Leading Healthcare Systems Respond to Obamacare by Making Supply Chain a Critical Differentiator

The health care industry in the US is undergoing transformation driven by the Affordable Care Act (Obamacare) and the increasing impact of consumerism. Healthcare providers historically have had prepaid plans where the cost of care was paid up front and the more procedures a hospital did, the more they got paid. Consequently providers felt little need to practice even the basic tenants of supply chain management or even understand the total cost of particular procedures.

Now reimbursements are not only going down, they are becoming incentive based. If a hospital does a procedure and the patient is released but then has to be readmitted, the provider takes a major hit on what they are paid. That means the industry needs a lower cost structure even as they improve the quality of patient outcomes.

Obama Signs Affordable Care Act
Obama Signs Affordable Care Act

Typically, if the network has more than four hospitals, savings in procurement become a major opportunity. Historically, many integrated delivery networks ordered from large medical supply distributors like Cardinal Health or Owens & Minor. Those distributors bought in quantity, broke the bulk, delivered smaller quantities to their clients, and earned a 3-6 percent markup for their efforts.

Now larger healthcare chains are building warehouses, automating them, ordering direct from the manufacturers, and eliminating the middle man markup. In one hospital’s case, University of Pittsburgh Medical Center (UPMC), they leased a 150,000 square foot warehouse, installed all the racking, hired new workers, installed a warehouse management system (WMS), and still were able to get a payback within six months based on moving the volume of approximately 10 vendors to self-distribution!

Kaiser Permanente, the US’s largest healthcare organization, recently spoke at Oracle OpenWorld about the supply chain transformation they are undergoing.  I’ll provide a few highlights of this transformation, but if you want the full story you can click here.

Historically, nurses spent time as hunters/gatherers, searching for needed products; this of course limited the amount of time that nurses spent with patients. Not surprisingly, just in case inventory existed in multiple storage locations across the system.  On most ordered items, Kaiser Permanente set inventory levels at individual storage locations (par levels) through committee decisions driven by nursing; there was no science involved in selecting a par level. The processes for discovering expired and recalled products – and there are thousands of recalls per year – were manual.

What Kaiser Permanente wants to move to is a focus on the patient at the point of care. The supply chain organization can help by implementing bar coding, and then removing nurses and other technicians from the need to select, cycle count, or reorder inventory. In addition to taking over reordering, the supply chain will also be responsible for maintaining procedure cards – the list by doctor of all materials that doctor uses for particular procedures. This information will allow them to see variation of product usage across procedures and surgeons.

But by far the most interesting initiative at Kaiser Permanente is integrating product scans to a patient’s electronic medical record. This allows Kaiser Permanente to do a comparative effectiveness analysis.

Successful change initiatives are usually a combination of people, process, and technology.  Getting the people issues right is often the highest hurdle. In a health care setting, buy in from doctors will be critical. The goal of linking of products used to patient records is to be able to show doctors data on the effectiveness of different drugs and procedures. Kaiser Permanente is so big, that they can benchmark a procedure’s performance based on the sheer number of times that the procedure is carried out in their own system.

The most forward looking healthcare systems will drive a lower cost supply chain while improving care, and this will allow them to grow substantially as the Affordable Care Act takes hold. In short, the supply chain organization will become a critical player in the best healthcare system’s competitiveness, not an afterthought.


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