The Changing Supply Chain Landscape

The impact of healthcare reform on supply chain and how leaders can position for success

A Panel Discussion

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On August 24, 2012, the Mid Atlantic Society of Healthcare Materials Management (MASHMM) hosted a panel discussion led by local senior supply chain leaders to discuss the impact of healthcare reform on supply chain management. The objective was to facilitate dialog from the panelists, and between panelists and attendees, that would provide insight into how these leaders are positioning their organizations for success in this challenging environment.

Jamie Kowalski, CEO, Jamie C. Kowalski Consulting, opened the discussion by sharing insights gained from an annual survey he administered in partnership with AHRMM and Marquette University. The survey evaluated the perspective of supply chain leaders and the C-Suite on the impact of healthcare reform and the recession on the supply chain. It demonstrated that both supply chain leaders and C-Suite executives share the same key concerns:

While supply chain management has improved, there remains a disparity between how the C-Suite and supply chain leaders view the important role supply chain can play in helping providers achieve their objectives in the changing healthcare landscape.

These themes were confirmed by the panelists during an engaging discussion.The questions in blue were asked by Kowalski:

What has been (or soon will be) the impact of healthcare reform on supply chain management? Specifically related to supply chain management; what is the best and worst thing about reform?

All panelists agreed that the role of the supply chain will become increasingly more important. “The environment will elevate and challenge supply chain. This is our time to shine,” said Kenneth Grant, vice president supply chain management, Johns Hopkins Health System. “As revenue gain becomes harder, the CFO is looking for supply chain to step up. We must step up and deliver.”

“Collaboration and trust will be needed to work with partners you have not worked with in the past, which increases the opportunity for supply chain,” said Charles Neikam, corporate vice president of supply chain, Inova Health System. “There will be an increased level of physician engagement.”

Edward Robinson, vice president performance improvement and operational support, MedStar Health, believes the financial environment is creating a higher level of engagement by physicians in supply chain. “Physicians are becoming more involved in discussions about cost containment. Providing comparative market data brings additional support. Historically sensitive “sacred cows”, such as physician preference items and device standardization, are now being evaluated. All this increases the prominence of supply chain.”

Victoria Bates, director, system contracting, University of Maryland Medical System, agreed. “Having senior leadership support for your cost saving initiatives is critical. When a senior leader allows a physician to leave when they are not willing to consider a product change that will reduce significant cost – that sends a strong message to the organization.”

“The environment will elevate and challenge supply chain. This is our time to shine.”
- Ken Grant, Johns Hopkins Health System

While healthcare reform provides an opportunity for supply chain to grow in prominence, it will also present many challenges. “We will see a large influx of new patients, which will create a shortfall of qualified physicians and clinicians, especially in the community hospitals,” said Bates. “Coupled with decreasing reimbursements, it will be a real challenge.”

“Health systems are on a buying binge,” said Grant. “The requirement of time and resources to integrate these new facilities into your organization is significant.”

Neikam added, “The growth of new non-acute sites – including physician practices – will challenge the supply chain. We need individuals who are experts in those areas and can help to lower those costs. It will create different conversations with distributors as to how they can help us better manage costs in that environment.”

Health systems are rapidly acquiring physician practices. Do employed physicians have a different attitude about and approach to supply chain vs. non-employed physicians?

Robinson said, “I think it has definitely had an impact. Has it been as dramatic as we had hoped? Probably not. It is moving more along a continuum. The physicians that are employed are becoming increasingly more supportive of the negotiation process with vendor partners. They must disclose any conflicts of interest, but there definitely is a difference. The younger physicians who are coming out of school have been especially supportive of supply chain initiatives. But no question, it is light years improved.”

“As we go through budgetary processes, physicians are realizing there is only so much to go around,” said Grant. “They understand that if they want the bells and whistles there has to be a give and take. When they help us to reduce costs we are able to give money back to their programs for the things they want.”

Have projects been put on hold as a result of healthcare reform?

