Saturday, March 2, 2013

Healthcare Catching Up With Supply Chain

Supplies are the second highest contributors to costs in hospitals. Supplies may range from cotton balls to knee implants. As it turns out, supplies are an area that could do with reform when it comes to reducing the cost of healthcare.  Doctors prescribe a variety of expensive medications, implants and other devices without much thought to their costs that compels the hospitals to purchase these and put the final cost burden on the patient/payer. A misalignment of incentives between doctors and hospitals has resulted in supplies representing 31% of the high hospital costs that burden patients in the end.

Seeing this inefficiency in supply, researchers thought to study and supply chain in hospitals and come up with a solution to curb supply costs. Gainsharing is one solution that has been proposed by them. In the system of gainsharing, doctors are rewarded for increasing efficiencies and reducing costs. In this way both, the doctor and the hospital share savings from improved efficiencies. The reduced cost of healthcare also benefits payers and patients, in the long run. Gainsharing experiments were performed in 13 different hospitals for the use of stents in cardiology. It was found that gainsharing lead to 7 percent decrease in costs per patient without affecting the quality or access to care. However, the U.S. Department of Health and Human Services Inspector General had objections to gainsharing and found it to violate anti-kickback regulations, due to which the researchers had to take special permission for their research. This does raise a larger question of the negative implications of gainshairing. Even if a few hospitals are allowed to adopt gainsharing, how will it be regulated and monitored to ensure that there are no lapses in the quality and access to healthcare? As more and more hospitals begin to adopt the system, this problem will become all the more complicated and difficult to determine whether or not the patient’s life was put on risk. It’s not like doctors don’t already take into account cost. It is well known that doctors will not prescribe certain treatments (in case alternatives are available) if a patient’s insurance does not cover it, or the patient cannot afford it. Gainsharing will only give an incentive to doctors to use supplies that are cost efficient. But to put the system in practice, effective checks and measures will have to be out in place.   
Supply chain management has also lagged in the hospital space because of the limited customization and choice offered by the suppliers in this space. Hospitals generally buy finished products, off the shelf which sets them apart from other retailers or service providers that have attributed their success to supply chain management. For example, an auto manufacturer might ask its supplier to design a different kind of break for a new car. However, Hospitals can’t ask a med-device company to make an implant specifically designed for the hospital. Supplies haven’t really been seen as assets before, so the question of supply chain management never arose.

There are certain procedures performed in hospitals whose costs heavily depend on supplies. These are referred to as “supply intensive admissions”. For these procedures, supplies take up 50-80% of the total cost of the procedure. They include joint replacement and cardiac surgery that comprise the fastest growing segments in American medicine with the highest costs. An approach to reducing the cost of the medical supplies in these procedures would be standardization. Healthcare practitioners will have to come together to decide on a set of common products for the supply intensive procedures which will lead to lower supply costs.

To bring in an efficient supply chain for hospitals, it will become imperative for doctors, hospitals and suppliers to coordinate their efforts to reduce costs and serve patients at the same time. These parties have traditionally worked in silos, sometimes even sparring with each other. Collaborating with each other will require the realigning of interests and redefining their roles in the healthcare system in order to mutually benefit each other. Operational efficiencies will benefit all parties, that much is obvious. Whether the above mentioned strategies will work on a large scale, still remains to be tested. One successful supply chain improvement has been the implementation of electronic medical records (EMRs). With the adoption of EMRs, paper is becoming increasingly redundant, saving on costs. Another one is UPMC that has created an operationally efficient virtual marketplace for procurement that improves contract compliance and saves the buyer’s time.   

The healthcare sector has been a little late in catching up with supply chain management. While gainsharing and standardization are starting points for establishing supply chain efficiencies, these strategies need to be further examined to eliminate any loopholes that may deprive the patient of better healthcare. Whereas, the recent recession has forced hospitals to think about supply chain management in order to keep their heads above water. Would you as the supply chain head of hospital apply the above strategies (gainsharing and standardization) to reduce costs? What changes (if any) would you make to ensure that there is no drop in the quality of healthcare? How would you get the various parties (suppliers, doctors, etc) on board to accept your proposal?


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