Decreasing reimbursements amid rising operational costs can threaten a healthcare organization's bottom line.
Supply chain costs continue to represent the second largest operating expense for hospitals and health systems after labor, according to a 2014 Market Realist report. Efforts to effectively allocate finances for supplies are challenged by pressure to satisfy physicians' demands for preference items. A 2016 survey from Premier found 98 percent of C-suite leaders cite standardizing physician preference items as a major concern they expect to address in the near future.
This content is sponsored by ROi.
Many healthcare executives are identifying the supply chain as an area of strategic opportunity to cut costs and improve the bottom line, but they don't always have the right tools to do so. Organizations often lack the time, money and resources necessary to standardize products, update ordering practices or find the most cost efficient items for their facilities.
A solution is born
In the late 1990s, leaders at St. Louis-based Mercy set out on a quest for operational efficiency. Their journey — and the development of their supply chain organization Resource Optimization & Innovation (ROi) — started with notes on the back of a napkin.
They envisioned a more strategic operational approach that internalized and integrated key functions within the supply chain and group purchasing process. Those dreams were recognized in 2002, when Mercy officially founded ROi as its own accountable supply chain organization.
"From 2002 to 2011, ROi exclusively ran Mercy's supply chain and kept adding services to its offering to help drive down costs for Mercy," says Greg Firestone, vice president of strategic customer relations for ROi. "We found a lot of opportunity to increase supply chain efficiencies and to improve the quality and safety of care delivery."
ROi operates the end-to-end supply chain activities — including self-distribution and logistics — for the 43-hospital system on a daily basis. Over the past 15 years, ROi has helped Mercy save more than $1 billion, according to Mr. Firestone.
ROi's first step to achieve these cost savings was setting up its own consolidated service center to take control of Mercy's supply chain.
"We felt like we could deliver the products to our own facilities in a more efficient manner," says Mr. Firestone. ROi also built its own self-contracting portfolio to better manage supply costs by building closer relationships with industry suppliers.
After working with Mercy for nearly a decade, ROi has established a large breadth of knowledge and first-hand experience by executing critical elements of the supply chain, says Mr. Firestone. Mercy and ROi commercialized their supply chain and GPO services in 2011 to help other healthcare providers recognize similar operational improvements and cost savings.
The accountable supply chain organization now provides multiple cost management and supply chain services to more than 240 hospitals and about 2,800 non-acute facilities across the country. Services include:
1. Contracting and sourcing
ROi offers a very broad contract portfolio for its member organizations, with a special emphasis on physician preference items.
"These items represent 35 percent to 50 percent of total supply costs, depending on the health system," says Mr. Firestone.
Since Mercy's size and scope drives a large demand for physician preference items, ROi can commit to purchasing a high volume of these products from suppliers, which results in sustainable controlled costs. Our model has fostered highly collaborative relationships with physician preference item suppliers that allow us to gain commitment from key stakeholders," says Mr. Firestone.
2. Manufacturing and packaging operations
ROi implemented a self-distribution model that allows the supply chain organization to manufacture and distribute its own products at much lower costs, according to Mr. Firestone. Services include custom procedure trays, pharmaceutical repackaging, medical device reprocessing, private label products and, most recently, IV compounding.
"There are many supplier companies that do not manufacture their own products, which provides us the option to go directly to the source of manufacturing to create our own private label at a substantially reduced cost."
Mr. Firestone says this helped ROi and Mercy achieve a 10 to 30 percent cost reduction for supplies. "We essentially return a mass majority of these cost savings over to our member facilities," he says.
3. Consulting
ROi also offers GPO members supply chain optimization consulting free of charge, says Mr. Firestone. Consultants with extensive clinical and operational expertise visit provider locations in person, helping them develop more efficient inventory management processes within their facilities and build collaborative relationships with physicians.
"If organizations are interested in setting up a consolidated service center, we've also gone in and shown them how to do that after conducting a feasibility study," says Mr. Firestone.
Case study: Mercy's custom procedure tray operations
One of the best examples of ROi's initial success with Mercy's supply chain was its transformation of the health system's custom procedure tray operations.
In 2007, each of Mercy's hospitals managed its own unique pack program, yet there was no effective way to manage item usage. The lack of structure and organization contributed to a large amount of waste throughout the health system. After conducting a Six Sigma project, ROi discovered Mercy was losing about $30.71 per pack — an average of six items per pack were thrown away without ever being used.
