Supply Chain Management Practices of the Largest Health Systems. The Health Management Academy Benchmarking Series

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1 Profiling Success: Supply Chain Management Practices of the Largest Health Systems The Health Management Academy Benchmarking Series A White Paper Reporting on the Large Health Systems Supply Chain Management Practices Survey Conducted by The Health Management Academy with sponsorship from Broadlane The Academy

2 Advisory Committee Donna Drummond Vice President and Chief Procurement Officer, North Shore Long Island Jewish Health System Jack Fleischer Vice President, Strategic Sourcing, New York Presbyterian Hospital Joy Gorzeman, R.N. Senior Vice President, Patient Care Services and Chief Nursing Officer, Trinity Health Dennis Herrick Chief Financial Officer, Beaumont Hospitals Vance Moore President, Resource Optimization & Innovation, Sisters of Mercy Health System Mark Solazzo Chief Operating Officer, North Shore Long Island Jewish Health System Christine Stesney-Ridenour Administrative Director, Beaumont Hospitals Ann Symonds Senior Vice President, Material Services, Memorial Health Services (Long Beach, CA) Michael McKenna, M.D. Vice President, Medical Management, Advocate Good Samaritan Hospital and Academy GE Fellow Study Director Paul Alexander Clark, DrPH (cand.), MPA, FACHE Senior Director, Research & Programming, The Health Management Academy Study Funding Broadlane, Inc. (Dallas, TX) provided financial support for this study. 2 The Health Management Academy

3 TABLE OF CONTENTS Executive Summary Study Results Comparing Top 10% vs. Bottom 10%: Wide Variation in Results Corporate Office Direction System-wide Supply Chain Executive: A Necessity System-wide Supply Chain Executives: Hospital Background Management Approach: Continues to Evolve Centralization of Supply Chain Management Managing Supply Chain Improvements: Collaborate System-wide, Execute from Corporate Leadership Senior Leadership Support Engaging Hospitals & Physicians: Strongest Predictor Clear and Effective Policies Managing Physician Preference Items Physician Engagement Physician Satisfaction and Supply Chain Performance Not Mutually Exclusive GPOs Outcomes of Supply Chain Improvement Initiatives Future Opportunities Survey Methodology Appendix A. Participating Health Systems Appendix B. Titles of Survey Respondents Appendix C. Supply Chain Metrics Appendix D. High Performance Health System Supply Chain Management Profile Supply Chain Management 3

4 Executive Summary This study of 60 of the largest health systems, with average annual net patient revenue of $2.7 billion, presents benchmarking and best practices data that form a guide for senior executive teams to achieve supply chain management success. This study found: Wide variation in supply chain performance; Leadership, management and organizational factors resulted in significant supply chain savings, ranging up to an estimated $130 million annually; Physician relationships can be improved via effective involvement in supply chain teams and improvement processes. Best Practices of High-Performing Systems As a method of highlighting important practices and creating guidelines for health systems, Top 10% and Bottom 10% comparative groups were created. Full confidentiality was maintained throughout. Success Demands Persistence Every year, achieving supply savings becomes more challenging. Before we could take our supply chain to the next level of savings, we needed to align supply chain objectives system-wide. With our recent system-wide alignment, we can now better promote and guide product standardization without compromising quality, improve divisional accountability and accelerate results. Chris Stesney-Ridenour, VP Operations, Beaumont Hospitals A composite ranking (discussed in the Methodology) of multiple performance measures determined the Top 10% and Bottom 10% groups. Figure 1 shows the dramatic difference in supply expense ratios (supply expense/net patient revenue) recorded by the study. The 9% difference represents a gap worth hundreds of millions of dollars annually between health systems in the Top 10% and Bottom 10%. Figure 1. Top 10% vs. Bottom 10% Performance Comparison 25.0% 21.8% Top 10% Bottom 10% 20.0% 17.6% 15.0% 12.5% 10.0% 8.3% 5.0% 3.0% 5.2% 0.0% Supply Expense Ratio SE as % of TOR Rx as % of TOR Supply Chain Management 5