“One of the ongoing challenges for health systems is our massive infrastructures that have ongoing needs to maintain, renovate and upgrade. We are holding on to equipment longer,” said Robinson. “Capital is being directed to such things as physician acquisition and IT requirements, which creates a struggle to bring in more current technology for clinicians.”

Do priorities in the C-Suite differ from previous years?

All the panelists agree that cost reduction is becoming more prominent, with savings goals for the next fiscal year ranging from $30 to $48 million.

“We go through expense reductions every year, but it has been elevated to something that is very serious for us,” said Grant. “We need to look at new strategies to achieve these goals. To think that we can spread it like butter will no longer work. It is no longer something we do in a vacuum. We must all have skin in the game.”

“We are not in it alone. The C-Suite is engaging us in the strategy and wants to know what tools we need to be successful,” Neikam said. “Physicians are also very involved and are working with us to help us achieve our goals.”

“We are not in it alone. The C-Suite is engaging us in the strategy and wants to know what tools we need to be successful.”
- Charles Neikam, Inova Health System

Robinson believes there is a perception that supply chain can deliver an endless flow of savings. “We have done a good job year after year negotiating contracts, leveraging spending and providing value. As a result, there are high expectations. There is not appropriate recognition given to the value of a highly functioning contract team. We should be adding, not decreasing these resources. Supply Chain is expanding into areas like facilities, food & nutrition, pharmacy, lab, and IT and bringing greater leverage to our 0rganizations.”

Bates said that healthcare reform has refined the priorities for the C Suite and health organizations from previous years due to Medicare reimbursement reductions, cost of capital, volume capacity issues and adequate physician/nurse staffing. “We are encouraging ‘out of the box’ solutions to meet the savings objectives. We need to think differently about how we will achieve savings. Standardization and utilization will have a stronger focus vs. price reduction, and we will inject our supply chain concepts through a collaborative effort with the C-Suite.”

How are you developing future leaders in supply chain?

“Having a defined succession plan is critical,” Neikam said. “We are asking our team – what is your plan for the next five years? We want to show them how they can progress within the organization. There are exciting job opportunities like strategic sourcing that provide opportunities for individuals coming out of MBA schools who are interested in a career in supply chain – they can move forward faster.”

Bates agreed. “Our five year strategic supply chain plan includes succession planning. We have to be better at mentoring the young people coming in to the industry. We are in a powerful position – we have the ability to impact significant cost for the C-Suite. Supply chain is an exciting place to be.”

Everyone agreed that more will need to be done with a shrinking pool of resources. “In a large health system with multiple facilities, talent is disbursed,” said Robinson. “We struggle with limited capacity and bandwidth to take advantage of all the opportunities. We need to distribute projects throughout our organization and let folks in the individual facilities lead a system initiative. This is not just a supply chain issue – this is an industry issue. We have an age gap issue. We need to make sure young people are ready to assume those roles as people retire.”

Is supply chain being elevated because of its ability to help avoid layoffs?

Grant believes that supply chain is the first line of defense against layoffs. “It is easier to deal with commodities than human beings. Getting people to appreciate that is key. If one does not happen, the other will. It is in everybody’s best interest to take as much cost out of supply spending as we possibly can to avoid layoffs.”

“GPOs are strong partners for health systems and community hospitals. They have the resources we don’t have and have their pulse on the healthcare industry”
- Vikky Bates, University of Maryland Medical System

Physicians are seeing a real impact to their clinical resources, especially in the operating room, where they have specific specialties that are in demand,” said Neikam. “This gives us an opportunity to help them with that – by lowering the costs of providing care we can provide better incentives to keep these talented resources.”

Robinson shared his experience at an Ohio health system where his system CEO framed it up very effectively to his leadership team during a tough budgetary time. “Our CEO said, ‘We only have two kinds of expenses – wage or non-wage. And what side of the equation do we want to focus on first? What is going to have the least amount of impact on quality, safety and the patient experience? Can we get the organization to rally around the fact that the stronger we become financially, the better off we are to weather the impact of whatever comes our way, whether it be the recession or healthcare reform?’ It resonated well with our team.”

