Value-based supply chain management: 5 questions with Cardinal Health's Carola Endicott and Ken Shastany

Healthcare leaders are expanding their strategic focus to include the supply chain as a key component to achieve optimized cost savings amid a changing healthcare landscape.


The supply chain can serve as a critical strategic asset to a hospital or integrated delivery network when addressing the important initiatives tied to managing costs and quality of care. Hospitals should step back from pre-existing inefficient processes and workarounds and instead focus attention on leveraging automation and technology to drive efficiencies, lower costs and improve care quality.


Carola Endicott, VP of services and operations at Cardinal Health, and Ken Shastany, RN, MSN, strategic solutions specialist with Cardinal Health™ Inventory Management Solutions, recently spoke to Becker's Hospital Review about supply chain's crucial role in ensuring a smooth, cost-efficient transition toward new payment models.


Note: Responses have been lightly edited for length and clarity.


Question: Nurses working in procedural areas spend a lot of time on supply chain-related tasks. What do you think is causing or driving this trend?


Ken Shastany: In my experience, nurses working in procedural areas probably experience more supply chain-related stress than nurses in general care units of hospitals.


In specialty areas like cardiac cath labs or interventional radiology labs, clinicians help order, stock, monitor and manage high dollar physician preference items, while the materials team handles supply chain activities for lower cost commodity items. Clinical staff members often hold full responsibility for an inventory valued greater than the total cost of the medical/surgical supplies in the hospital's main store room.


A good example of where clinicians spend too much time on supply chain-related activities is in the operating room. Inventory is often managed by the clinical lead. This senior nurse often manages the administrative tasks around the proper accounting of consigned items, like heart valves or orthopedic implants, as well as tissue tracking and vendor stock. They're frequently interacting with people from the supply chain and the billing office, instead of working at the top of their license caring for patients.

Carola Endicott: I think, what we're really talking about is peace of mind. Clinicians want to easily find and grab a product off the shelf without worrying if it's expired, out of stock or the wrong item, so they can quickly return to caring for the patient. That's where supply chain is realizing they have a lot to offer. While supply chain traditionally had a role in commodity supply within the OR, we're now seeing more supply chain leaders taking a seat at the discussion table regarding the management of high-value supplies coming through traditional and special order channels.

Q: A growing number of integrations are occurring in healthcare, which forces enterprise accounts to assess opportunities to gain efficiencies such as product standardization by value analysis teams, interoperability, technology consolidation, etc. How can supply chain or inventory management help support these efforts while contributing to the bottom line?


CE: We've been involved with a number of large health systems as they go through this process of growth and consolidation. When they consolidate, supply chain plays a large role. As the planning process kicks off — even before the ink is dry — both health systems think about how they can bring their supply chains together. Will they be on one materials management or enterprise resource planning system? The "let's combine our item masters" mindset is common during integrations, but complete standardization is much more complicated. Taking advantage of shared information across multiple departments or hospitals is harder.


We've seen a real appetite from utilization management teams in the supply chain, made up of clinical experts, physicians, etc. When utilization managers face resistance to clinical product standardization, they need to be able to back up their case with data specific to a particular case or clinician. Most of the utilization management folks are really limited to what data they can get their hands on. Typical data rests on patterns of purchases for products. It tells you what was bought, not used, and it doesn't indicate which physicians used those products, or on what day they were used, without massive data mining and integration.


Having usage information in one system available to supply chain and clinical leaders alike that also offers cost and usage information is beneficial to utilization managers. This information enables managers to pinpoint which physicians use what product and talk with them when working to standardize supply categories.


The gold standard is to integrate patient outcomes and product utilization within one supply chain data set. That's our vision, and what we are focusing on. The data is there, and we are working to pull it together. With that information, standardization becomes less of a top-down, imposed policy and, instead, something that involves input from physicians and nurses on a shared foundation of data.


KS: Standardization on a local level is often driven by emotion. Nurses or physicians fall in love with a particular product, whether it's a stent or an exam glove, and supply chain has limited objective data to aid in standardization. An inventory management solution can provide usage data to drive decisions for what is best for the organization and what will work with physicians. The technology and the data take the emotion out of the decision-making process when trying to improve the bottom line.

We've seen the benefits of good data first hand with one of our accounts. We work with five departments in one hospital. Prior to automation, the departments were running their own inventories and used overlapping supplies. Expiration and overstocking resulted in a lot of waste and excess. In less than a year, the departments created a consolidated view of their inventory across product lines and saved about $670,000 in supply chain costs, gaining support from their clinical customers in the procedure areas. Extrapolate those cost savings across an IDN of six or seven hospitals and the savings could be very significant.

Q: Many hospitals are happy with consignment and think of supply chain management as a vendor relationship to manage, rather than a direct issue. Is this the most efficient way to manage inventory? What are the risks associated with this mindset?


CE: We like to remind people that consignment is not free. Hospitals pay a premium to use a consignment model. On the other hand, some products are very expensive, so there is a risk of expiration and obsolescence associated with owning these items, which is how consignment has become so popular. If you could manage the expiration of products and purchase products to match utilization patterns, then some of that risk goes away.