5 This study systematically examined more than 180 variables representing numerous best practices, technologies and demographic characteristics. A small set of variables demonstrated a statistically significant relationship to supply expense ratios and a larger set of practices were common among the Top 10% performers. A summary of key differences between the Top 10% and Bottom 10% performers is reviewed below. Corporate Office Direction. Top 10% performers (Table 1) all employed a full-time corporate-level supply chain executive. The governance process was more aware of and involved in supply chain activities. The Top 10% had a more centralized supply chain function, vertically integrated and structured a more corporate approach to supply chain innovations. Leadership. Senior leadership in the Top 10% performers (Table 2) was more likely to involve physicians on the supply chain teams, change vendors, raise visibility of the supply chain program, enlist physician cooperation and seek cooperation among system hospitals. System-wide Policies. The Top 10% performers (Table 3) were more aggressive in refusing payment for non-approved devices, limiting vendor access, integrating cost, productivity and quality measures into long-term agreements, operating corporate-level pharmacy procurement and using process improvement techniques to enhance supply chain performance. Physician Engagement. Top 10% performers in improving physician engagement (Table 4) were more likely to provide support for physician cooperation, use individual physician comparisons and involve physicians on expert committees and supply chain teams. Measurement by Product Type. Top 10% performers utilized certain metrics more frequently than the Bottom 10% group (Table 5). In particular, tracking usage and costs per product type were two metrics used by the Top 10% which received less attention from other health systems. Table 1. Corporate Office Direction Top 10% Bottom 10% Corporate Supply Chain Executive 100% 50% Board Review: Annual Rarely Never 100% 0% 0% Program in place at least 5 years 67% 33% Management Approach: Vertically-integrated Traditional High Centralization 100% 17% 67% 0% 0% 33% 67% 0% 50% Corporate Approach to Innovation 83% 33% 6 The Health Management Academy

6 Table 2. Leadership Support Top 10% Bottom 10% Physician Involvement on Supply Chain Teams 100% 33% Willingness to Change Vendors 100% 50% Program Visibility 100% 50% Physician Cooperation 100% 67% Hospital Cooperation 100% 67% Table 3. System-wide Policies Top 10% Bottom 10% Refuse Payment for Non-Approved Devices 100% 50% Limit Vendor Access 100% 50% Integrate Cost, Productivity and Quality into Long- Term Agreements 100% 50% System-Level Pharmacy Procurement 67% 33% Utilize Process Improvement Techniques 83% 50% Table 4. Practices Resulting in High Physician Engagement Top 10% Bottom 10% Leadership Support: Physician Cooperation 90% 54% Individual Physician Comparisons 70% 40% Physicians Involved on Expert Committees 70% 50% Physicians Involved on System-wide Supply Chain Teams 50% 30% Table 5. Supply Chain Metrics Top 10% Bottom 10% Usage per product type 100% 17% Cost per product type 100% 33% Central storeroom inventory turn ratio 100% 50% Cost per purchase order 83% 50% Supply Chain Management 7

7 System Practices Will Lead to Future Gains in Supply Expense Reductions Measures of system size or supply spend were not related to supply chain performance in this study of the largest health systems because a critical mass of purchase and pricing power had already been reached. Therefore, supply expense reductions going forward will most likely result from leadership, management and organizational factors described in this white paper. Supply Chain Executive Views Supply chain executives completing this survey were quite positive about both the effectiveness of their GPO and the benchmarking services offered by the GPO. Supply chain executives defined broadly the positive influence of their supply chain programs to include finances, quality, patient safety and productivity of the health system. Supply Chain Gains Will Continue Figure 2 shows that over 90% of the health systems surveyed believe that significant (60%) or moderate (33%) opportunities exist for reductions in supply expenses. The practices outlined in this White Paper and pursued by the Top 10% performers represent a guide for realizing supply chain gains. Figure 2. Potential for More Supply Chain Gains Minimal, 3.3% Extraordinary, 3.3% Moderate, 33.3% Significant, 61% 8 The Health Management Academy

8 Study Results Comparing Top 10% vs. Bottom 10%: Wide Variation in Results Examining the highest performing health systems provides valuable insight towards substantial yet obtainable performance improvements. Supply expense ratios varied widely (Figure 1). 1 A 40-50% difference between the Top 10% and Bottom 10% performers indicates that substantial opportunity exists for improvement. Given that the average annual supply expenses are $483 million, the differences between the Top 10% and the Bottom 10% represent a potential annual supply expense savings in excess of $100 million. For details on the analysis of these savings and the methods for determining the Top 10% and Bottom 10% analysis, please see the Methodology section. KEY FINDING #1 Future Gains from Health System Practices System size or supply spend were not related to supply chain performance in this study because a critical mass of purchase and pricing power had already been reached by the largest health systems. Therefore, future gains will be related to leadership, management and organizational factors. Figure 1. Top 10% vs. Bottom 10% Performance Comparison 25.0% 21.8% Top 10% Bottom 10% 20.0% 15.0% 12.5% 17.6% 17.6% mean 15.4% mean 10.0% 8.3% 5.0% 3.0% 5.2% 4.4% mean 0.0% Supply Expense Ratio SE as % of TOR Rx as % of TOR 1. The limitations of supply expense ratios due to variation in revenue were recognized by the advisory committee. The measure was selected as it s the most universally utilized outcome measure and has provided effective benchmarking in other studies. Supply Chain Management 9

