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Armchair Finance

Philip Betbeze, for HealthLeaders Media, September 10, 2008
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Lessons Learned in Supply Chain

Hospitals these days are making admirable strides in efficiency. From enacting justifiable pricing to becoming more consumer-friendly, efficiency is the watchword for the coming years in healthcare reimbursement. But perhaps some of the biggest savings can come from the supply chain—where hospitals, as a group, have traditionally done a poor job of integrating technology, tracking inventory, and squeezing the best prices they can from their suppliers. That's changing, however, thanks to a leadership focus on achieving savings in this area as well as a bevy of new tools being shopped by vendors and group purchasing organizations.

Still, the hard work being done by supply chain leaders is about achieving physician buy-in and consensus—much more of a squishy notion, as I learned during a recent Webcast I moderated. Steve Pitzer, the system director of supply chain at Irving, TX-based Christus Health, says supply chain directors need to change the dynamics of the question they've been asking over the years. Making sure charges cover your supply costs is only part of the equation. Building a cost model that is supported by your revenues is the key, and forming doctor-driven committees to make decisions based on cost and quality is the only way to get there.

The hospital supply chain has always struggled with making the connection to physicians that unnecessary variety in physician preference items is a big driver in high costs. The more variety, the less of a particular item you will order—and the less leverage you have to gain volume discounts from suppliers. But you can't just order your staff physicians to buy from an "approved" list of items, unless you can get them to develop the list themselves in return for being able to spend the savings elsewhere on their pet projects.

Further, you have to undertake strategies that will decouple your physicians from the influence of product reps. Easier said than done, I know. But the key, says Webcast participant Jim McManus, vice president of finance with St. Joseph Health System in Orange, CA, is developing strong transparent data to influence physicians on their choices. But even more important than that is the presentation of a unified front among physicians and the executive leadership team at the hospital. Product reps can sense division and have had years of experience exploiting that cultural divide.

There are many hurdles to overcome in dealing with suppliers. They won't be interested in reducing prices, says McManus, unless they feel threatened with a loss of business. The only way that threat has teeth is through a unified front among the leadership team and physicians. To be sure, execution of these strategies is the real hard work. But until you understand the basics, you can't advance.

Philip Betbeze

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