Healthcare Ecosystem: Linking Logistical Flows and Clinical Flows Hugo RIVARD-ROYER, Martin BEAULIEU et Terri FRIEL Cahier de recherche n o 03-04 Mars 2003 ISSN: 1485-5496 Copyright 2003. HEC Montréal. Tous droits réservés pour tous pays. Toute traduction et toute reproduction sous quelque forme que ce soit est interdite. Les textes publiés dans la série des Cahiers de recherche du Groupe de recherche CHAÎNE n engagent que la responsabilité de leurs auteurs. Publié par le Groupe de recherche CHAÎNE, HEC Montréal, 3000, chemin de la Côte-Sainte-Catherine, Montréal (Québec) Canada H3T 2A7.
Abstract The synchronization of information and materials flow is the principle upon which the integration of supply chain management is based. However, in the healthcare sector, supply chain integration cannot rely solely on traditional logistics information (stock levels, order quantities, etc.) to attain new efficiency levels. The complexity of the healthcare ecosystem, the criticality of care and the need for efficiency gains also require the integration of clinical patient information (patient records, treatment plans, pharmaceutical therapy, etc.) with traditional logistical information. This article presents examples of the benefits of taking clinical information into account in the supply chain and discusses what steps are required before these benefits can be realized. Key words : information management, supply chain management, healthcare sector, information technologies
Biographical Notes Hugo Rivard-Royer is the Director of Strategic Planning for Bell Canada s healthcare market. His responsibilities involve anticipating future market requirements and evaluating the impacts of technologies on healthcare organizations. Previously, he was a senior consultant for a large Canadian distributor where he helped healthcare organizations streamline their processes. Hugo Rivard-Royer is the author of numerous publications and is a frequent guest speaker at academic and professional forums on healthcare issues. He is also a member of the board of directors of the Quebec Association of Healthcare Suppliers. Mr. Rivard-Royer is an economist who holds a M.Sc. in Operations and Production Management from HEC Montreal. His master s thesis focused on the healthcare supply chain. Martin Beaulieu is Research Professional for the CHAINE Research Group at HEC Montreal (www.hec.ca/chaine). He holds a M.Sc. from the Université de Montréal. His research areas are healthcare logistics, supply chain management and operations strategy. He has written numerous articles for publications such as the International Journal of Operations & Production Management, Supply Chain Forum, and the European Journal of Purchasing and Supply Management. Mr Beaulieu has also been a frequent guest speaker at academic and professional forums. Terri Friel is an associate professor at Butler University in Indianapolis, Indiana. She teaches operations research, international business, and statistics. She conducts research at the intersection between areas such as supply chain management and quality, accounting and operations or international quality management issues. She has worked for P&G and Pepsico and developed a patented process.
Introduction The link between timely, accurate information and material flows is the principle upon which the integration of supply chain management is based. In a sector where information and product availability is mission critical to healthcare establishments, this linkage is of great importance to the overall performance of hospitals. It is with good reason that Evans and Wurster [1] consider the healthcare sector an information industry that generates enormous amounts of data (clinical, logistical, and administrative). Experts estimate that as much as 40% of hospital costs are tied up in collecting, storing and disseminating information [2]. However, in spite of this, the performance of supply chain management in the healthcare sector has been deemed inferior to that (RA) in other sectors [3]. Over the past few decades, a variety of methods have been deployed in an attempt to channel information and make it more usable in the management of logistics in the healthcare sector. However, these initiatives have rarely achieved their goals and in many cases have been abandoned. In our opinion, these failures are attributable, among other reasons, to an overall inability to adapt traditional logistics activities to the realities of the healthcare sector and to the realities of the ever-evolving continuum of care in the clinical chain. Healthcare suppliers typically have developed strategies only for the individual healthcare facilities they serve, rather than for the whole clinical chain. In order to integrate the supply chain, we must also reflect upon the global ecosystem of healthcare systems and include the clinical portion of the chain as well. This consideration of the entire chain is necessary in the healthcare sector because, in some instances, this chain can be more complex than in most other industries such as retail or manufacturing. For this reason, the true potential for improved healthcare profitability and services using supply chain management lies not only in the efficient synchronization of information with materials, but also in the overall integration of clinical and logistical information. In adopting this perspective, it is our opinion that important gains will result in reduced management and inventory costs, and in better utilization of all healthcare resources, including healthcare professionals [4]. This article is divided into three main parts. First, we present a description of the unique characteristics of the healthcare supply chain. In the second part, we will describe the clinical chain in comparison with traditional supply chains. In the third and final section, we will introduce the concept of a healthcare ecosystem, which can be defined as a unified clinical/supply chain. In section three, we will provide examples of clinical information integration improving the performance of the supply chain. Supporting examples are drawn largely from the U.S. healthcare sector rather than the international healthcare sector due to the diversity of experiences and outcomes. Characteristics of the healthcare supply chain To understand the difficulties inherent in the integration of the healthcare supply chain, it is necessary to identify its distinctive characteristics. We believe that five fundamental characteristics differentiate healthcare supply chain issues from those in other industries. The first relevant characteristic of the healthcare supply chain is the diversity of its distribution channels and their roles, as illustrated in Figure 1. A manufacturer who designs and manufactures various products may wish to interact directly with healthcare facilities in order to be aware of their specific needs. A distributor can play different roles within the supply chain. For example, a traditional role [5], where it consolidates requirements and Copyright 2003. HEC Montréal. 1
