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

Modern Healthcare - - FRONT PAGE - 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.”

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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