Special report: Chief purchasing officers shouldering bigger role
Chief purchasing officers and other supply-chain execs gain new responsibilities as hospitals work to control rising costs
Intermountain Healthcare in Utah saved $185 million in supply costs after bringing in a chief purchasing officer. Pittsburgh-based UPMC recorded more than $100 million in savings after Chief Supply Chain Officer Jim Szilagy took control of the system’s supply chain.
The hiring of supply-chain leaders at both systems reflects an industrywide shift toward making purchasing an executive position, while also recognizing the growing awareness of supply-chain costs on a hospital’s longterm financial health.
“You’re seeing the role of chief procurement officers in health systems rise,” says Drew Ungerman, a director at Mckinsey & Co. in Dallas. “There’s a need to drive standardization and deliver savings so that they can rein in spending in ways that don’t compromise patient care.”
Executives say supply-chain costs are a hospital’s second-highest cost after labor expenses, yet the practice of establishing a chief purchasing officer at most of the largest health systems in the U.S. did not begin to occur until about 10 years ago, Ungerman says. The function has become more common at small to midsized systems and stand-alone hospitals in recent years.
Both the titles—hospitals vary in how they name their top supply-chain executives—as well as the responsibilities of supply-chain executives differ from hospital to hospital. Reducing costs, including addressing expenses for goods and services outside of the traditional supply-chain sector, and driving standardization are becoming more widespread.
“You’re seeing a much greater willingness to drive standardization and that’s not only due to the obvious cost benefits that standardization can help provide,” Ungerman says, adding that standardization also can provide hospitals with a quality benefit by ensuring proper training and standard operating procedures within service lines.
When Brent Johnson, vice president of supply chain and imaging services and chief purchasing officer at Intermountain Healthcare, joined the Salt Lake City-based system in 2005, the strategy was to save $20 million for each of his first four years. Intermountain’s efforts addressed clinical and nonclinical spending areas such as third-party contracts and information technology hardware and software. Johnson oversees a staff of 600, including about 90 employees in the central office.
“There’s a definite rise in recognizing the value of having supply chain run more strategically, at a higher level in the organization,” he says.
The purchasing department at Intermountain eventually “earned” the right to oversee purchasing of IT hardware and software,
third-party contracts, equipment maintenance, auditing, marketing and pharmacy for the system’s 20 hospitals and 185 physician clinics, because of savings achieved in materials management, Johnson says. The purchasing department also will be involved the next time the human-resources team seeks bids for benefits negotiation.
“The nonclinical spend isn’t very sexy, but it’s often untouched,” Johnson says. “It’s kind of the forgotten category in healthcare.”
To reduce clinical expenditures—medical-surgical products make up about 30% of the $1.5 billion Intermountain spends on nonlabor expenses each year—johnson focused on the system’s use of its group purchasing organization, as well as physician preference items. Intermountain, which has part ownership of Amerinet, a St. Louisbased GPO, now actively self-contracts with some suppliers while maintaining other contracts through Amerinet.
“GPOS are very necessary to manage supply chain in healthcare,” Johnson adds. “However, GPOS should not be the total strategy. They should just be a tool.”
Johnson, a former supply-chain executive at Pacificcorp, also sought to increase standardization and reduce product preference, one issue that often puts supplychain staff at odds with physicians, nurses or even janitors.
“We’ve been very successful working with physicians,” he says, “but it’s taken a lot of extra time to engage them, to involve them in the process, and to educate them and use lots of data to understand what it costs the company to allow preference when, in reality, the preference and the high dollars that some suppliers want us to pay them for technology is not justifiable.”
On some major projects, Intermountain shared the benefit of savings with physicians’ offices. But beyond price negotiation, the next step is to reduce variation in products and processes, Johnson says.
At Community Health Systems, the purchasing department has been an active participant in supporting the Franklin, Tenn.-based system’s acquisition strategy. Chief Purchasing Officer Tim Marlette joined CHS in 1998 as an assistant vice president of materials management.
“Twenty years ago, there were only three things that we were responsible for doing: placing orders, receiving the shipments and distributing the supply,” Marlette says.
Marlette notes that his first priority is still managing supply expenses, but the position he holds has evolved in recent years to include due diligence and oversight of imag- ing and laboratory services.
After an acquisition, Marlette and a team of eight staffers evaluate the acquired hospital’s GPO, compare the contracts and provide training on CHS’ materials management systems—and then initiate the capital purchases that are often part of CHS agreements. More often than not, the acquired hospital will begin working with Healthtrust Purchasing Group, the system’s GPO.