ensures delivery of a wide variety of products to each healthcare facility. To gain a competitive market advantage, the distributor can obtain exclusive rights for a line of products from a particular manufacturer, a common practice in most industries. A second role is that of providing value-added services. For example, during the 80s and 90s, major American distributors offered direct replenishment services to large healthcare facilities, allowing them to go stockless. These services aimed to increase traditional supplier activities through the internal management of supplies at each facility. This arrangement eliminated the typical information disconnect between the supplier and the buyer facility, and created more data transparency for both. However, with these services, the distributors became a sort of buffer between erratic hospital demand fluctuations and the supply policies and constraints of manufacturers [6]. The increase in expenses and the difficulties of managing such programs drove some large suppliers to the brink of bankruptcy. By the mid 1990s, these programs were being increasingly abandoned by their promoters [7]. Figure 1 - Healthcare supply chain Vendors External chain Manufacturers Distributors Group Purchasing Organizations Internal chain Hospital Hospital storeroom Patient care units Points of care Adapted from Arthur Andersen & Co, 1990, p. 38 Copyright 2003. HEC Montréal. 2
Another characteristic is the unique market structure of the supply chain. In healthcare, this is reflected in the presence of group purchasing organizations (GPOs) (see Figure 1). These entities assume responsibility for research, negotiations and contract management on behalf of a healthcare facility [8]. In the United States, 70% of all major hospitals use such organizations [9]. Traditionally, the role of GPOs is to consolidate the purchasing power of their customers so they can negotiate on a level playing field with powerful suppliers to gain cost advantages that are potentially not negotiable by a single healthcare facility. However, in the U.S., the role of some GPOs has evolved and expanded over the years to include exclusive agreements aimed at representing major manufacturers in dealings with healthcare facilities. In healthcare, these GPOs have become significant, even unavoidable, intermediaries in the healthcare system [10]. A third characteristic is that the healthcare facilities represent a point of convergence for a wide variety of products that must be managed efficiently throughout the hospital system because of their immediate impact on quality of care. Before supplies are sent to their final destination a healthcare professional or patient they must generally move through the internal process of various healthcare facilities, which includes receiving, storage, and replenishment at multiple inventory locations. In addition, some products must also be prepared for use by the providers, i.e., cleaned, sterilized or processed in some way. The complexity of this process is illustrated in Figure 2. Clearly, integration of the supply chain in the healthcare sector requires the synchronization of both external and internal supply chains for each individual facility [6]. Figure 2 The role of healthcare facilities Medical supplies Pharmaceuticals Linen Food Stationary Cleaning supplies Receiving Storage Processing Replenishment Copyright 2003. HEC Montréal. 3
A fourth characteristic is the uneven use of information technology and logistical practices in the North America healthcare supply chain. In this healthcare market, we find considerable variety in the use of technology for supply chain management, ranging from sporadic and traditional telephone-based ordering to fully automated order replenishment systems. EDI use in healthcare systems also varies significantly. According to a recent survey by the Association for Healthcare Resource & Materials Management, less than 30% of all purchase orders are electronically transmitted (EDI or computer) [11]. What s more, these results vary depending on the importance of the supply chain function within a healthcare facility. Thus, 80% or more of large hospitals and Integrated Delivery Networks use EDI for purchasing, but this technology is less common in other healthcare facilities [10]. By the end of the 1990s, several e-marketplace initiatives had emerged in the U.S. healthcare sector. However, many of these projects evaporated about the same time as the speculative bubble collapsed in the technology markets. The dot.com businesses were suffering from inadequate revenue streams and poor business alignment with the healthcare needs of the market. Many dot.coms underestimated the equilibrium required (technology, market leverage and supply chain know-how) [12] for value-added healthcare solutions. As a consequence, these initiatives were eventually abandoned or else taken over by traditional healthcare supply chain players. Therefore, the healthcare supply chain is characterized by a diverse set of actors, diverse distribution channels, a wide variety of products to be managed, and heterogeneous supply chain technology deployment and practices. Although these characteristics are specific to the supply chain, the most distinctive characteristic of the healthcare supply chain is its dependency on the point of care, which is the consumption driver in the clinical chain. Definition of clinical chain Thus, in