9 Causes of Variation: Leadership, Management, and Organizational Factors More than 180 variables were examined to determine the potential causes for this variation, including demographic variables, measures of system size and supply expenditures. System size and demographics did not show statistically significant differences in supply chain outcomes. However, leadership, management and organizational factors did demonstrate significant differences; they will be discussed in succeeding sections of this white paper. Significant Financial Success Possible We have successfully validated almost $200 million in savings over six years and during that time, our margins have improved from less than 2% to over 5% system-wide. Lou Fierens, SVP, Supply Chain and Capital Project Management, Trinity Health 10 The Health Management Academy

10 Corporate Office Direction System-wide Supply Chain Executive: A Necessity Nearly all health systems (92%) reported having a system-wide supply chain management program with a system-level executive responsible. Each health system in the Bottom 10% did not have a fully dedicated system-level supply chain executive. System-level supply chain programs and executives typically report into the system level COO or CFO (Figure 2). System-wide Supply Chain Executives: Hospital Background Most (77%) health system-level supply chain executives began by operating supply chain programs at hospitals. Other experience categories, including retail, manufacturing, pharmaceutical or government accounted for more than 28%. Supply chain leadership development and succession planning remains a strong need for many health systems. Figure 2. Reporting Relationships of the System-level Supply Chain Executive System COO (or equivalent) 38% System CEO 11% System CIO 6% Other 6% System CFO 39% KEY FINDING #2 Management and Organization Can Make a Difference High-performing systems report that they began with a well-planned organizational design for system-level supply chain management and a progressive approach to managing suppliers. Start With Organizational Design North Shore Long Island Jewish Health System established a new organizational structure that guides the ongoing transformation of the supply chain function. Borrowing from lessons learned in retail and manufacturing sectors, this transformation focused on the establishment of effective governance, active leadership, cross organizational integration, resource management, stakeholder relationship management and relevant performance metrics to guide continuous improvement. Donna Drummond, Chief Procurement Officer, NSLIJ Supply Chain Management 11

11 Management Approach: Continues to Evolve Health systems typically pursue one of three approaches to supply chain management: 1. Traditional Supply Chain: Dependent on outside intermediaries, such as GPOs, distributors and transporters. 2. Vertically-Integrated Supply Chain: Disintermediated model with large purchase power, distribution facilities and other system-controlled functions. 3. Collaborative Supply Chain: Highly selective partnerships with suppliers and intermediaries (such as GPOs) with agreements or incentives to collaboratively improve performance. These management approaches are often considered to be evolutionary stages, with collaborative and vertically integrated typically considered the ideal model for achieving higher performance. 2 In the qualitative responses, it was common for health systems with traditional models to report that they were in the process of evolving their supply chain approach to collaborative or vertically integrated. The variance analysis showed a preponderance of health systems with a vertically integrated approach among the Top 10% performers and health systems with a traditional supply chain approach in the Bottom 10%. Figure 3 shows a relatively even distribution among these approaches. Figure 3. Large Health Systems Management Approaches to Supply Chain Other 10% Vertically- Integrated 22% Collaborative 35% Traditional 33% 2. Anderson D, Lee HL. The Internet-Enabled Supply Chain. ASCET Vol. 4, May 16, The Health Management Academy

12 Centralization of Supply Chain Management Health systems rated the degree of centralization of the common elements of supply chain management: centralized, blended, or decentralized. To be assigned to the centralized group all eight of the following elements were centralized. To be assigned to the decentralized group, at least four of those eight elements were listed as decentralized. ERP Item Master/Electronic Commerce Strategic Sourcing Commodities Procurement Accounts Payable Procurement Processes Value Analysis/Vendor & Product Selection Performance Measurement Supply Spend In order to focus the analysis on the centralization of management functions, omitted from this must have list were pharmacy procurement, equipment cleaning/maintenance and receiving/ inventory management. Figure 4. Distribution of Centralization of Health Systems Supply Chain Management 70% 60% 65% KEY FINDING #3 Highly Centralized Health Systems Achieve Better Results Systems that centralized all principal supply chain management functions into the system s corporate office demonstrated significantly lower supply expense ratios. Centralizing Health System Supply Chain Management Delivers Results We created an overall health system value analysis program. Enabled through our internal business information system, we have a formal and structured standardization process, as well as, institutional commitment to compliance. It has been a 10- year journey to eliminate over $70 million in product related costs, not including the people savings. Charles Agins, Vice President, Finance, Montefiore Medical Center 50% 40% 30% 24% 20% 10% 11% 0% Highly Centralized Blended Decentralized Supply Chain Management 13

