Driving Transformation in the Healthcare Supply Chain: Change Can Be Good for Your Bottom Line. A GHX White Paper for Healthcare Executives

Transcription

1 Driving Transformation in the Healthcare Supply Chain: Change Can Be Good for Your Bottom Line A GHX White Paper for Healthcare Executives

2 Driving Transformation in the Healthcare Supply Chain: Change Can Be Good for Your Bottom Line A GHX White Paper for Healthcare Executives Executive Summary The healthcare industry stands at a crossroads. Faced with unprecedented challenges on a variety of fronts, it can continue to do business as usual and risk being unable to achieve its mission. Or it can change the way it does business and tackle the challenges head on forging a path to the future. There s a new sense of urgency in healthcare today. On the provider side, the mandates of healthcare reform intersect with declining reimbursements. At the same time, providers are being asked to deliver the same high-quality level of service to their patients. On the supplier side, with selling, general and administrative expenses nearly twice those of any other industry, manufacturers of medical-surgical supplies and the distributors who work with them are watching as margins continue to decline. Some in the industry are embracing major changes and transformation to address the challenges facing their organizations. And they are using their supply chains to help drive that transformation. By making their supply chains a strategic asset that can help them meet operational, clinical and financial imperatives, these organizations have recorded tremendous successes in controlling costs and increasing business efficiencies both paramount to the future of healthcare. This white paper will examine: How gaining visibility into, and control over, your organization s supply chain can help you weather the current changes in healthcare and emerge stronger Why healthcare organizations undertake supply chain transformations What is necessary for successful supply chain transformation The results that can be achieved through transformative change in the supply chain Seven Steps to Success 1. Executive support 2. Alignment to organizational objectives 3. A holistic approach across departments 4. The right technology 5. Robust processes and training 6. Proper resource alignment 7. Change management/ communication 1

3 Robert Beyer, Vice President of Materials Management, HSHS Catalysts for Change Never before has the business case for transformation in the healthcare supply chain been so persuasive. While the future is unclear, most agree that at least some things are certain. Healthcare costs must come down. Hospitals and other care providers will be reimbursed on value, not volume. And hospitals will need to survive on Medicare reimbursement levels. Despite the ongoing political and legal debate over healthcare reform, most healthcare organizations realize the time for change is now. Consider these facts: In 2010, the most recent year for which figures are available, the U.S. spent $2.6 trillion on healthcare, or $8,402 per person, according to the Centers for Medicare & Medicaid Services. Healthcare spending now accounts for 17.6 percent of the nation s Gross Domestic Product, and CMS projects it will grow at an annual average rate of 5.8 percent through 2020 a rate that is considered unsustainable. Supply chain costs are the second largest and fastest growing operational expense for most hospitals (labor is the largest expense). (Gartner AMR Supply Chain Research) Some studies show 30 percent of hospitals today are unprofitable. It takes $1,000 worth of new revenue to have the same impact on the bottom line as just a $1 reduction in operating expense. (Thomson Reuters) Better supply chain management can save anywhere from 5-15 percent, translating into a profit increase of 2-7 percent. (Gartner AMR Supply Chain Research) No Quick Fixes So far, healthcare as an industry has been slow to embrace change in its supply chain. Despite progress in recent years, the healthcare supply chain continues to be plagued by inefficient manual processes, inaccurate data, lack of visibility and poor business intelligence and reporting, and healthcare is far behind other industries in adopting global data standards. Further complicating matters is the fact that the healthcare supply chain has not been entirely successful in shedding its image as a tactical back room function, separate from other functions and with no strategic role. One of the things that make transformative change in the healthcare supply chain difficult is the supply chain s complexity. There are several reasons for that complexity. On both the provider and supplier sides, the number of players is large, unlike other industries, in which there are just a few big players. In the U.S. alone, there are nearly 5,300 acute-care hospitals, each of which has hundreds and sometimes even thousands of vendors. The healthcare supply chain also must deal with a tremendous amount of data, such as contract information, that changes often. Disparate IT systems that don t share information and the difficulty of incorporating standards into procurement processes both add to the complexity. Despite the obstacles, many healthcare organizations today, confronted by compelling reasons to change, are beginning to break down the barriers and build the supply chain of the future. That supply chain will be lean, quick to respond to opportunities and challenges alike, and viewed as a strategic imperative for the financial health of the entire organization. And perhaps most importantly, it will be sustainable. 2

