Making The Link Between Supplies And The Revenue Cycle

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May 19, 2004

Hospital chief financial officers who are attempting to link the supply chain and revenue cycle are entering uncharted territory -- and it's rough terrain. Hospitals are essentially making up how to create this link as they go. Approaches will vary, and many aspects of the project can be simplified with information technology solutions. But experts say that any approach needs to encompass several major steps, as discussed in a new HFMA report released this month, "Linking Supply Costs and Revenue: The Time Has Come." Below is a summary of those steps:

Involve all of the stakeholders, as needed. Effective linkages require regular interaction among all of the major stakeholders in this whole process, including the people who work in supply chain management, finance, the departments that use supplies, and the physicians.

Clean up the item master to reflect the supplies used. Ideally, a hospital's formulary and item master are one and the same -- but making them so takes considerable work. Start by deleting supplies that are not commonly used. You can identify these items without consulting clinicians by running an information system report on what supplies had been bought less than three times in the past 12 months. Then, to prevent multiple item master listings for the same item, implement a strict naming convention using the same type of descriptors to describe every supply on the item master. Finally, identify chargeable, expensive supplies not currently on the item master. One way to do this is to compare invoices for high-tech items against the item master.

Update your chargemaster, using the item master as a guide. To make the job manageable, identify a key area you want to start with, such as pharmaceuticals or surgical supplies. Next, assign appropriate charge codes for all chargeable supplies in that section of the item master. This process is very complex, requiring intimate knowledge of managed care contracts, CMS payment requirements, and all of the various reimbursement codes, so the finance staff needs to work hand-in-hand with appropriate departmental or product line leaders. Finally, establish your mark-up policies and set mark-up prices in each key area.

Link the cleaned-up item master and chargemaster. Hospitals can develop a home-grown crosswalk if they have the expertise on staff or purchase an information technology product to achieve this linkage. The goal in linking the two is that when changes occur in supply costs, the changes would be efficiently reflected in the chargemaster.

Work with physicians to narrow the number of high-tech supplies. Form a committee that includes physicians from across the health system and comprises subcommittees of physicians in different specialties. To make the best use of physician time, consider the approach used at Memorial Hermann Healthcare System, Houston, Texas. There, materials management staff are dividing the 24,000 supply items on Memorial's cleaned-up item master into therapeutic subclasses such as orthopedic supplies. Then, the supplies in each subclass are further divided into A, B or C items. "A" items are noncontroversial supplies that would not require discussion during physician committee meetings. By contrast, physicians will require considerable time deciding which "C" items should be listed on the item master.

Identify ways to add and delete new high-tech supplies. The same type of physician committees that evaluate the existing supplies on the item master could also be recruited to evaluate new high-tech devices before they are purchased.

Set up safeguards. The reality is that it's close to impossible to keep vendors away from physicians. Some new high-tech devices will probably slip into the hospital and not make it on the chargemaster -- even after the supply chain and revenue cycle are linked. That's why the information technology solutions hospitals use need to include some safeguards, such as exceptions reporting, for capturing these renegade supplies.

SOURCE:

"Linking Supply Costs and Revenue: The Time Has Come," a collaborative effort by HFMA and MedAssets, Inc. HFMA members received a copy of this report in their May issue of hfm.

Additional Resources

Resource Management Update: Healthcare Supply Chain
Resource Management: The Healthcare Supply Chain 2002 Survey Results
"Streamlining The Supply Chain," hfm, July 2003 (available to HFMA members only)
"Using Organizational Change to Reach Your Technology Goals," hfm, August 2002 (available to HFMA members only)
Revenue Cycle: Comprehensive List of HFMA Products and Services
HFMA Fall Seminar Series
1. Revenue Cycle and Supply Chain Management: Gaining Insight and Improving Key Hospital Processes
2. Cost Control and Six Sigma: Using Process Redesign to Reduce Operating Costs
3 Turning Data into Useful Information: How to Effectively Collect, Analyze and Report Financial and Clinical Data to Enhance Decision-Making in Healthcare

If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble at lnoble@hfma.org.

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