Bates sees the clinical team being more collaborative, and having a greater recognition of their role in cost reduction efforts through standardization and utilization. “They realize it is good for all of us and helps to avoid layoffs. No one in any organization wants to lose precious resources – we can’t afford that today with the impact of healthcare reform.”

Many hospitals are outsourcing departments today. How do you see that impacting cost, and do you see that trend continuing?

There was agreement that the outsourcing trend will continue. In today’s environment of shrinking capital and resources, partnering with companies that provide value in areas that are not core competencies makes sense.

“I think there will be a continued willingness to look at new opportunities,” said Robinson. “Companies come to us all the time touting their ability to do some specialized function more effectively. And in some cases that is true – they have the expertise, proprietary technology and access to talent that can be beneficial. They can also implement at a faster pace than we can. In those cases, it will be a challenge for us to demonstrate our own internal value proposition. However, it requires a lot of due diligence and maintenance. You can’t just turn an important functional area over to the vendor and move on.”

How is reform changing the relationship with physicians?

“Incentives to support cost reduction initiatives seem to be of interest to physicians,” said Grant. “These won’t be cash incentives, but there are other things – training, research, etc. – that can drive the results we are looking for.”

Robinson believes alignment can occur through data transparency. “If you have data that shows physicians that they are paying a higher price for their implants than others it creates an incentive to participate. The other appeal is that they are practicing medicine in an environment that is financially strong – but in order to do that they need to help us reduce cost. We will have alignment, but it will take time.”

How is reform changing the relationship with GPOs?

All agreed that GPOs will continue to play a role, and it is going to be very important to select the right partner that matches up with your organizational goals.

“It is an excellent time to align with the right partner who can bring knowledge and expertise that you don’t have, as well as the resources,” said Neikam. “There has to be a high level of collaboration and trust. They have the information collected over multiple facilities that allows us to compare ourselves to best practices and gives us visibility to the right indicators moving forward.”

Bates agrees. “GPOs are strong partners for health systems and community hospitals. They have the resources we don’t have and have their pulse on the healthcare industry. They understand the impact of healthcare reform on other entities, such as manufacturers, and bring that knowledge to us.”

It is commonly known in supply chain that the best pricing comes from locally negotiated contracts vs. GPO contracts. Do you agree or disagree, and how will healthcare reform impact this?

Grant has his own GPO at Hopkins. “Obviously, I have to agree. We have a great brand and that allows us to negotiate competitive pricing. And, we are testing our pricing against market pricing, including external GPO pricing.”

“One of the strategic initiatives with GPOs involves information and data systems, spend analytics, price benchmarking and price transparency,” said Robinson. “MedStar has joined with Sentara and Novant over the last year to form an LLC called MNS. We have gone to market on select initiatives using our common GPO, Novation. We are not looking to re-create what has been done but to enhance it. However, in areas like Pharmacy, we don’t have the same leverage as Walgreens or CVS, so it would be hard to negotiate those contracts on our own. Bottom line: you need to use a combination of GPOs and locally negotiated agreements.”

“The term partnership is widely overused. Our goal is to achieve the best outcome with the lowest, most efficient use of resources. Those suppliers that are proactive in creating the best partnerships will be successful.”
- Ed Robinson, MedStar Health

Neikam is looking for his GPO to help him identify facilities that are using the same items as a way to negotiate better pricing. “For example, if I am using two different commodity items, I would like to see a comparison to facilities that are using the same two items – versus telling my physicians they need to change – if I can partner up with 50 facilities nationally using those same two items I can have greater leverage.”

How is reform changing the relationship with vendor partners?

“The term partnership is widely overused,” said Robinson. “Our goal is to achieve the best outcome with the lowest, most efficient use of resources. Many times the supplier incentive is to sell the most products at the highest cost and margin. There is a natural misalignment and tension. The challenge is how we can be better aligned so we have sustainability over the long term. It creates a duty for our suppliers to be proactive in bringing us information – don’t wait for us to confront you with benchmark data that shows we are not accessing the best pricing or that pricing has fallen off contract, etc. Those suppliers that are proactive in creating the best partnership will be successful.”