13 Considering centralization at the corporate system level, a normal curve emerges in the distribution of decentralized, blended and centralized (Figure 4). Health systems with centrally managed supply chain programs have significantly lower supply expense ratios (Figure 5). Centralizing supply chain management functions at the system level makes a signifcant financial difference. Figure 5. Centralization and Supply Expense as % of Total Operating Revenue 18.0% 16.0% 14.0% 12.0% 10.0% 13.8% Highly Centralized 15.7% Managing Supply Chain Improvements: Collaborate System-wide, Execute from Corporate Managing supply chain improvements across a large health system provokes a challenging balance between hospital-specific initiatives while seeking an aligned, uniform organization. Health system supply chain executives described their health system s approach to managing supply chain management improvement initiatives as follows: Corporate Direction The health system typically designs and leads all initiatives. Corporate Execution Hospitals and health system both design initiatives. Health system leads all initiatives. Blended/bi directional Hospitals frequently design and lead their own initiatives, typically with assistance from the system. The health system also designs and leads large-scale initiatives. Grassroots Hospitals typically design and lead their own initiatives. Blended Decentralized Figure 6 shows the distribution of these approaches among health systems. 16.8% Corporate Execution should be the most effective structure for managing supply chain innovation. Corporate management of the improvement process is necessary to ensure consistency and quality in replicating newly discovered best practices across diverse, geographically dispersed facilities. Nevertheless, total corporate control ( Corporate Direction ) would likely be suboptimal as forcing all improvements to come from the central office often stifles local creativity and innovation. 14 The Health Management Academy

14 Figure 6. Distribution of Approaches to Managing Supply Chain Innovation 50% 40% 30% 20% 10% 0% 42% Corporate Execution 35% Blended/ Bi-directional 22% Corporate Direction 2% Grassroots KEY FINDING #4 Best Approach to Managing Supply Chain Improvements: Front-Line Engagement with Corporate Execution Balancing the need for health system alignment and supply chain standards with unique local facility needs is a challenge. Better performance results when health systems engage hospitals in the design of improvement initiatives but the corporate office leads the implementation and execution of the initiative. Success Builds Upon Success The results affirmed this theory (Figure 7). Systems that engage hospitals, facilities and physicians in supply chain improvement initiatives achieve much lower supply expense ratios. Figure 7. Approach to Supply Chain Innovation and Supply Expense Ratios 20.0% 18.0% 19.3% 17.6% 17.9% Our Procurement Department has contributed over $20 million in impact annually to the hospital for three years running. We are more engaged with physicians and operating departments than ever before and working in new areas that procurement rarely was involved in before. Jack Fleischer, VP, Procurement & Strategic Sourcing, New York Presbyterian Hospital 16.0% 16.4% 15.7% 14.0% 13.1% 12.0% Supply Expense Ratio Supply Expense % of TOR Corporate direction Blended Corporate execution Supply Chain Management 15

15 Leadership Senior Leadership Support Health systems supply chain executives identified specific actions that senior leadership took to support supply chain programs: Program visibility Accountability Willingness to change vendors Insistence upon cooperation from hospitals and departments Insistence upon cooperation from physicians Based on the responses, health systems were assigned to one of four categories of leadership support: Complete (all five senior leadership support actions identified) Strong (four) Some (two or three) Little-to-None (one or none) Using multiple behavior reports to determine the degree of leadership support elucidates a more accurate and valid measure. Figure 8 displays the breakout of health systems, according to strength of leadership support. Although a little over half (58%) Figure 8. Distribution of Leadership Support 80% 60% 58% 40% 30% 20% 12% 0% Complete Support (5) or Strong (4) Some (2-3) Little to None (1 or less) 16 The Health Management Academy

