Supply Chain Management

Looking Beyond Cost Control: A New Role for Strategic Healthcare Supply Chain Leaders

August 23, 2017 4:56 pm

Healthcare leaders have long been accustomed to seeing the role of supply chain management as focused simply on managing the purchase and delivery of medical-surgical and pharmaceutical supplies. Under this traditional view, advanced responsibilities might include controlling costs through price negotiation, product standardization, and inventory management.

Healthcare reform has begun to transform this conventional view of the supply chain, as healthcare executives are increasingly embracing supply chain leaders as strategic partners in the new world of value-based care. In fact, the most proactive supply chain leaders today are measuring their success in terms of the extent that they have helped their organizations achieve the Triple Aim, as set forth by the Institute for Healthcare Improvement (IHI). That is, they are collaborating on initiatives to improve the patient experience of care, improve the health of populations, and reduce the per capita cost of care.

Indeed, strong supply chain involvement is essential to high performance under value-based care for three primary reasons:

  • Supply chain leaders bring critical expertise and evidence-based data to any discussion that can impact cost, quality, and outcomes, whether the issue is an acquisition, a regional partnership, or a new delivery model.
  • Supply chain leaders are heavily involved in data and technology—critical competencies in the emerging management environment.
  • Supply chain leaders are accustomed to working with a broad range of internal stakeholders and external partners, and these extensive relationships put them in a unique position to effect change within the acute and non-acute care space.

For finance leaders working to adapt to payment models that give providers strong incentives to deliver high-quality, cost-efficient care, supply chain professionals are natural allies. This point is exemplified in four case studies from organizations participating in the Cost, Quality, and Outcomes (CQO) Movement, an initiative of the Association for Healthcare Resource & Materials Management. a These case examples show how supply chain leaders can effectively collaborate with finance executives, clinicians, and suppliers to reduce costs and improve patient care. The emphasis in these case studies is on the role of supply chain leaders, but finance leaders have an important role to play in making these contributions of supply chain leaders possible, as will be discussed.

Kaiser Permanente: Cutting Orthotic Costs, Improving the Patient Experience

Many see the role of the supply chain as accommodating physician supply needs. Recently, supply chain leaders at Oakland, Calif.-based Kaiser Permanente went beyond that definition by helping to develop a new supply strategy that improved patient care while reducing a range of costs.

At Kaiser Permanente hospitals, patients in the emergency department (ED) with unstable spinal fractures often received a custom back brace, which can take several days to fabricate. Based on their status, patients were either admitted to the hospital to await their orthotic or discharged and asked to return when their brace was ready. Each option had disadvantages: Admission increased patient days, and home discharge increased the risk of pain, further injury, and infection.

When providers identified this situation as a performance improvement opportunity, supply chain leaders began working with orthopedic surgeons to examine the issues. They investigated the alternatives and identified potential savings available through prefabrication. Ultimately, orthopedic surgery approved a new protocol. Now, most patients with defined spinal injuries receive a prefabricated back brace.

This supply initiative has improved performance across the board. Kaiser Permanente now maintains an inventory of prefabricated spinal orthotics, which has created holding costs. However, the prefab items are between one-third and one-tenth as costly as custom braces. Cutting customization out of the process reduced inpatient days by 4,522 days systemwide between 2014 and 2015, representing a total cost reduction of $10 million. Just as important, by reducing the delay from injury to intervention, the initiative has helped improve patient care and the patient experience.

Avera Health: Boosting Quality, Access, and System Scalability by Redesigning Logistics

According to the IHI, system integration is a key strategy for fulfilling the Triple Aim. In line with this principle, many hospitals and health systems have merged in recent years. Unfortunately, newly integrated systems often are challenged to achieve promised care delivery improvements and cost efficiencies.

One such organization is Avera Health, an integrated health system based in Sioux Falls, S.D., which has grown through acquisitions and partnerships to encompass 35 hospitals and 11 affiliated facilities in five states. Although Avera Health’s recent growth has been impressive, fast expansion created complex logistics around lab specimens, pharmaceuticals, and biomedical replacement parts. Disjointed processes have added cost, reduced efficiency, and delayed the delivery of drugs and test results.

For Avera Health, supply chain involvement proved instrumental to realizing the benefits of scale. Supply chain leaders helped guide a comprehensive redesign of logistics systems, streamlining and standardizing core processes and centralized key functions. Chain-of-custody controls for laboratory specimens and pharmaceuticals also were strengthened, and the use of medication verification technologies was expanded. These changes have enabled Avera Health to establish and maintain an accurate and consistent delivery schedule for drugs, specimens, and biomed parts. The schedule covers facilities in both larger cities and remote locations.

Supply chain leaders’ participation in this initiative has helped Avera Health to optimize system performance. Greater logistics efficiency is projected to generate operational cost savings of $1.3 million over 5 years. Lower operating costs have allowed Avera to establish more drop points without increasing spending, thereby helping increase access to care, including service to long-term care facilities and Native American reservations.

The redesign also has helped improve the patient experience. Better process controls have improved patient safety by helping to prevent medication errors. Moreover, patients now receive test results and other services in a timelier manner.

Chesapeake Regional Healthcare: Filling the Data Gap for Managing Bundled Episodes

Managing costs is essential under bundled payment models. Unfortunately, all too many healthcare organizations’ ability to manage costs effectively is impaired by an inability to tie costs to specific services and care episodes. Understanding the critical importance of accurate costing, supply chain leaders at Chesapeake Regional Healthcare in North Chesapeake, Va., led efforts to incorporate robust supply chain data into management information systems.