“Supplier relations are an area where we need to be stronger,” said Neikam. “We are going to need the game-changing products that will allow us to be innovative. The taxing of devices is making suppliers take cover and in the end we are all going to pay. I am encouraging our sourcing teams to better understand the new products and innovations so they can have more knowledgeable conversations with our physicians.”

"Across the industry, we are behaving transactionally, not strategically. This is the view from both the C-suite and supply chain. Yet, we are asking suppliers and GPOs to behave strategically. There is a clear disconnect.”
- Jamie Kowalski, Jamie C. Kowalski Consulting

Bates said, “The supplier community needs to understand that they need to adhere to our policies and procedures. Back-door selling undermines relationships. There is nothing worse than a supplier going directly to the physician because of their relationships without going through the proper channels. This creates delays to the process and creates barriers versus solutions.”

What do suppliers need to do differently?

Robinson provided a list of attributes that make a supplier high-maintenance. “The more of these characteristics that are attributed to a supplier, the less likely we will be willing to do business with them.”

On the flip side, according to Bates, suppliers can bring value and gain business by:

Do your peers in other organizations know what it is to be a good supply chain partner?

“Five years ago we had a group consisting of MedStar, Hopkins and UMMS supply chain leaders that met to collaboratively increase the use of women and minority businesses,” said Grant. “We were able to put aside our competitive feelings and work together towards a common goal. We need to get back to that – we cannot survive in this environment alone.”

Kowalski provided the national perspective. “The survey showed that across the industry, we are behaving transactionally, not strategically. This is the view from both the C-suite and supply chain. Yet, we are asking suppliers and GPOs to behave strategically. There is a clear disconnect.”

How do you establish priorities with all the opportunities available to you? How does a vendor get an audience with you?

All agree they don’t want to stand in the way of the next best idea. “My door is always open for those opportunities and I am constantly looking for them,” said Neikam. If I close that door to those new ideas, we are limiting our potential. I must demonstrate that behavior in order for my staff to do the same.”

Bates has a contracting road map that covers the key project priorities. “While our calendars are limited, we are still open to looking at new opportunities. You do not want to miss that golden opportunity to consider something that is not on our list.”

“The word no-brainer is overused,” said Robinson. “A true no-brainer is getting a lower price for something I am already using. It comes down to the amount of validation we need to conduct around the opportunity. Sometimes it feels like we are chasing a pot of gold at the end of the rainbow in terms of outcome and confirmation of the value and results achieved are illusive. There is a balance between the potential savings versus the amount of effort required. We need to make sure we don’t go broke saving money.”

Grant says it is all about value. “Once I read an email about the value a certain opportunity will offer, I can send that opportunity on to someone in the organization who can evaluate it. It is all about how the opportunity is presented by the supplier.”

What are the keys to success for supply chain leaders who are moving up in the profession and organization?

“A balance of technical and interpersonal skills is required,” said Grant. “The ability to convince people to change behavior comes from a certain style and approach. People who have that skill set tend to be a lot more successful. Obviously, having the knowledge and understanding of supply chain is important, but if I can find someone who has that right personality and approach, and a bit of the salesperson in them, I think those are the ingredients that make for a successful career in supply chain.”

Bates believes there are five key areas you need to focus on. “People are most important, followed by service, quality, financial and growth. You need to have an unrelenting passion for supply chain. You have to believe that what you are doing is great for our patients to be successful.”

Neikam thinks you need to surround yourself with people who have the skills you lack. “You need to understand what your gaps in knowledge are. Surround yourself with individuals who have the talents you know that will make you successful – not everyone has every talent. To think that you can have all that in one person is unrealistic.”

Robinson adds, “There has to be the ability to multi-task. You also have to be comfortable in a high tension, ambiguous environment. It is a schizophrenic environment – one day your top priority is cost containment and the next day it may be improving HCAHPS scores and maximizing the patient experience. You need to have a certain amount of data savvy – the ability to synthesize data and make it actionable is critical. That is a real skill set and people who can get things done will always be highly valued.”