addition to the complexity of the physical chain, the healthcare sector presents a fifth important characteristic its complex healthcare network which we have referred to as the clinical chain. This chain can be defined as a collection of medical and clinically related activities supporting the healthcare continuum (prevention-diagnosis-treatmentrecovery). These activities can occur in what has been described as the point of care (POC). The POC is where the patient and the healthcare professional interact. Common examples of POC locations could be operating rooms, hospital wards, outpatient clinics, doctors offices, a patient s home, etc. This clinical chain must have appropriate supplies at the right locations in order for proper treatment to be delivered. Thus the POC is where the supply chain and the clinical chain interface and consequently it appears to be the most natural point for the linkage between clinical flux and logistics flux. The POC integrates the flow of supplies for direct medical practices (medical supplies, pharmaceuticals, instruments, etc.) with indirect supplies (stationery, linens, food). Managing these supplies requires that logistical information be collected (stocks, consumption, price, demand, planned procedures, point of care location, etc.). These physical and information flows constitute the basis of the classical supply chain. To this we add another flow medical information (patient records, treatment plan, pharmaceutical therapy, etc.). This integration of the clinical chain and the supply chain far exceeds the current charge-capture practices that have been administratively focussed on transactions (bar codes, computerized supply cabinet). Copyright 2003. HEC Montréal. 4
Lack of specific information regarding clinical needs and a lack of feedback following the consumption of supplies both create a situation in which periodic replenishment is required and the supply system is uncoupled from its users. Examples of such clinical information include lists of medical procedures (including surgery), patient admissions, discharge/transfers and planned patient care such as dialysis or homecare services [13]. We believe that integrating this type of relevant information will enable supply chain cycles to be better synchronized with the real-time needs of the supply chain in an economically feasible context. Integrating the Healthcare Ecosystem Supply chain management in healthcare cannot be hospital-centric only. The continuum of care has evolved to include other important point-of-care segments. For example, a patient with a specific pathology can now be treated and monitored from a variety of locations such as his doctor s office, his own home and even his workplace, depending on his preferences and circumstances. Continuity of care requires up-to-date information regarding the patient s past and current diagnosis (including laboratory results), past and current treatment, pharmaceutical profile and administrative profile (insurance coverage, etc.). Technologies and practices are emerging to facilitate the efficient exchange of clinical and administrative information. In the U.S., the Health Insurance Portability and Accountability Act of 1996 (HIPAA) gave the Department of Health and Human Services (DHHS) the authority to mandate the use of standards for the electronic exchange of healthcare data. One of the standards that has become increasingly common is HL7 (Health Level 7), which was specifically designed by the healthcare industry to facilitate patient data exchange between computer applications and systems [14]. Although necessary, these initiatives address only a particular facet of the information exchanges within healthcare. We define healthcare ecosystem as the system created by the supply and clinical chains (Figure 3). This ecosystem is driven by the clinical chain activities (prevention-diagnostic-treatment-recovery). These drivers supersede all other techno-clinic support activities such as pharmacy, laboratory and radiology. Finally, the external layer is composed of support activities such as kitchen, linen service, housekeeping, etc., together with supply-related activities handled by the suppliers (Figure 2). Copyright 2003. HEC Montréal. 5
Figure 3 Healthcare Ecosystem Kitchen Laundry Pharmacy Printing Laboratories Recovery Treatment Radiology Prevention Point of Care Diagnostic We consider this vision as more representative of the current and emerging logistical realities of the healthcare sector. Although we emphasized logistical aspects in our demonstration, one should not be distracted from the important role played by clinical activities as the driver of the ecosystem. Even though most activities in Figure 3 can be assumed in a hospital-centric setting, certain other activities can also be assumed in new POCs external to the hospital environment. In both cases, efficient integration will be a necessity in order for healthcare organizations to stabilize the rising costs of healthcare, given our aging population. Examples of integration using information technologies Such a vision of the healthcare sector supports our view that supply chain optimization should be driven by clinical information. The U.S. experience offers examples of the integration of clinical information flow with the supply chain, such as electronic prescriptions. Although the concept itself is not revolutionary, it has evolved with technology and clinical practices. After an electronic prescription is automatically verified by the expert system for adverse drug reactions and insurance coverage, the system generates an order over the network to the hospital s pharmacy or the patient s local drug store. The same information is then used to debit the pharmacy s stock and credit the patient s bill. In a hospital setting, product dosage and patient identification can be validated electronically at the point of care using various technological means, e.g., bar code scans on the patient s wrist or the patient s chart. The logistical information is then periodically transmitted to the appropriate suppliers under secure conditions using, for example, point of sale algorithms. Copyright 2003. HEC Montréal. 6