16 of programs could be classified as receiving strong leadership support, there is a dramatic difference in performance in the programs receiving only Some or Little-to-None support (Figure 9). Figure 9. Senior Leadership Support and Supply Expense Ratios: Stronger Support and Lower Relative Supply Expense 20.0% 18.0% 16.0% 14.0% 16.1% 19.3% 14.0% 17.0% KEY FINDING #5 Leadership May Be Most Important Not only does leadership support emerge as the strongest variable leading to better supply chain outcomes, but leaders will substantially influence all other factors, such as the supply chain program s approach to management and innovation, policy formulation and enforcement and degree of centralization. Leadership Support Matters 12.0% Supply Expense Ratio Complete Support (5) and Strong (4) SE as % of TOR Some (2 3), Little (1), or None We are extraordinarily supported by our CEO, Executive Vice President of Finance, all hospital presidents and senior management team. Engaging Hospitals & Physicians: Strongest Predictor Testing each of the leadership action variables using multiple regression analysis insistence upon cooperation from hospitals and departments and insistence upon cooperation from physicians were the two greatest drivers of lower supply expense ratios. We are building more physician relations every day. Our challenge, like that of most other health systems, is utilization and practice change, especially around a new technology. That is why we try to scrutinize it to the extent possible and reasonable, making sure that we do not compromise quality patient care. Judith Lipscomb, VP, Materials Management, BayCare Health System Supply Chain Management 17

17 Clear and Effective Policies Managing Physician Preference Items As Table 6 shows, nearly all health systems educate physicians on the cost of supplies. Nearly 90% of health systems did not report utilizing gainsharing or other monetary incentives for physicians as part of their supply chain management improvement initiatives. The best practice rated most highly effective was Payment refusal for non-approved device invoices. Nevertheless, this practice remains unutilized at any level by 22% of all health systems. How do these tactics mesh with physicians preferences? Health systems reporting strong leadership support for collaboration with physicians utilized two tactics for managing physician preference at a far greater rate: Limit vendor access through policy Payment refusal for non-approved device invoice Table 6. Tactics for Managing Physician Preferences Tactic Usage Educating clinicians on costs 80% Physician involvement on the supply chain team 73% Limit vendor access through policy 62% Payment refusal for non-approved device invoice 57% Individual physician comparisons 45% Vendor credentialing 43% Gainsharing or other monetary incentives 5% KEY FINDING #6 Clear and Effective Policies Are Critical Managing the relationship between the health system, medical staff and vendors is crucial. Given that most physicians are not employed by the health system, successfully achieving alignment on device usage is through clear, consistent and effectively enforced policies. In this study, vendor access policies and payment refusal for non-approved devices figured most prominently. System-wide Policies Work Successful system-wide initiatives involved standardization of physician preference items: sutures and endomechanica, cardiac rhythm management devices and orthopedic implants that narrowed use to either one or two suppliers, depending on the initiative. All three had significant cost savings. Carl Tietjen, Senior Director, Corporate Contracting, University of Maryland Medical System 18 The Health Management Academy

18 Physician Engagement Physician Satisfaction and Supply Chain Performance Not Mutually Exclusive Ten health systems reported that supply chain programs resulted in high physician satisfaction (rated very good ); these systems also had lower supply expense ratios (Figure 10). These data indicate that a highly satisfied medical staff and reduced supply expenses are not mutually exclusive. Comparing the Top (rated 5 or very good ) and Bottom (rated 3 or fair ) performers in physician satisfaction (Table 4, pg. 7) demonstrates that high performers engage their physicians more frequently and in more effective ways. Leadership s willingness to engage physicians and involve them on committees and teams not only improves financial outcomes but also improves medical staff relations. All this emphasizes the role of leadership in developing the organizational structure and culture to promote high physician engagement in supply chain improvement initiatives. It s possible to achieve a true win-win increased physician satisfaction through involvement in decisionmaking and improved supply chain performance. Figure 10. Physician Satisfaction Estimates and Supply Expense Ratios # of health systems Fair 16.3% % 4 Good 14.7% 10 5 Very Good 16.5% 16.0% 15.5% 15.0% 14.5% 14.0% 13.5% SE as % of TOR KEY FINDING #7 High Physician Satisfaction and Improved Supply Chain Management Not Mutually Exclusive. Health systems with the highest reported physician satisfaction had slightly lower supply expense ratios. Senior leadership s ability to gain the cooperation of physicians was the leadership factor that accounted for the greatest variance. Quantitatively and qualitatively, high performers exhibited stronger clinician engagement. Physician Involvement on Committees We have three physician committees: (1) Cardiology helped us standardize to 90% vendor on CRM, 80% on DES; (2) Orthopedics helped us with matrix pricing; and (3) Technology Review. Physicians are asked to review clinical efficacy and support standardization. Even after all physician committees make recommendations, final approval by Supply Chain Oversight Committee comprised of CMO, COO, CFO, Lab and MM Executives. Judith Lipscomb, VP Materials Management, Baycare Health System Supply Chain Management 19