Chesapeake recently implemented new electronic health record (EHR) and enterprise resource planning (ERP) technologies. Supply chain leaders realized that these systems, if they were connected, would provide the means to link supply data to clinical care data. The connection was accomplished by creating a virtual private network between Chesapeake’s inventory management software and its patient medical record and patient billing systems.

The next step was to implement barcode scanning at the point of care. Supply chain management worked with stakeholders to make sure supply scanning did not interfere with clinical workflows.

By linking these information systems, Chesapeake was able to create a strong platform for managing bundled services. When a caregiver scans a supply item, the system automatically assigns that item to a patient and an episode of care, thereby helping finance leaders manage episode costs and ensure an adequate margin under capped payments.

This system capability also potentially creates an opportunity to tie supplies to patient outcomes, enabling more robust value analysis. In the very least, accurate costing allows Chesapeake to generate more detailed bills, potentially improving patient satisfaction. The new system also creates opportunities to reduce costs through better supply forecasting and inventory management. For example, after reducing medical/surgical supply inventory on one nursing unit by 70 percent, Chesapeake applied the system enterprisewide, resulting in a minimum inventory reduction level, in medical/surgical supplies, of 50 percent.

Ochsner Health System: Reducing SSI Rates by Optimizing Supply Use

Traditionally, the supply chain ends when a supply item is in the hands of the caregiver. At Ochsner Health System in New Orleans, supply chain leaders believe their responsibility goes beyond supply delivery and extends to supply use. Recently, they translated this belief into action by participating in an initiative focused on the use of skin preparation products in the operating room (OR). The initiative both reduced costs and improved patient care.

The initiative addressed surgical site infections (SSIs), which lead to poor patient outcomes and are penalized by Medicare. Ochsner’s supply chain leaders observed that the nine-hospital system had an opportunity to reduce SSI rates through organizationwide improvements. After securing approval from system executives and the surgery department, they launched a Lean Six Sigma project focused on surgical prep processes.

The project was driven by a multidisciplinary team representing all facilities within the system. Team members observed current OR processes, performed a gap analysis, and conducted a literature review. They also analyzed information on correct product use. The project led to the creation of a standard skin prep process for the OR, specifying standard procedures and products and eliminating variations in practice. An implementation and staff education plan also was developed, as were tools and processes for monitoring outcomes.

The initiative has had a strong impact on care quality and patient outcomes at Ochsner facilities. In one year, class I and class II SSI rates decreased 40 percent, and during the same period, the SSI rate for abdominal hysterectomy declined 82 percent. Because a single SSI event can cost about $20,000, the improvements have generated significant savings. As an additional benefit, product standardization has helped the system reduce costs through volume purchasing.

Next Steps

The examples above show just a few ways supply chain leaders are proving instrumental in helping healthcare organizations achieve the goals of the Triple Aim. It should be reemphasized, however, that the most successful initiatives result from supply chain professionals entering meaningful partnerships with other healthcare professionals. Finance leaders have a clear role to play in realizing the strategic benefits of strong supply chain involvement. Specifically, they can be strong advocates for their organizations to immediately take the following actions.

Elevate supply chain leadership to the executive level. As the case examples demonstrate, strategic supply chain leadership goes beyond cost control. Next-generation supply chain leaders can make important contributions to care quality, patient satisfaction, and patient outcomes. Many leading healthcare organizations are acknowledging this key role by appointing a chief supply chain officer. Giving supply chain a seat at the executive table ensures that every leadership decision can benefit from supply chain’s involvement and expertise.

Help build links between supply chain management and physician leadership. In most hospitals, physicians and supply chain professionals occupy separate silos. Yet each group has information and insights that can help the other achieve its goals. Finance leaders can help elevate system performance by engaging with supply chain and the medical staff. For example, the prefabricated orthotics initiative at Kaiser Permanente included a change management process that brought together physicians and supply chain leaders. The project team secured endorsements from key physician leaders and developed a physician-focused “road show” designed to introduce the new supply program to the medical staff, answer questions, and provide clinician education.

Transition the organization from product analysis to value analysis. In recent years, many healthcare organizations have replaced their product standards committee with a value analysis committee (VAC). Unfortunately, however, most VACs still focus on product analysis. Few of these committees have fully embraced the mission of improving cost, quality, and outcomes. Finance leaders can help improve performance by engaging with and supporting VAC efforts to reorient toward the goals of the Triple Aim. Visionary supply chain leaders are a natural ally during this transition. They offer critical expertise in cost issues and can contribute valuable perspectives on supply issues.

Helping Health Systems Thrive

Although cost control remains a key focus of the healthcare supply chain, today’s supply chain professionals offer significantly enhanced value to hospitals and health systems. Next-generation supply chain leaders are helping their organizations achieve the Triple Aim by working closely with clinicians and finance partners to reduce healthcare costs while improving quality and outcomes. This collaboration, in turn, provides a means for helping healthcare organizations thrive under value-based payment models that reward improved outcomes and high-quality, cost-efficient care.

Michael Schiller, CMRP, is senior director of supply chain for the Association for Healthcare Resource & Materials Management.


a. To find out more about the AHRMM’s CQO Movement, go to


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