Managing Materials No Small Task

Materials management, in many ways, is under its share of scrutiny daily to keep operating rooms efficient, while keeping costs down. But the current situation in the United States has brought some challenging situations into the fray of the supply chain, particularly capital equipment. Knowing how to move forward and facing these situations is important in providing an efficient OR, while putting the latest technology in the hands of physicians and staff.

Trends

Without a doubt, the economy has played a role in the behavior of materials managers looking to purchase capital equipment. “We’re definitely seeing a reduction in capital,” says Barbara Limberg, acting senior director of surgical contracting at Novation. And with the lower operating margins, comes the reality that operating rooms are not able to take on any prices or any higher-priced products.”

ORs are looking at where can they standardize and streamline their utilization practices, just to be able to achieve efficiency immediately. But there’s more. “There is a willingness to look at things that may have been a little more difficult, or a little bit more of the “sacred cows,” if you will,” says Limberg. “The things that previously ORs wouldn’t consider reducing, certain categories or products,” that are now fair game to achieve savings and efficiency without sacrificing patient outcomes or care.

One of those things not previously looked at is reducing waste. “We should be challenging every operating room in today’s environment over how many products are open and unused,” says Dee Donatelli, vice president of performance services at VHA Inc., “that either gets stored in the trash or sent back down to the store room.”

She points out an example of a facility that VHA assisted where only 21 percent of the high-dollar inventory in one clinical storage area was actually being used. The buying of excess inventory was tying up capital that could have been used elsewhere. After the analysis, the facility reduced their purchases by 58 percent, and cut 6 percent off their bottom dedicated to inventory investment.

“You’re wasting a lot of motion of products that come up and down, up and down, or what we call ‘riding the elevator,’ Donatelli quips. “You need to focus on having exactly the right quantity of what you need, so that you’re eliminating the waste and the re-work.”

One of the tough choices outpatient facilities are torn with as well is which is better to reduce in these tough times: staff or “stuff” — supplies and services, says Donatelli. “Like never before we have organizations focusing on ‘stuff’... As we continue to peel back that onion, and we look at where we spend the most money.” She continues, “That’s probably where we have the greatest opportunity.”

Limberg agrees. “With (ASCs) facing staff reductions, the biggest expenses are your supplies and your staff. So typically supplies have always been the first one that were scrutinized and looked at. But it’s even more dire right now, because we’re hearing stories of more and more facilities actually going into reduction of staff. When you’re reducing staff, it’s even more important to look at you supplies spend.”

At the same time, another difficult decision material managers are facing is deciding whether or not to keep using equipment that is preferred by their physicians to save money. In the end, Donatelli suggests sitting down with physicians over their equipment requests, in the hopes of finding a compromise. “When we’re talking about a really quick hit to drop cash to your bottom line,” says Donatelli, “that begins to bleed over a little bit into better aligning with physicians about the tools of the trade that they are requesting.”

While reduction of capital has become prevalent, capital has been under scrutiny for many years in the entire healthcare industry. Where it has come into play the most is with capital purchases. Many large purchases are being put on hold, and while there are still some capital purchases being made, they are specifically for daily patient care. “But we’re still seeing where (ASCs are) looking at maybe holding (capital purchases) off or refurbishing the equipment, or using what they have for a bit longer.”

Group Purchasing Organizations

A clear alternative for facilities now is the use of group purchasing organizations (GPOs), which allow healthcare facilities to achieve cost savings by aggregating their buying volume, then using that leverage to negotiate discounts with manufacturers, distributors and other vendors. The savings have translated in a large way for the hospital industry already. According to a survey of 429 hospitals and over 3 million hospital admissions, it is estimated that GPOs are saving hospitals $36 billion annually in healthcare and related costs savings.¹

By far, the largest benefit for facilities is the ability to obtain equipment at a discounted price. But there’s another benefit, especially for smaller surgery centers and outpatient facilities in rural areas.

“They don’t have the time or the resources to do all of the research and negotiation on these pieces of equipment,” says John Leibold, director of capital equipment services at Broadlane. “So not only are they saving a chunk of money to get the best technology at the best value. They’re also saving the time it takes.”

When it comes to ASCs, most surgery centers buy the bulk of their capital upfront during construction or renovation, spreading their capital purchases from that point on out over years. But they do buy supplies and other items every day, and GPOs can help with those bulk buys. “We work with them to consolidate purchasing through one vendor,” Leibold explains, “and by doing that, you can drive pricing down, which gives them savings as long as they’re willing to commit to a particular vendor or product.”