19 GPOs Group Purchasing Organizations: Overall Effectiveness and Benchmarking Supply chain executives were universally positive about the effectiveness of their GPOs (Figure 11). Evaluations of their GPOs benchmarking services showed wider variation (Figure 12). Health systems showed strong interest in benchmarking supply chain metrics and identified several new metrics that would be helpful in the future, including: Surgery inventory turn ratio, total inventory dollars per average patient days, percentage implant procedures meeting clinical utilization criteria, Item standardization rebate loss and vendor standardization rebate loss (Appendix C). Figure 11. Supply Chain Executive Perceptions of their GPO s Effectiveness Executives' Avg. Ratings of GPO Effectiveness Mean Score AmeriNet VHA/Novation HPG/Consorta MedAssets Premier Broadlane Figure 12. Supply Chain Executives Perceived Effectiveness of GPO Benchmarking Service Executives' Ratings of GPO Benchmarking Mean Score HPG/Consorta AmeriNet VHA/Novation Premier Broadlane MedAssets 20 The Health Management Academy

20 Outcomes of Supply Chain Improvement Initiatives Supply chain executives broadly defined the positive influence of supply chain programs to include not only finances, physician satisfaction and productivity but patient satisfaction and clinical quality. As supply chain programs continue to make greater gains in the health system, it is expected that the influence of the supply chain programs will grow. In manufacturing and other industries, it is assumed that greater efficiency leads to higher quality. It seems likely that medical care delivery will also follow that pattern over time. Future Opportunities Future Opportunities for Savings Two-thirds (63%) of health systems see extraordinary or significant potential for future total cost reductions in supply expenses (Figure 13). Opportunities Are Endless I believe we are in the top decile of supply chain, but even greater contributions can be made by our team in the future. We excel in contracting, purchasing, e-business, distribution, standardization and many other areas. As we grow our data tools and embrace a lean sigma culture, combined with the opportunity of merging or best practice successes with the emerging system level clinical protocol, utilization and quality opportunities are endless. - Jim Gleich, Director of Supply Chain Management, BJC Healthcare Future Research This study is one of the first to independently tie supply chain attributes and management practices to actual financial statistics and metrics from many of the largest healthcare institutions in the country. Future research might investigate large health systems best practices in managing high impact service lines and devices, such as orthopedics, spine and implants. Figure 13. Future Opportunity for Total Cost Reduction in Supply Expense Extraordinary, 3.3% Minimal, 3.3% Moderate, 33.3% Significant, 60.0% Supply Chain Management 21

21 Survey Methodology Survey Design The Health Management Academy developed an Advisory Committee of representing each major health system c-suite perspective and senior supply chain executives (see pg 5). A comprehensive literature review was conducted using multiple structured searches of the major healthcare management and business literature databases. The results of the review and interaction with the Advisory Committee bore the conceptual development of the survey. Construction of the survey items, survey validation and testing was conducted by The Academy under the guidance of the Advisory Committee. The survey was designed for Internet response mode. Vovici hosted the survey. Sample Selection All Academy health systems, excluding Veterans Health Administration (VHA) and military health services, were eligible for participation. The Academy members are among the largest health systems in the United States and account for approximately 50% of the net patient revenue in the United States. A single member in each health system was selected to receive the survey invitation via using the following precedence: COO, CFO, CEO, CNO, CMO. This hierarchy was selected in order to deliver the survey to the person in the health system closest in organizational structure to the health system s head of supply chain. Data Collection The survey was launched September 11, 2007 and closed November 20, Four waves of invitations were sent to 84 health system executives. The s specifically requested that the health system executive forward the invitation to the person responsible for your health system s supply chain management. 60 of 84 eligible health system executives completed the survey for 71.4% response rate. Responding health systems were representative of The Academy membership. Additional data from The Academy databases supplemented these responses. This included supply expenses, pharmacy supply expenses, net patient revenue, GPO utilized, supply expense ratio (supply expense as percent of net patient revenue) for the most recently closed fiscal year (FY06). These data were collected in May 2007 for The Academy s annual Financial Performance Benchmarking Program (FPBP). A small number of responding health systems were ed requests for these data if they were not FPBP participants, thus completing the database. 22 The Health Management Academy