4 But it won t be a quick fix. Typically, supply chain transformation takes time, with 10 years or more not unusual for large organizations. However, some leading healthcare organizations already have begun and are showing remarkable progress after just a few years of working to transform their supply chains. Turning Challenges into Opportunities New York City Health and Hospitals Corporation, Cleveland Clinic, Hospital Sisters Health System and Champlain Health Supply Services are among healthcare organizations that are well on the way to success in their supply chain transformation efforts. Faced with different challenges, but with the common goal of cutting costs and becoming more efficient, all four organizations used similar methods to turn their challenges into opportunities. They found there were seven crucial steps for success, as follows: Executive support Alignment to organizational objectives A holistic approach across departments The right technology Robust processes and training Proper resource alignment Change management/communication The remainder of this paper will examine each of the factors considered essential to successful supply chain transformation by four healthcare organizations that already have made the journey to cut waste, add value and sustain improvements in their supply chains. By following these steps, they have turned the weaknesses in their supply chains into strengths, creating viable solutions for the longterm success of their organizations. It All Begins at the Top True supply chain transformation requires a clear mission set forth by upper management. As part of an ongoing effort to understand and improve the processes of business, Visa Commercial Solutions commissioned Deloitte & Touche Consulting to conduct a comprehensive study of procurement and payment best practices for large and mid-size companies nationwide. The first key finding of that study: leading companies that optimize their procure-to-pay (P2P) function have proactive, ongoing senior management sponsorship for their P2P initiatives. The study went on to say that senior management interest in the P2P process has increased significantly due to economic conditions and an increased focus on cost containment. At Hospital Sisters Health System (HSHS) in Springfield, Ill., one of the hurdles that had to be overcome as the system began to transform its supply chain was the if it ain t broke, don t fix it mindset. With a legacy materials management information system (MMIS), obtaining buy-in from the administration to spend some money on the supply chain was critical. Robert Beyer, vice president of Materials Management at HSHS, said the approach he and his team took was to focus on how the transformation would drive expense reduction. We demonstrated the return on investment, and that was what sold our CEO and upper management, Beyer said. At Cleveland Clinic, widely regarded as one of the premier healthcare organizations in the world, the direction actually came from the top down. To prepare the organization for new, innovative technology that would be introduced as part of the comparative effectiveness movement, the CEO directed that the clinic take $100 million out of supply chain costs over a 24-month period. Other industries do it, Bill Donato, Executive Director, Supply Chain Management, Cleveland Clinic 3

5 Simrit Sandhu, Senior Director, Supply Chain, Cleveland Clinic why not healthcare? said Bill Donato, executive director, Supply Chain Management. With $1.6 billion of spend influenced by the supply chain, we had to become a strategic imperative of the organization. The leadership of New York City Health and Hospitals Corporation (HHC) also recognized and championed the need for change. In fact, HHC s top management felt the need was so acute that the organization named a chief restructuring officer to guide the effort. Start with a Goal and a Vision Another thing all four healthcare organizations had in common was they began with a vision that was aligned with organizational objectives. HHC was grappling with a billion-dollar deficit that threatened its ability to serve 1.3 million New Yorkers every year more than 450,000 of whom are uninsured. The imperative for change was clear and supply chain reconstruction was seen as one method of driving significant cost reductions. At HSHS, Beyer said his organization was transitioning from more of a holding company that provided guidance to its 13 hospitals to a company that began to look at operations and drive efficiencies throughout the organization. This transition, along with healthcare reform and other economic pressures, led to a greater focus on the supply chain as a way to reduce costs and improve the system s ability to deliver excellent patient care. Cleveland Clinic, well-known for innovation in other parts of its organization, wanted to prepare for the new technology, but realized that technology itself was only an enabler and that it needed to build sustainability to help it move forward in continuing to take costs out of the supply chain. It knew process change also would be required. Champlain Health Supply Services (CHSS), whose very reason for existence was to integrate sourcing, procurement and logistics for member hospitals and eventually other healthcare providers in the Ottawa, Ontario, area of Canada, said the first thing it did was create a business plan as a blueprint for change. The goal was to build an integrated supply chain system that would improve the hospitals performance and generate $32.5 million in cumulative supply chain cost savings over a 10-year period for use in direct patient care. Joseph Quinones, HHC s vice president of Contracting and Supply Chain, had a vision of a streamlined, automated supply chain that would give HHC the visibility and transparency it needed to drive down cost and deliver excellent patient care. Throughout a restructuring initiative, the vision lived on and was extended based on the belief that delivering an enterprise-wide Amazon.com experience would be a critical lynch pin in HHC s strategy to transform the organization. Breaking out of the Silos Traditionally, the various departments within healthcare organizations have functioned in separate silos, as they do in many other industries. Finance, procurement, accounts payable, physicians, clinicians, IT all have tended to develop tight-knit groups and become isolated in their work. Breaking down the silos by putting people with different backgrounds and perspectives together and enabling them to understand each other s issues is a critical component of supply chain transformation, GHX has found in working with organizations that have done it. Overcoming this barrier to change requires collaboration, Simrit Sandhu, Senior Director, 4