For Niklaus Fincher, vice president of purchased services sales and capital at VHA, the capital purchasing process entails much more than just pricing. “Most of the programs that we’ve been putting in place have been way ahead of that,” he says. Part of the VHA GPO program includes offering a variety of systems to engage with members in forecasting and anticipating their needs. “It also allows us to provide them information earlier in the continuum, which they can use to best achieve best market value (in their purchases), regardless if it’s through the GPO or outside of that contract.”

One of the programs to assist facilities buy capital equipment, Leibold describes, is a group buy program. The rigorously, thorough process consists of four parts: an objective overview of the technology by an outside group, such as ECRI Institute; an evaluation of the technology with vendors to assure that the product will fit the facilities’ needs; a discussion of the cost and life cycle of the equipment; and finally making the final contract award decision.

Along with a similar group buy program, Fincher also mentions the use of hybrid products from suppliers for ‘right sizing’ a project, determining if a facility who could be in danger of overspending their budget on a piece of equipment is still viable for that project, if downsizing the scale of the project is possible or whether cancelling the project altogether is the best option available.

“Where we don’t have expertise (on a particular topic), we’ve gone and sought out market leaders with a proven background and experience in the market, like for ‘right sizing,’ to provide our members with as many options as possible in achieving the best market value,” Fincher states.

Group purchasing organizations also offer other programs for facilities in other aspects. For example, capital procurement services streamline the capital purchasing process. Another is the use with the reduction of new construction of expansion, GPOs are instituting programs allowing their customers to buy used equipment, or help them save money for service expenses. They also help with building evaluation with the help of clinical resource groups, and by working with architects and engineers to plan accordingly to avoid any usability issues.

But Fincher warns that ASCs need to avoid some pitfalls that can hamper your capital purchases. He suggests the following:

• Create a good, reasonably accurate budget.
• Create a strategic, long-term capital plan.
• Make sure that data sources you are using for capital purchases are ones that you trust.
• Access accurate pricing information.
• Obtain current supplier information.
• As the budget is being developed, tie the dollars that are approved to the dollars that are requesting. If somebody wants to change an item, make them re-justify it.
• Develop a budget development process.
• Don’t ever start from list price.
• Control the vendors’ access to the facility and your staff.
• Read terms and conditions carefully.
• Leverage GPO contracts to get a better deal.

Some Words of Advice

While, from an economic standpoint, things are in a downturn, Fincher believes that because of the length of time involved in the capital purchasing process, the full impact won’t be felt for some time. “We won’t see the true impact of what the economy’s going through now probably until the first quarter of 2010.”

He also points out that many projects that started or achieved funding before beginning of the recession are still going forward. On the other hand, they may be forced to downsize in the size and scale of the project.

“The economy is now playing right into the hands of the directors of materials management, Donatelli states, “because they’ve been preaching in the basement about how important it is, and now all of a sudden, it’s in the board room, too.”

She gives this advice on materials management: “I think one of the most important ones is having an actual resource dedicated to materials management in the OR... Having a dedicated and trained materials specialist in the OR versus having a scrub tech, who has morphed into managing supplies, is very different. So the trend today is to make sure that you have an educated materials specialist in your operating room.”

Limberg says the focus for materials management should be on product standardization and utilization. “Are there areas where they can standardize to gain better efficiencies in the pricing? And look at the utilization and look at the outcomes. Where can they drive with the same quality outcomes, but through the utilization of products?”

Leibold feels a large pitfall to avoid is not planning accordingly for capital equipment. It’s easier to make changes in the initial phases of a construction project than in the long run. “It does add to the cost, but it’s relatively minor compared to going back and adding necessary requirements later.”

He also gives a word of warning for what’s known as “forklift upgrades,” where a company offers to upgrading a current piece of equipment by coming in with a forklift and bringing in a new piece. “They call it an upgrade, but it’s really a replacement machine,” notes Leibold. “It may be discounted. It may be used. It may be a little bit of an upgrade.”

“Financing is sort of a sticky situation with some vendors,” says Leibold, discussing the current financial status and GPOs. “But many of our vendors we have contracts with have financing programs they provide from their corporations. We encourage our clients to look at those programs and evaluate them like they would any other type of financing, because it’s a very competitive market and they need to shop that like they do anything else.”

Reference

Schneller, Eugene S., PhD. “The Value of Group Purchasing 2009: Meeting the Needs for Strategic Savings.” Health Industry Group Purchasing Association. April 2009.