Modern Healthcare

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

- Jaimy Lee

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.”

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 ?? UPMC ?? 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.”
UPMC 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.”

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