6 Supply Chain at Cleveland Clinic, believes. What we really needed to do was engage multiple stakeholders across the organization, she said. Supply chain is not a department, it is not a function, it is a process, and every stakeholder across the organization is engaged, involved and impacted. During its transformation initiative, Cleveland Clinic wanted to make certain it was addressing issues that affected multiple departments, not just a siloed supply chain. So it involved everyone from senior leadership to physician leadership and every key department with the supply chain department acting as a business consultant. John Martin of CHSS, a shared services organization similar to regional service centers in the U.S., said his organization created a governance structure to ensure that all parties lived up to commitments and that the collaborative effort was, and continued to be, sustainable. An operations group made up of representatives from all participating hospitals also was formed to review potential supply chain opportunities. Technology as an Enabler HSHS, HHC, CHSS and Cleveland Clinic all were pursuing a solution to the same problem how to cut costs, streamline operations and work more efficiently. And while each organization took a somewhat different approach to solving that problem, one thing they all had in common was the recognition that technology, while not what drives supply chain transformation, can be a powerful enabler of change. Healthcare providers traditionally have invested less in information technology than have organizations in other industries, and the money they do invest primarily goes for clinical IT systems. Although a federal government requirement that providers make substantial investments in electronic records provides an impetus for providers to continue doing that, a recent study by Oracle Healthcare Insight makes a strong argument for reversing the trend. The study concludes that healthcare providers that make greater investments in back-office automation and process improvement enjoy operating cost ratios that are 2 4 percent better than those of their peers. Through its work with a global network of more than 5,500 hospitals and the suppliers from which they purchase the majority of their supplies, GHX has found that the following technologies are necessary for successful supply chain transformation: Purchasing automation Contract and price management Content management Requisitioning workflow and price control/ contract compliance Invoice and payment automation Business intelligence and reporting across all levels of the organization While technology can be a powerful enabler, it s also generally recognized that technology is only as good as the data that feeds it. Data plays a key role in providing the foundation on which healthcare supply chain management technology is built. Without great content (right item, right description, right price), the focus of a technology solution shifts from process automation to workflow enablement as more players must participate to ensure that the right data (right item, right description, right price) goes to the supplier when a product is ordered. John Martin of CHSS is a believer when it comes to good, clean, meaningful data being critical to the success of a supply chain John Martin, CHSS 5

7 transformation. Without having a high degree of confidence in your data, it s difficult to establish a baseline, Martin said. And if you can t establish a baseline, it s difficult to create a business case and measure success. You don t know what you don t know until you try to measure it. Martin said roles and duties of the different people involved in the process should be clearly defined and training should emphasize how invoices and requests should be processed, the reasons why deviation from the process is unacceptable and the consequences involved with deviating from the process. Joseph Quinones, Vice President of Contracting and Supply Chain, New York City HHC Joseph Quinones of HHC agrees that it all starts with data. HHC had no formulary or even a sourcing catalog before the transformation began, and Quinones said it was like going to Amazon.com and finding there was nothing to buy. HHC realized that building an item master using good, clean data was crucial to controlling its spend and ensuring it was getting the correct contract price for products. Doing Business a Different Way Too often, organizations make isolated technology decisions rather than focusing on a plan to implement an entire solution. Leading organizations, however, look at things more pragmatically, focusing on the implications of supply chain transformation for the entire organization. Most importantly, they recognize that the benefits of technology can only be fully achieved by incorporating process changes into the transformation. Align to Win Successful supply chain transformation requires strict alignment of resources throughout an organization to ensure proper execution. Bob Beyer of HSHS credited a seamless relationship between supply chain and IT as one of the key reasons his healthcare system succeeded in making transformative change. We also found it was critical to have someone with no emotional ties to get the project going and keep it on track, said Beyer. So we set up four teams of product experts and engaged GHX Business Solutions to bridge all four modules and make sure they aligned. He added that by aligning resources in that manner, HSHS made sure it was not a single department s project but a supply chain transformation project that involved everyone. GHX Business Solutions also served as a business consultant for HHC s, CHSS and Cleveland Clinic s supply chain initiatives. Part of its role was to help ensure proper alignment of resources. When we began, we thought technology was the problem, said Cleveland Clinic s Simrit Sandhu. Shockingly, and to our dismay, we found that process was the problem. What we really needed to do was engage multiple stakeholders across the organization and convince them to do business a different way. The need to develop standardized processes and training around the P2P function also was identified as a critical element by CHSS. John At HHC, the complexity of the organization mirrors the broad diversity of the city. Aligning the leadership team and winning the hearts and minds of the thousands of associates who help run HHC s supply chain was a monumental challenge, according to Quinones. To align the seven networks within HHC, Quinones reached out directly to the local leadership and their key lieutenants to help them understand the vision and what they could do 6