Medical device manufacturers and vendors also struggle with hospital-based consignment inventory. Vendors constantly have to manage their field inventory, making large write-offs when field-based products expire on the shelf. All of that waste washes back into the hospital's cost of medical devices.


Consignment models can produce a lot of cost and waste. If you add all of the combined hospital and manufacturer supply chain related loss and waste, it amounts to about $5 billion per year, according to data from a GHX quantitative research study done in 2011.

Consignment won't go away right now, especially in smaller hospitals that don't have a better way to manage inventory. It can be a nice model and work well in some cases. However we believe hospitals shouldn't use consignment as a crutch when they can use technology as a more cost-effective model.


KS: The myth of consignment is that it is not coming with a cost, but sometimes there is a hidden cost of consignment, beyond product pricing, which can be a lot more than people realize. I've been all around the country talking to customers about consignment agreements. I visited one hospital that had all its stents and balloons on consignment. The consignment agreement said the department should have 90 stents on the shelves, but the hospital had 180. The lead tech in the department was tired of getting yelled at for an item being out of stock, so he doubled up on stock and the department had no idea. So while the hospital assumed all stents were on consignment, a careful look at its contract indicated half of its on-hand quantity was actually purchased and owned. This is an easy fix when contracts are digitized and users are alerted to consignment par overages.


It doesn't have to be a no-win scenario. Vendors and hospitals should be able to attack this problem around risk and obsolescence. They need to have a solid inventory management solution as the source of truth. Objective data on both sides can be used to know what is owned, what is consigned and where the contract exists. If we can attack that $5 billion Carola talked about, both sides win.


Q: Compared to clinical technologies that directly impact patient lives, supply chain and inventory technology is not always a main priority in the minds of hospital executives. How can supply chain leaders elevate their position at the discussion table?


CE: When I was a VP at Tufts Medical Center in Boston, we spent many budget seasons around the table looking at a constrained capital budget, a situation I think is true for every hospital in America. It is difficult for a supply chain technology or enhancement to compete with a revenue producing piece of equipment, room or new service line. There is never enough capital, and clinical needs usually win.


However, there's an argument to be made for why capital invested in supply chain efficiency is a smart business decision. Reducing costs offsets the organization's profit and loss in a more direct fashion than revenue projected from a new service line or equipment. There is often a lot of hope when hospitals bring in new technology — promises are made around new revenue, yet uncertainty often exists around reimbursement. Supply chain technologies that lower costs while providing the same service levels fall directly to the bottom line, along with the immeasurable benefit of providing peace of mind to clinicians.


If capital constraints exist, hospitals should explore alternative buying methods for inventory management technologies, including what Cardinal Health offers. For example, hospitals can take a subscription or rental approach that doesn't require any capital up front.


KS: Hospitals will always need inventory management and can always count on it versus reimbursement for a procedure that may become obsolete. When I was a manager, there was a big push for radiation brachytherapy as a treatment for restenosis. Then, drug-eluding stents came along and rendered the treatment cumbersome, expensive and the technology obsolete. Hospitals had invested heavily in infrastructure to provide the treatment, but it didn't pay off.


There are hundreds of examples of huge revenue generation promises that didn't pan out. Maybe the push toward investing more in the supply chain takes a bit of reminding from supply chain leaders, who can point out obvious losses in which the hospital previously made heavy investments.

As a clinician, it's hard to invest against the cutting edge technologies that may improve patient care or increase potential revenue, but there's no reason why clinical and supply chain technologies can't coexist. It doesn't make sense to not invest in an inventory management solution to help improve efficiency, patient safety and staff satisfaction, while also remaining budget neutral and achieving a positive return on investment.      

Q: In terms of change management, what's the best approach to ensure a smooth transition to more efficient supply chain workflows? How do you get buy-in from executives and build the business case to increase the value of investment in supply chain technology?


CE: At the macro level,it's very helpful for supply chain leaders to work with the CEO and COO to develop a vision of the future. When you hit tougher times the vision serves as a reminder for leadership and staff as to why the supply chain transformation or automation is worth doing. On a more micro level, I recommend some kind of demonstration or proof of concept where leaders take a small area with willing and competent participants to operate as an example for the rest of the hospital. Ken and I spend a lot of time in hospitals, and we've found they have a "show-me" culture. A proof of concept project adds to the speed and efficacy of technology adoption and acceptance of change.

KS: Before developing a vision, it is vital to first demonstrate there's a problem. I think a lot of facilities may or may not be aware of the magnitude of opportunity for savings and standardization resting in their supply chain. And even once this opportunity is recognized, initiatives to solve the logistical problems will probably get pushed back, given all the other pressing priorities hospital leaders face.

Hospitals need to focus on the value proposition and return on investment. The worst thing you can do is just focus on the price of a solution. Investment in a "revenue generator" is considered a good return, while investment in a "money saver" is labeled as a cost avoidance and isn't valued as highly. We need to change this mindset and advocate for more proven cost avoidance strategies.

More articles on supply chain:

Senate committee releases comprehensive report on high drug prices: 4 things to know
Supply chain tip of the week: How to put your supply chain on a 'diet'
Survey: 19M Americans have purchased cheaper drugs across US borders


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