Found money: How to clean up preference cards to cut inventory spend and boost margins

Heightened cost pressures continue to force hospitals to look for ways to reduce wasted spend. In fact, in a recent survey, hospital executives said finding cost savings to meet their current-year objectives is one of their top challenges.

The supply chain—more specifically, inventory and order management processes—is a natural place to look for savings. A study from the International Journal of Supply Chain Management shows that inventory and order management costs account for 61 percent of total supply chain costs (or $61 million per year for a typical large healthcare provider).

Charles Poirier, author of Diagnosing Greatness: Ten Traits of the Best Supply Chains, provides a compelling synopsis of the enormity of the opportunity. In a blog post, he estimated the $3 trillion U.S. healthcare system could cut $60 billion in inventory spend and $6 billion in working capital through better supply chain practices. As Poirier notes, "That is a lot of new free cash flow."

Arguably the biggest driver of over-budget inventory spend are medical-surgical supplies—the disposable or implantable items used in the operating room that include high-cost physician preference items. These items, which can account for 30 percent to 40 percent of a hospital's supply expenses, represent by far the largest percentage of inventory spend. That's not surprising given the high cost of many items in the category. But they also are responsible for a substantial portion of the typical hospital's inventory budget overrun. That was the case at one hospital, whose per-case supply costs exceeded the median cost for peer organizations by $300.

The chief culprit

Why do hospitals struggle so much to contain their medical-surgical inventory spend? The biggest culprit is the physician preference card.

The preference card specifies the supplies a surgeon requires to complete a particular procedure in the OR. It's critical to ensuring the nurse pulls the right supplies from stock and has them at the ready when the surgeon needs them. The problem is, in a typical hospital, preference cards are often outdated or otherwise inaccurate.

Of course, preference cards were accurate when nurses created them. But over time, as surgeons change how they execute a procedure or learn about new products, nurses add items to the card—but often don't remove the ones no longer used. In other words, they're not spending time tweaking and refining preference cards. And that's understandable: Nurses' primary role is caring for patients. They're not materials managers or inventory specialists, and when forced to choose how to juggle demands for their time, the patient always wins.

Yet the end result remains: Preference cards have come to resemble more of a laundry list of all items a nurse thinks a surgeon might require—rather than a reflection of a surgeon's exact supply needs for a given procedure.

These inaccurate preference cards lead to substantial supply waste in the OR. For example, at one hospital, surgeons typically use only about 60 percent of the supplies pulled for a typical procedure. The rest are either discarded because the package has been opened and the remaining items are no longer sterile; or, if not opened or used, must be manually returned to stock. This helps explain why, according to one estimate, every year more than $5 billion is wasted on expired, lost or un-captured medical device and implantable charges.

And returning items to stock can be very labor intensive. A nurse must reenter each returned item into the OR information technology system, deduct the charges to the patient and physically put the item back on the shelves. In isolation, the labor involved in returns for one procedure doesn't seem like much. But in a large hospital that does 200 surgeries a day, and each surgery's preference card includes 100 to 200 items and the OR and storeroom are two floors apart, it adds up quickly. Indeed, 70 percent of respondents in a recent survey said excess clinical time spent on inventory replenishment is a "very" or "somewhat significant" challenge to their hospital's operating room.

But inaccurate preference cards don't just lead to excess items being pulled for the OR. They also can mean an item the surgeon needs is not on hand when needed, requiring the nurse to quickly retrieve the product from the stockroom in the middle of a procedure. That's not ideal for anyone involved.

Making matters worse, inaccurate preference cards have a major ripple effect on procurement. When nurses pick supplies for surgeries, the hospital's broader inventory system considers them allocated or used. That tells procurement it's time to order replacements for those items. But at the same time, procurement has no idea what might be returned to stock after the surgeries. Undoubtedly, some items will be returned, which means the hospital now has redundant supplies of those items—and those supplies will only continue to grow as the practice is repeated.

Such inefficiencies, waste and duplication can have an insidious effect on a hospital's bottom line. Consider this typical scenario, which we developed based on aggregate data from five different hospitals. This analysis clearly illustrates how much inaccurate preference cards truly cost a typical hospital.

The representative hospital has an overall medical supplies budget of $12.5 million and conducts 22,000 surgeries annually. With the cost of an average preference card topping out at $1,200, that translates into $15.8 million a year spent on medical-surgical supplies. Of that, $2.9 million is spent on items that are opened and unused, and $4.7 million on items unused and unopened (222,000 of them annually). This adds up to $1.6 million in overspend a year based on perpetual inventory inaccuracies traced to outdated preference cards.

Attacking the root cause

How can hospitals identify what they are actually losing due to inaccurate preference cards—and, more important, actually capture those potential savings? They need to start by attacking the root of the problem and clean up their existing preference cards.