"You need to have an unrelenting passion for supply chain. You have to believe that what you are doing is great for our patients to be successful.”
- Vikky Bates, University of Maryland Medical System

What advice do you have for supply chain employees to be even more successful than you have been?

Bates shared another list:

There seems to be a lack of mentoring in supply chain management. How are you addressing this?

“Mentoring is obviously extremely important,” said Grant. “We are fortunate to have a fellowship program that attracts the best and the brightest. However, it has been a struggle to convince these individuals to take on supply chain. But, it is important to identify those individuals that have that talent.”

Neikam looks for individuals who have the fire in their belly. “They are curious how things are done. They are willing to do what it takes. Those are the individuals who will be the future leaders in supply chain. Those are the people who make it easy to mentor.”

What about education? What are some of the opportunities for ongoing education?

Kowalski believes that AHRMM has great education programs. “There are also universities that have supply chain programs now, and can be taken online. However, you have to be careful – not all are healthcare-focused.”

Each organization represented here is doing some unique things – tell us about them.

Neikam discussed a position created by Inova’s CEO, Knox Singleton, who recently co-authored a book on Sustainability for Healthcare Management. “Sustainability has been a long standing value at Inova. This value was further cemented into the organization by hiring a Director of Sustainability to lead system-wide initiatives. For Inova, sustainability goes beyond the positive impact on the environment to understanding our role as a health provider, community leader and the impact of engaging our employees. The Inova Sustainability program has an opportunity to impact the supply chain with the products we purchase. Sustainability is shifting from a ‘value-add’ to being part of the strategic decision with the vendors we partner with. We are working a sector with other health systems through the Healthier Hospitals Initiative to share our best practices.”

Robinson shared the partnerships MedStar has developed to bring new ideas and competencies that they lack. “It is related to expanding capacity and bandwidth across the entire organization,” said Robinson. “The Cleveland Clinic has developed a commercialized approach to research. They have developed patents and spin-off companies. MedStar also did a study with UPMC with the Advisory Board on population health management. Finally, the MedStar-Novant-Sentara alliance is another example of how we can be more effective if we align with organizations that do things better than we do.

At UMMS, Bates is very excited about how they have grown by aligning with organizations in the community. “We now have 12 hospitals in the region, and the economic impact on Maryland is significant,” said Bates. “Gary Kane, our vice president of supply chain, came from ROI in St. Louis and was recruited to duplicate his successes here. Our five-year strategic plan has a goal of transforming our supply chain and implementing a consolidated service operation.”

“Johns Hopkins is the first in the region to have the opportunity to expand our facilities in a significant way,” said Grant. “We invested in a consolidated service center with over 150,000 square feet and 23 bays. A chain powers the movement of materials around this facility – we move 2,000 carts a day around our organization. We have integrated and centralized many services, which has allowed us to be very efficient.”

How are you collaborating with your internal technology leaders to improve supply chain?

“We report to the CIO, so we are very much engaged in IT,” said Bates. “We need a good foundation in place – everything we do has to be data driven. As we grow, the challenge will be to integrate the technology effectively.”

“We are looking at some unique industry platforms, such as the Prodigo buyer portal at UPMC, which utilizes a Google screen. It is very innovative,” said Neikam. “These are the types of opportunities I am bringing to our IT team.”

Grant said a significant investment was made in IT a few years ago. “We’ve invested in SAP and have begun to implement it in our community hospitals – it will link everyone together in the system.”

“I am a member of the Information Technology Executive Council, and that allows me access to the decisions being made with IT at MedStar,” said Robinson. “We are in the process of implementing a new ERP system – Oracle’s Peoplesoft. Information is the golden ticket to how we will link our cost structure to clinical outcomes.

Conclusion: This is an opportune and critical time for supply chain leaders to step up and demonstrate the value that the supply chain can bring to their organizations. Supply chain leaders can be or are already, de facto contributors to the executive team.