Why it’s Time for Healthcare to Shift Operational Efficiency Focus to the Supply Chain

Operational efficiency is a commonly used business term that means different things within different industries. In the healthcare industry, for the past three decades, it’s mostly meant digitizing patient records and getting ERP systems in place in order to improve patient care.

Improving patient care will always be an ongoing effort, but in most organizations, the major digital transformation has been done. They’ve gotten rid of manila folders with handwritten notes, and transitioned patients to online portals where they can see their records and communicate with their doctors. Some organizations are even on their second generation of digital records systems. For the most part, operational efficiency around patient care has moved into the optimization phase.

The imperative now is to increase the operational efficiency of the supply chain. There has obviously been work done on that, but there hasn’t been the same level of focus and technology investment as on the patient care side. There have, however, been significant technological breakthroughs since the last time most healthcare organizations focused on supply chain planning and inventory management optimization, with the cloud and machine learning perhaps being the most relevant.

The Push to Value-Based Care
Technology transformation is always a big challenge. What’s pushing organizations forward with digital supply chain transformation is the government mandate to shift from fee-based to value-based care, and the wave of mergers and acquisitions that shift has triggered across the industry.

The transition has proven more difficult than expected, and one of the reasons is that value-based care demands that hospitals and other providers have real-time visibility into costs, down to the physician, location, and patient level. You don’t have that when you’re operating on spreadsheets or legacy technology.

Here’s the problem. Let’s say you have a heart attack and you go into the hospital for open heart surgery. You stay there for a couple of days and then you're transferred to a short-term rehabilitation facility for a few days. You go home, and you get about 20 different bills--anesthesiology, radiology, cardiology, hospital stay, hospital transfer, rehab, etcetera, etcetera. That’s fee-based care.

In value-based care, you get one bill at the end that to captures all the charges and shows what the insurance is going to pay for. But, if the hospital doesn’t have real-time visibility into their supply chain, getting all of that information together is going to take a long time. That means the hospital can't recognize that revenue until long after the patient is discharged—probably several months.

The Supply Chain Challenge
Further complicating things is the fact that what the hospital gets paid from the government or the insurance company is going to be tied to the costs and supplies for that patient. To understand the scope of the challenge, let’s look at just one part of the cardiac arrest care supply chain, the heart surgeon.

The surgeon might be part of a physician group that is focused solely on surgeries. That’s become a fairly common setup as these groups are growing in size through mergers and acquisitions. Maybe they have 150 surgeons spread over 25 or 30 offices, each of which are buying their own supplies.

One office buys coronary artery stents from J&J and another office in the same group buys them from Cardinal Health. The products are nearly identical, but one costs 67 percent more than the other. Even two offices that are both buying from J&J could be paying different prices, depending on what they’ve negotiated.

This happens every day, across virtually every product and service, in every hospital in America.

What to Charge?
Hospitals doing business with this physician group can’t very well charge one patient more for heart surgery than the other. That's not only crazy, it’s not financially viable. The insurance company has negotiated the price they're going to pay the hospital for the service. The hospital can’t have a physician group charging them more than what the insurance company is going to pay.

Every hospital, clinic, rehab facility and physician group has to preserve revenue and control costs, all while maintaining the same quality of care. This is why having visibility, accurate data and real time reporting is so important. All the mergers and acquisitions that are sweeping the industry won’t achieve the necessary economies of scale if the combined organizations can’t use technology to consolidate buying, control inventory, and have some type of system for replenishing supplies from contracted providers, at the negotiated rate, on an as-needed basis.

Ultimately, to support all the goals of value-based care, the supply chain has to be integrated with medical records because suppliers now must align prices with patient outcomes. Eventually, patients are supposed to be able to comparison shop for non-emergency procedures.

For example, I had a friend in the Boston area who needed a hip replacement, and there are several good hospitals in town, so I encouraged him to shop around. He was shocked to find a 30 percent price difference between the most expensive and least expensive provider. Of course, these were all ballpark prices, because no one really has a handle on all the costs yet.

Supply chain data has a role to play in patient care, which is becoming increasingly data driven, as well. Using predictive analysis and scenario planning, for example, you could take a look at trends and spot increases in certain types of procedures in certain populations. Let’s say you see Type II diabetes in males aged 55 to 65 increasing by ten percent year over year. Doctors may want to look into why that is. Supply chain professionals will want to plan to meet demand.

That’s all very futuristic given where the healthcare supply chain is today, but those are more reasons why undertaking this transformation now is so important. To achieve the goals of value-based care, and better patient care in general, you eventually are going to need the real-time data and visibility from the supply chain integrated across the entire organization.

What we need most right now though is nuts and bolts supply chain optimization—supplier consolidation, category and contract management, easy-to-use requisitioning for front end users, speedy approvals and robust reporting. For organizations that haven’t updated their supply chain technology since the cloud and machine learning came on the scene, there’s bound to be a strong business case with a good ROI for doing it now.