22 Data Analysis The Academy conducted all data analysis utilizing Microsoft Excel and SPSS. The Advisory Committee guided the analyses and interpretation of the results. Determining the Top 10% Health systems provided: Supply Expense as % of Net Patient Revenue Supply Expense as % of Total Operating Revenue Pharmacy Expense as % of Net Patient Revenue We also asked health systems to provide a qualitative rating of the success of their supply chain improvement initiatives on five specific outcomes: Financial Clinical Quality Patient Safety Productivity Physician Satisfaction We determined the Top 10% Performer Decile by a composite ranking of those three reported objective outcomes and five reported subjective outcomes. The outcomes were weighted in the following fashion: Each objective outcome had a 25% weight and the five subjective outcomes had a total weight of 25%. This methodology has several advantages: Mitigates potential differences in supply expense accounting methods by integrating respondents ratings of success. Multiple measures provide stronger validation. Integration of non-financial measures recognizes the common mission of not-forprofit healthcare organizations to patient care quality. Sample Demographics Figure 14 displays the sample demographics. The average annual supply expense for systems in this study was $483 million. Average net patient revenue (NPR) was $2.7 billion. The sample mirrored The Academy membership in NPR and percent of academic health systems. Compared to the national population, The Academy membership has Supply Chain Management 23

23 a stronger representation of academic and larger health systems. NPR distribution in this sample was similar to The Academy as well as the previous Capital Benchmarking study (labeled CBP). Religious and profit status approximately match the national population. Figure 14. Profile of Responding Health Systems Profile of Responding Health Systems Religious Status Academic Status Profit Status Rel., 33.3% Non- Academic, 41.7% Academic, 58.3% For-Profit, 5.0% Non-Rel., 66.7% Not- For-Profit, 95.0% SC Sample Net Patient Revenue Distribution 20.0% 26.7% 53.3% Academy 19.8% 26.7% 53.5% CBP Sample 13.3% 29.3% 51.2% 0% 10% 20% 30% 40% 50% 60% >$3B $1 $3B <$1B Strictly Private and Confidential None of these health system characteristics exhibited any statistical relationships to the results. Respondents were system-level executives, reporting to or members of the system c-suite, with responsibility for supply chain management across the health system. (See pg. 33 for a complete list of the respondents titles). 24 The Health Management Academy

24 Major demographic characteristics of the Top 10% and Bottom 10% are relatively similar (Table 7). Demographic characteristics do not explain the variance here or in the overall sample. Table 7. Top 10% and Bottom 10% Comparison: Demographics Top 10% Bottom 10% Academic Health Systems 67% 50% Not-For-Profit 83% 100% Religious 33% 17% Bond Rating 100% A rating or better 83% A rating or better Multiple Market Presence 83% 67% % with 8 hospitals 67% 50% Supply Chain Management 25

25 Appendix A. Participating Health Systems Adventist Health System Advocate Health Care Ascension Health Atlantic Health Aurora Health Care Banner Health BayCare Health System Baylor Health Care System BJC Healthcare Bon Secours Health System Inc Carolinas HealthCare System Catholic Health Initiatives Catholic Healthcare West Centura Health Christiana Care Health System CHRISTUS Health Duke University Health System Fairview Geisinger Health System Hawaii Pacific Health HCA Henry Ford Health System Hoag Hospital Johns Hopkins Health System Legacy Health System LSU Health Care McLaren Health Care Memorial Health services Montefiore Medical Center Moses Cone Health System Mount Sinai New York Presbyterian Hospital North Shore Long Island Jewish Northwestern Memorial Norton Healthcare Ohio Healthcare Corporation Partners Healthcare PeaceHealth Piedmont Healthcare Presbyterian Healthcare Services Providence Health & Services Saint Barnabas Health Care System Scripps Health Shands Healthcare Sharp HealthCare Sisters of Mercy / ROi Summa Health System Swedish Medical Center Tenet Health Systems Trinity Health UMass Memorial Medical Center University Hospitals Health System University of Maryland Medical System Vanderbilt University Medical Center Vanguard Health Systems William Beaumont Hospitals Willis Knighton Health System Yale New Haven Health System 26 The Health Management Academy

26 Appendix B. Titles of Survey Respondents President Acting CEO COO CFO SVP, CAO and CFO SVP Finance Chief Supply Chain Officer Senior Supply Chain Officer SVP Supply Chain and Capital Project Mgt VP ERP & Supply Chain Operations VP, Supply Chain Management VP, System Logistics Management VP, Materials Management VP, Procurement & Strategic Sourcing VP of Operations Administrative Director Director, Supply Chain Strategy Director, Materials Management Director, Logistics & Systems Director, Value Analysis Senior Director, Patient Care Services Senior Director, Corporate Contracting Supply Chain Management 27