“A lot of the hospitals we acquire haven’t had a lot of access to capital,” he says.
Capital purchases often include IV pumps, surgical equipment and sterilizers, according to Marlette. Of the deals that CHS announced last year, the system said it would provide a $60 million capital investment to Moses Taylor Health Care System, a two-hospital system in northeast Pennsylvania; a $50 million capital investment to 272-bed Tomball (Texas) Regional Medical Center; and $68 million in Pennsylvania’s Mercy Health Partners system, per terms of the agreements.
According to Ungerman, supply-chain involvement during acquisition talks has become more common.
“The supply-chain departments in those larger systems actively participate in the M&A dialogue, which is heating up as consolidation trends continue in hospitals,” he says. “They’re able to identify where synergies are coming from more proactively.”
CHS, which has 133 hospitals, will spend $1.8 billion on supplies this year, according to Marlette. He adds that the focus during the next 12 months is on medical devices, with a goal to reduce spending on high-cost items such as hip and knee implants and drug-eluting stents.
“That’s the biggest area of spend that’s the easiest to get to,” he says.
For many of the large systems that have developed sophisticated supply-chain departments, price has become less of the prize. Now, establishing the value of procured goods or services and increasing standardization are key initiatives that large systems will undertake.
“As the environment has gotten a lot more difficult, you have to enter the value into the equation,” Ungerman says.
Intermountain Healthcare and UPMC are building new distribution centers, both of which are slated to open this year. The distribution facilities will support the systems’ efforts at self-distribution while also removing their use of distributors from the supplychain function.
Johnson says that Intermountain is the “right size and geographic density” to handle its own distribution. The $35 million distribution center, which is set to open in July, is expected to help streamline the supplychain process.
“We’re standardizing our products and we’re buying directly from manufacturers, bypassing the distributors,” Johnson says. “In some ways, we’re bypassing the GPOS on certain products … Now we’re going to bypass the distributors on 70% of the items.”
UPMC’S facility, which is expected to open
this month, will support the system’s move toward self-distribution.
Szilagy, a former executive at Alcoa, joined UPMC as chief supply chain officer in 2005. Like Johnson, he found the system was heavily reliant on its GPO contracts. Now, UPMC also is involved in self-contracting and responsibilities include contracting, accounts payable, distribution, transportation and the materials management staff employed by the system’s 10 hospitals.
The system handles about $1 billion in supply spend each year.
“They’re looking to supply chain to deliver cost reductions,” Szilagy says in reference to executives at other organizations. “They know that the operating expenses have to go down and you need a leader within the organization who knows how to do that; who knows how to transform the supply-chain organization and to work with user groups across the system in a collaborative way to drive out costs.”
UPMC is unique in that it developed an electronic marketplace technology for supply-chain operations. Then, in 2008, the system created a for-profit company called Prodigo Solutions that offers the technology to hospitals and health systems as well as supply-chain consulting services to other providers. Clients include Ohio State University Medical Center in Columbus, Evergreen Healthcare in Kirkland, Wash., and Children’s Medical Center of Dallas, says Michael Deluca, a director of supply-chain solutions and consulting services at UPMC, who worked with Szilagy at Alcoa.
Since Szilagy joined UPMC, the system has reorganized the materials management staff at its hospitals so that they report to Szilagy.
“We weren’t given control right off the bat,” Deluca says. “We had to show through our business impact that we deserved the right to manage those employees and by ceding off control of the supply chain, we could actually run a tighter process and improve cost-savings within the hospitals.”
Despite the financial successes of some supply-chain executives, the transition for many hospitals to address supply costs through the leadership of a purchasing executive has been slow. Szilagy notes that significant supply-chain organizational efforts require a lot of change, in the culture of a hospital and in behavior.
“You have to prove and verify and continue to show value,” he says.
Johnson and Ungerman estimated that a hospital can achieve between 10% and 20% in savings by evaluating clinical preference product costs. Mckinsey had served as a supplychain consultant to Intermountain prior to Johnson’s hire.
“It’s worth substantial dollars to capture this kind of impact,” Ungerman says. “It’s not easy. It requires an investment and the right kind of talent and collaboration across key stakeholders, including the clinical staff.”
Jim Szilagy, chief supply chain officer for Pittsburgh-based UPMC, says health systems need leaders who know “how to transform the supply-chain organization” and work collaboratively “to drive out costs.”