This typically begins with focusing on a particular service (e.g., orthopedics) and all the doctors who perform surgery within that service. To understand how accurate those doctors' preference cards really are, the hospital should appoint a team to get an on-the-ground look at each doctor's use of routine medical surgical supplies during surgery. The team typically comprises an onsite program manager as well as several sterile techs who are responsible for observing the procedures. The number of techs on the team varies by the number of surgical procedures targeted. As a general rule, two techs are needed for every 15,000 annual procedures.

At the end of each procedure, the techs document what was used, what was unused and unopened and what was opened and discarded. They then compare this snapshot with the associated preference card to identify how closely actual supply use during the procedure matched what's on the preference card. To ensure the data gathered are representative and accurate, a tech repeats this process four more times for the same doctor and procedure.

With these data in hand, the techs can have a fact-based discussion with each doctor to illustrate the disparity between his actual supply use across the five observed surgeries and what's on his preference card. This includes pointing out items on the card the doctor used and frequency of use (e.g., 100 percent, 80 percent and 50 percent of the time); those on the card he never used; and those he used (and how frequently) but weren't on the card—i.e., the ones the nurse had to rush out to retrieve in the middle of surgery.

The goal of this discussion is to give the doctor the data necessary to make an informed decision about which items should remain on his card or be added to it, and which should be removed, so that it accurately reflects his actual use. Once the doctors provide their input on what their cards should now contain, the techs make the requested changes to each doctor's preference card in the OR IT system.

The techs also give the updated cards to procurement professionals so they can make better-informed decisions about what they should order. This, in turn, ensures inventory better reflects what's actually being used in the OR. For instance, procurement may find that a certain doctor no longer uses a particular item, or less of it than he once did, and can recalibrate purchasing accordingly. Doing so can go a long way toward putting the clamps on inventory bloat.

Sustaining the benefits

But the benefits of this initial exercise won't be sustainable if the hospital simply returns to its old ways of maintaining preference cards. It has to put in place a new process for ensuring they remain current and accurate.

One of the biggest problems with the way hospitals currently maintain preference cards is the fact that it's every nurse's responsibility. As mentioned, that adds to nurses' workload, which is already full with caring for patients. Nurses don't have time to continually update and refine preference cards beyond simply adding new items as doctors begin using them. And the fact that any nurse can amend any preference card in the system only adds to the risk that the cards become "grab-bags" of items.

The solution: assigning a dedicated resource as the "preference card keeper" whose sole responsibility is to gather ongoing updates to preference cards from nurses, make those changes in the OR IT system and communicate the changes to procurement so procurement can ensure their purchasing keeps pace with how doctors' supply use evolves. If the hospital is big enough, it could create such a role for each service area.

The frequency of updates can vary. While getting feedback after every procedure would be ideal, it's unrealistic. For most hospitals, a quarterly audit—in which the card-keeper reconciles supplies picked against what the hospital charged the patient for—is sufficient. A large variance for a doctor or a procedure is a red flag that further monitoring is needed.

By limiting access to a single person who's accountable for updating preference cards, the hospital ensures that proper updating actually happens. It also prevents others from making ad hoc, haphazard changes, which helps preserve the cards' integrity. In effect, the hospital instills a system of checks and balances and ensures card updating is done in a disciplined, formal way.

However, nurses still play a critical role. After all, they're in the OR every day. It's up to nurses to continue to employ the process the techs used to compare what's on the cards with actual use after every procedure, and communicate any discrepancies to the card-keeper. Implementing 5S—a common tool used in Lean methodology to eliminate waste from the work environment—can be especially helpful in supporting nurses' efforts to keep cards current over the long term.

Conclusion

There's no question that hospitals today are under intense pressure to operate more efficiently and get a better handle on their cost structure. But it's equally true that any moves to address either or both of those challenges must be done without negatively affecting patient care. In fact, ideally these two objectives can be accomplished while actually improving patient outcomes.

Myriad potential cost-reduction targets exist in the typical hospital, but arguably none is more prominent than preference cards. As discussed, inaccurate preference cards can cost a typical hospital $1 million or more in annual overspend—money that, if recovered, drops straight to the bottom line.

The good news is that capturing those savings isn't difficult. Preference cards are actually low-hanging fruit for any hospital that's serious about reducing its costs and improving efficiency. All it takes is an initial effort to clean them up so they reflect OR reality, and the discipline to maintain the cards' integrity and currency over the long term.

Given today's climate, it's an exercise that's unquestionably worth the effort.

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Stephen W. Simco is practice director for healthcare at Sedlak Management Consultants. He has more than 25 years of experience in the consulting and healthcare industries, with a broad background across the supply chain including transportation, planning, distribution and inventory management.

David S. DuBose is director of supply chain solutions at Sedlak Management Consultants. He has nearly three decades of experience across industry and consulting. His background includes supply chain strategy, logistics network planning and design, and inventory planning and management.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.​L

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