27 Appendix C. Supply Chain Metrics Assessing supply chain performance starts with selecting the most useful measures. Among dozens of potential measures, only a few measures could be considered universal standards supply expense, supply expense ratios and % compliance with GPO (Table 8). In addition to the widely used measures, health systems in the Top 10% utilized several metrics more frequently than others (Table 5). Tracking usage and costs per product type were the two metrics used by the Top 10% which received minimal attention from other health systems. Measurement Categories Finance Operational Sourcing and Procurement Utilization Metrics Indicates top 5 most used and most desired metrics Table 8. Supply Chain Metrics Utilization METRIC Use Don t Use Don t Use but Helpful in the Future Supply Expense Supply Expense Ratio Supply expense as % net operating revenue Supply expense as % total operating expense Supply expense per adjusted patient day, discharge and/or with case mix adjustment Rx supply expense per adjusted patient day, discharge and/or with case mix adjustment Supply expense per surgery case Supply expense per cath lab procedure Medical/Surgical Supplies as % total operating expense Rx Supplies as % total operating expense Central storeroom inventory turn ratio Surgery inventory turn ratio Cath lab inventory turn ratio Consignment inventory value Cost per PO % POs open for pricing/receiving discrepancies at 30 days % POs issued at correct contracted price % supply spend using a PO % PO lines using ERP/MMIS item master number Total inventory $ / Average Patient Days % of capital spend through contracted suppliers % of pharmaceutical spend through contracted suppliers % of medical/surgical spend though contracted suppliers % of electronic PO documents of suppliers % of electronic invoice documents from suppliers % compliance with GPO % supply spend through common vendors % implant procedures meeting clinical utilization criteria Item standardization rebate loss Vendor standardization rebate loss Usage per product type Cost per product type Please indicate which of the following financial supply chain metrics your system routinely utilizes 28 The Health Management Academy

28 Appendix D. High Performance Health System Supply Chain Management Profile This White Paper reports leverage points for large health systems to achieve significant savings from supply chain management. The table below summarizes the best practices this study validated by regression, variance analysis and/or utilization by systems in the Top 10% of supply chain performance. Best Practices by Category Corporate office direction Evidence Supply chain initiatives centralized in corporate office Variance, Top 10% System-wide supply chain executive Top 10% Innovation is bi-lateral but execution is driven from corporate Variance, Top 10% Board review at least annually Top 10% Senior leadership support Insists upon cooperation from physicians and hospitals Regression, Variance, Top 10% Utilize individual physician comparisons system-wide Top 10% Involve physicians on expert committees and supply chain teams Top 10% Clear and effective policies Payment refusal for non-approved device invoices Variance, Top 10% Limit vendor access through policies Variance, Top 10% Integrate cost, productivity and quality into long-term agreements Top 10% Strategic deployment of technologies (e.g., emar, bar codes/scanners, RFID). Top 10% Physician engagement Individual physician comparisons utilized system-wide Top 10% Physicians involved on expert committees effectively Top 10% Involve physicians on system-wide supply chain teams effectively Top 10% Supply chain metrics Usage per product type Top 10% Cost per product type Top 10% Central storeroom inventory turn ratio Top 10% Cost per purchase order Top 10% Top 10% Practice was used more frequently by health systems in the Top 10% of supply chain performance. Variance Systems that used this practice had better supply chain results. Regression Practice was most predictive of low supply expense ratios. Supply Chain Management 29

29 Contact Information For more information regarding this study or to receive a comprehensive report of the survey results, contact: Paul Alexander Clark, DrPH (cand.), MPA, FACHE Senior Director, Research & Programming The Health Management Academy paul@hmacademy.com Phone: The Health Management Academy

30 About The Health Management Academy The Academy provides an open environment for the senior executives of the country s largest health systems and corporations to exchange best practices, focused on increasing the quality and efficiency of care. The Academy implements its strategy with member-driven executive study groups, fellowship programs, benchmarking studies, workshops and publications. By virtue of the size and position of their healthcare systems and corporations, The Academy members have similar opportunities and challenges. They view The Academy as a knowledge source for identifying and monitoring tactical and emerging strategic issues. The Academy was formed in 1998, the same decade many of the largest health systems were created. The Academy s model of educational programming assesses the top priorities of its members, monitors the organization and development of large health system executive teams and facilitates structured interaction among its health system members. The Academy is an accredited CE provider and is independently owned and operated. Its members agree to adhere to The Academy s Code of Conduct. The Academy activities are conducted in compliance with PhARMA, AdvaMed, and NEMA codes.