Lafond and Landry [15] offer a second example that involved introducing a logical planning process for supply management in a surgical department. It was based not on historical stock levels, but rather on the operating room case schedule, much like Manufacturing Requirements Planning (MRP) in the manufacturing industry. The concept of managing an assembly nomenclature is particularly relevant for operating room case preparation. Vendors adapted and developed the MRP to use the planned OR cases in order to generate product picks out of OR inventory and even generate replenishment to vendors in a proactive manner. This is just one concrete manifestation of the potential for logistical and clinical information integration. The clinical information (procedure, patient particularities and surgeon s preferences) can be used to proactively synchronize planned product requirements. This gives added visibility to upcoming OR product requirements and provides room for supply chain optimization rather than reactively stabilizing the replenishment process. The bottom line is that we can lower supply and clinical chain costs by saving on case preparation as well as reduce stock-out emergencies and their impact on the organization. An optimized logistical environment can signify productivity gains, especially when prepared with specialized equipment such as carrousel product picks. This type of clinical and supply chain integration has made significant progress during the past decade. Some practices have evolved to ensure complete outsourcing of OR case preparation by outside service providers. In a similar vein, some suppliers focus on specialty kits such as surgical kits customized to meet individual patient needs, taking into consideration end-user (physician) preferences and the type of operation. When the system is efficient, replenishment and management of these products can be synchronized to the individual needs of clinicians. By being electronically linked to the data needed to make such items available, suppliers can more efficiently and effectively plan and deliver their products, without any of the losses they might otherwise incur. The result: the significant amount of just-in-case supplies for specific needs can be reduced due to the ready exchange of data between entities. Moreover, this new communications link allows clinicians to manage and optimize the composition of various kits. For example, product use in the operating room can be updated directly on the supplier s Web site. Furthermore, the benefits accrue not only to the suppliers, but equally to the product users, giving them the possibility of continuously streamlining these operational processes. We emphasize that integration is not the ultimate objective per say, but rather that optimal integration levels must be envisioned based on the systemic organizational impacts of overall costs and inherent logistical/clinical risks. Conclusion In today s world, where the healthcare network is increasingly constrained by limited resources and mounting pressures for efficiency, the overall contribution of supply chain performance can represent a significant opportunity for appreciable gains. From a logistical point of view, the clinical chain imposes three major constraints: 1) The diversity of distribution channels for supplies and products that arrive at a variety of end points (labeled points of care ); 2) The need to maintain continuity of care as the overriding objective in which the logistics function is required to ensure a ready and timely supply of products and services exactly as required at the various points of care, all the while meeting logistical performance measures; 3) The limited visibility of clinical treatment plans and their significant impact on anticipated logistical requirements. Copyright 2003. HEC Montréal. 7
It is the convergence of the many direct and indirect processes of the clinical and supply chain that constitute a very diverse, complex ecosystem of information linking several points of care. At the moment, when the healthcare supply chain is still fragmented among numerous players, information management systems are frequently referred to as a key component of any global solution. Recently, significant developments in terms of POC technologies (peripherals, wireless devices, etc.) have given POCs access to the IT infrastructure and applications of medical establishments, with the important result of giving POC visibility in the clinical and supply chain. Point-of-consumption visibility is one of the fundamental principals of supply chain integration [16]. We believe that the complexity of the healthcare ecosystem demands that more information be gathered and retrieved than would normally be the case in other typical logistics functions. In addition, it appears essential that the clinical and logistics chains be linked in order for the most effective processes to be developed. Finally, in the healthcare sector, the need for basic clinical information on supply and clinical chain integration requires electronic mechanisms that can preserve patient confidentiality while still meeting diverse requirements. This implies the adoption of electronic information management systems that hinge on information access and integration across professional, administrative and legal barriers in order to allow information sharing between multiple entities. We believe a more broader view of electronic solutions based on process re-engineering and the integration of pertinent clinical information could improve the overall performance of the healthcare network. This will require new management practices and perspectives regarding the supply chain what we refer to as clinical logistics, the next phase of healthcare supply chain management in the years to come. Such integration has significant ramifications and possibilities for healthcare delivery. We believe these electronic solutions provide an opportunity to achieve better delivery of healthcare services and, at the same time, to reap considerable benefits from the application of this technology. This vision is part of the much larger e-health paradigm that is structuring the modernization of healthcare delivery. Copyright 2003. HEC Montréal. 8
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