases in the number of lesssupply- intensive medical patients, such as deliveries. Ultimately, SIM can help hospitals to identify opportunities for better cost management – a key imperative in today’s hospital environment.
SIM in Action: Case Studies
SIM provides the data to more effectively measure supply expense and drive positive change in hospitals. Several health systems have realized the benefit of having a reliable information tool to guide and measure their supply expenses:
Inova Health System Inova Health System serves more than one million people in Northern Virginia. Its Inova Joint Replacement Center, a Center of Excellence at Inova Mount Vernon Hospital, performs more than 1500 procedures annually. When comparing Mount Vernon to similar-sized facilities and to its sister campuses using traditional metrics, a hospital administrator might think Inova Mount Vernon Hospital has abnormally high supply costs. But Cindy Kilgore, Inova’s vice president of supply chain, says the SIM analysis showed that Inova Mount Vernon’s overall supply costs were in line with best practice supply costs given the large number of total joint patients treated at the hospital. “SIM was the first benchmark that actually made sense given the joint program at Mount Vernon.” SIM reveals that Mount Vernon is not an outlier, but is controlling supply costs for its specific patient population.
Atlantic Health Atlantic Health, a $1 billion dollar healthcare system in New Jersey, used the SIM methodology to determine the root cause of increasing supply costs. Supply expense was up 5% from the prior six months, but inpatient discharges were flat and adjusted discharges were down. Clearly supply costs were out of control. Or were they? Traditional supply expense metrics provided conflicting answers. Atlantic Health’s chief supply chain officer, Joe DiPaolo, knew that significant changes in their patient mix were an important part of the equation, but he was having difficulty finding answers and justifying the supply expense increases.
A year prior, Overlook Hospital, one of the two Atlantic facilities, had absorbed additional total joint, spine, cardiac, and interventional volume when a neighboring hospital closed. Since then these programs have continued to grow. Meanwhile, Morristown Memorial Hospital has also continued to grow, but in different ways. The new Gagnon Heart Hospital was opened in January 2009. These changes were coupled with decreases in women’s and children’s patients as well as behavioral health and general medical patients.
The types of shifts in patient mix that Atlantic Health is managing are very challenging for a supply chain team: new technology, new physicians, and new vendors. Monitoring supply expense versus SIM targets demonstrated that the supply expense increases observed were not out of line. While the entire supply expense increase could not be explained by the changes in Atlantic Health’s patient population, for the first time, Atlantic can understand the impact of this factor. Armed with this information, DiPaolo helped the supply chain team and hospital leadership to understand that the supply expense increase is not a crisis. This approach also allows DiPaolo’s team to focus on these populations going forward to maintain good cost management.
Baptist Health System Michael Louviere says SIM has become an important component of the supply chain department’s process to consistently review and improve on its activities in order to support the health system overall. SIM serves as his department’s own barometer, providing quarterly insight into whether the hospital’s supply expenses are in line or if they need to review expenses more closely. SIM is key to effectively measuring, and thereby controlling supply expenses in a constantly changing environment.
Predicting for the Future As hospitals strive to drive operational improvements and cut costs, gaining a more accurate picture of supply costs is a critical step. With falling margins, every dollar counts, and effective utilization of resources—both in supplies and the personnel who manage them—is imperative. SIM is an answer for supply chain leaders seeking new tools to meet new challenges.
It is crucial that health systems get it right when predicting supply costs – for the benefit of their organizations and communities.
Lisa Dietz serves as Director, Aspen Healthcare Metrics, a MedAssets Company and is a Six Sigma Black Belt.
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