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To Cut Hospital Costs, Leverage Vendor Relationships

Karen Minich-Pourshadi, for HealthLeaders Media, May 9, 2011

Johnson joined Intermountain Healthcare in 2003 after working in the utility industry. He was brought aboard after McKinsey Consulting completed an analysis of the large health system and recommended that senior management bring in a supply chain leader from outside the healthcare industry to spark process innovations.

"When I got to Intermountain, I asked who the top 10 biggest suppliers were and who was managing them. They didn't have an answer," he says.

The system had a $1 billion annual non-labor spend, yet no one was managing the top contracted vendor. The system was overrun with vendors, working with nearly 12,000. Moreover, contract negotiations and vendor selection (often based on physician supplier preference) was done by a variety of personnel at each hospital.

"When you let personal preferences drive you, you'll pay too much; if you don't have standards, you pay too much; and if you don't have leverage, you'll pay too much," says Johnson.

Getting the situation under control would be a large undertaking, but Johnson added to the task by pledging to leadership that he'd knock $20 million off of the bottom line each year over four years. To help him achieve this $80 million goal, 25 new hires were added, many of whom were brought in to help with analytics, strategic sourcing, and supplier relationship management.

Intermountain centralized the ordering and began managing each supplier based on why it was chosen. As part of their supplier relationship management, Johnson and his team communicated what the goals of the system were and they looked for opportunities for the vendors to work with them to achieve success.

For instance, by working with a sterilization vendor for six years to improve outcomes, Intermountain reduced costs by $2 million per year, and reduced medical waste. Both companies developed opportunities to share information and tracked monthly performance metrics against annual goals, Johnson says. 

Another instance where mutual goal setting is paying dividends developed over a four-year period of working closely with a manufacturer of smart infusion pumps; Intermountain reduced costs, increased quality, and reduced medication errors. Both companies committed resources to develop an improved pump with more advanced technology. 

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