A year later, ROi built a 6,000-square-foot custom procedure tray production facility inside its existing consolidated service center in Springfield, Mo. The supply chain organization's strategic contracting and sourcing team had to contract with 150 vendors to access 900 unique items used in the packs. ROi standardized existing packs and created new packs tailored to end users' preferences to eliminate unnecessary waste. These improvements led to a 10 percent reduction in custom procedure tray costs for Mercy.
Prior to implementing its own custom procedure tray operations, Mercy used 93 unique custom packs about 90,000 times annually. Now, ROi offers more than 600 unique custom packs used more than 500,000 times a year by Mercy and other health systems across the country.
"Most, if not all, of our commercial customers purchase packs from us, so they're experiencing the same benefit as Mercy," says Mr. Firestone.
The secret to a successful GPO
In addition to greater customer savings on procedure trays, Mr. Firestone believes ROi's GPO members receive numerous benefits from the organization's uniquely integrated structure and role in the healthcare industry.
He highlighted five ways ROi ensures sustainable cost savings and satisfaction for its GPO members.
1. Provider-owned perspective
Truven Health Analytics named Mercy among the top five large health systems in the country in 2016. After handling the day-to-day supply chain operations of such a large-scale, prominent health system for more than a decade, Mr. Firestone says ROi is well positioned to share it's breadth of supply chain knowledge.
"We bring a real-life, practicable application of running a supply chain," he says. "We can take the lessons we've learned from running Mercy's supply chain and transfer it over to our members."
Mr. Firestone says ROi leverages best practices in sourcing, contracting, standardization, utilization and supply chain management developed at Mercy so its member organizations can achieve the same level of success.
2. Vertically integrated service offering
Unlike many other GPOs, ROi manufactures its own custom procedure trays, IV compounding solutions and other products, including its own private label. By leveraging its self-manufacturing capabilities, along with strategically sourced branded products, ROi offers member hospitals additional savings on lower cost products that still promote clinical value and efficacy.
"We're always looking for other opportunities to further vertically integrate," Mr. Firestone says. "We're always searching for processes that generate a substantial amount of spend for an organization so we can attack those cost areas and start to reduce dollars."
3. Clinically integrated supply chain
ROi offers 11 service line committees that physicians, other clinicians or supply chain stakeholders from member hospitals can join to weigh in on the decision-making process when looking at supply and device contracts. The committees have monthly phone meetings to discuss not just the "price at the pump," but utilization and standardization opportunities for everything from med/surg supplies to pharmaceuticals to capital equipment, according to Mr. Firestone. They also place a strong emphasis on managing physician preference items and purchased services categories.
"We think clinical integration is critical throughout the decision-making process," he says. "We've found if we involve physicians' considerations from the very beginning, we get much better commitment on the purchases and better overall compliance, which in turn drives lower pricing and cost from a manufacturer's perspective."
4. Guaranteed sustainable cost savings
ROi's unique contracting and self-distribution strategy allows it to offer guaranteed cost savings to its members, according to Mr. Firestone.
Mr. Firestone is so confident in ROi's ability to transform a healthcare organization's operational supply chain structure and inventory management, he feels comfortable telling new ROi members upfront not only what they'll save in the first year, but each and every year for the duration of their partnership.
"We believe an organization should be held accountable for what they say they can deliver," he says. "We are very comfortable putting ourselves at risk to offer guaranteed savings."
5. No fees for service
ROi wants to be very transparent with its GPO costing model so members know the exact benefits they'll receive from day one and understand that's not going to change, says Mr. Firestone, who likens fee-for-service GPO models to extra airline fees.
"You buy your ticket, get on the flight and they charge you for an in-flight meal," he says. "Nobody likes to be on the receiving end of that."
ROi uses the simplest costing model possible, in which new members know exactly what they're going to get out of the partnership and are aware of the potential revenue generation and cost savings. The GPO also shares back a portion of collected administrative fees with its partners and avoids any service or membership fees.
Conclusion
The innovation behind ROi's integrated supply chain and group purchasing services is homegrown by a health system. That said, it offers substantial opportunities for health systems to achieve supply chain efficiencies, eliminate waste and lower costs, all while providing quality patient care.
ROi hopes to keep up this level of innovation with new service offerings and projects in its pipeline. Mr. Firestone says the company is looking into offering clinical analytics capabilities to aid hospitals in supply chain decision-making. ROi is also building a 110,000-square-foot custom pack facility to increase manufacturing capacity and expand the service across the U.S.
"We look at ourselves as a continuous improvement engine," says Mr. Firestone. "We constantly ask ourselves: 'How can we do the same things today, better tomorrow?"