8 to make the overall program a success. These roadshows proved invaluable to helping spread the vision and build grassroots support for the initiative. Associates saw first-hand the importance of the mission and what specifically they needed to do to make a tangible difference. The final and perhaps most important partnership HHC created was with the IT organization. During the planning phases, three new leaders entered the group and worked side by side with Quinones and the rest of the organization to deliver and support the new supply chain set of capabilities and help ensure that it integrated seamlessly with their existing technology. Change Management Is Imperative A key component for the success of any supply chain transformation initiative is gaining buy-in from everyone involved and helping them understand what it will mean to them and how they can help. A detailed plan that addresses concerns about how the new system will alleviate current issues and how it will affect job tasks while providing a clear long-term strategy that can be understood and embraced by everyone is imperative. GHX has observed that the most successful organizations invest in communicating the value, testing the solution, creating the right initial experience for users and sustaining the change. And that requires a robust change management and communication effort. The four healthcare organizations highlighted in this paper all realized the importance of change management to the success of their efforts and conducted robust change management programs. Cleveland Clinic s Simrit Sandhu said communications, training and change management really were what drove her organization s success. If you re going to change the supply chain in healthcare, you re going to have to start at the grassroots level and involve everyone, she said, while acknowledging that it requires a mammoth effort. HHC also recognized the need for cross-functional buy-in to drive change. Joseph Quinones said some of HHC s supply chain staff had been doing things the old way for a long time, and that it required a real culture change that included training staff on new technology and processes and showing them why the change was necessary. Reaping the Benefits of Transformative Change HSHS, HHC, CHSS and Cleveland Clinic have shown that the supply chain can be an engine for cutting costs and putting a healthcare organization on better financial footing. The results of their organizations efforts and how they achieved them provide a roadmap for other healthcare organizations considering their own supply chain reengineering initiatives. Here are the highlights: New York City Health and Hospitals Corporation has cut costs and improved operational performance, achieving a $14 million annual savings goal in the first year of its transformation. It built a virtual item master that consists of more than 800,000 enriched items by facility, of which 98 percent are on contract. Champlain Health Supply Services had set a goal of $32 million in supply chain cost savings over a 10-year period, but now expects to realize that goal in just six years. In 2010 alone, CHSS documented $1.5 million in savings and is on track to save $2.8 million by March Hospital Sisters Health System had a goal of reducing expenses by $12 million in fiscal year 2010, and it achieved more than Working with GHX as our consulting, technology and business partner, we now conduct business in a fundamentally different way. This project has helped HHC take a very significant step forward in helping to ensure that we can serve the residents of New York City both today and in the future. Joseph Quinones, Vice President of Contracting and Supply Chain, New York City HHC 7

9 $14 million in savings. Supply expense as a percentage of revenue decreased during the same period by a full percentage point from 17.8 percent to 16.9 percent. Cleveland Clinic, in the first year alone, cut $45 million in costs by reengineering its business processes to make them more efficient and by implementing supply chain management solutions. Conclusion Change is happening everywhere in healthcare today, and organizations that don t embrace the change and reengineer their business processes accordingly run the risk of failing to achieve their mission providing high-quality patient care. But true transformative change is not easy. It requires time and a commitment to sustaining the change, even when leadership of an organization changes. The healthcare supply chain is evolving to help deal with the challenges facing the industry. Now more than ever, supply chain leaders have an opportunity to play a strategic role in their organizations by providing greater spend visibility and identifying effective ways to cut costs. Through process automation, technology improvements and greater resource alignment, healthcare organizations collectively can build the supply chain of the future, one that will be leaner, more efficient and able to withstand the challenges ahead. To download a copy of this white paper, go to 8

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