With seven acute care hospitals, the Texas health system is using innovative ideas to trim its $1.4 billion supply chain budget, while increasing efficiency.
When David Peck arrived at Houston Methodist in 2018, there was no centralized purchasing. Each entity of the health system purchased its own goods. Peck, vice president of supply chain management, centralized all purchasing at the corporate level, delegating it into pods: The operating room (OR) buyers. The laboratory buyers. The general medical-surgical buyers. And so on.
Supply chain started using Global Healthcare Exchange (GHX) tools to place and chase orders, allowing technology to do the follow-up work instead of Houston Methodist employees. The health system onboarded vendors to the GHX EDI platform. "When I got there, we had seven to eight transactions on the EDI platform. Now we have more than 200," he says.
With military precision, the former Navy officer set out to decrease supply delivery traffic at its seven hospitals, implement robotic picking at its warehouse, set a drone delivery plan in motion, and, when COVID-19 hit, arranged for local PPE manufacturing. During the pandemic, Peck's department also completed a $50 million cost savings initiative to renegotiate contracts and standardize products across the system.
Consolidated service center: standardizing delivery, reducing truck traffic
Houston Methodist leased 250,000 square feet in the 1.3 million SF distribution warehouse Medline built, to stand up a consolidated service center (CSC), to do all centralized receiving for the health system. The only deliveries that go directly to the hospitals will be via next-day air early morning, or anything mandated to go directly, like frozen bone and tissue, and radiopharmaceuticals.
The packages arriving at the CSC will be delivered by Medline in a 3PL backhaul. "Every item is received and accounted for the same way," he says. Using this method speeds up the invoice processing time, making it more uniform.
This method also reduces congestion on crowded campuses, by eliminating most delivery trucks. The Medline trucks make nighttime runs when it's less busy. It allows the hospital to better use its personnel, so they are not stationed at the receiving dock, he says. Peck says he is not sure whether this method currently lowers costs, but it improves operations and efficiency. In the next two years, Houston Methodist will maintain the seven acute care hospitals' OR inventory at the CSC. "That would truly reduce cost," he says. Currently each hospital OR department is ordering supplies separately.
Buying the beds
The CSC will have a bed depot to manage the rental bed fleet, and store and maintain their own beds. "Most places don’t think that way," he says, as most systems just lease beds. "For us, it’s a way to control our costs. It cuts down on rentals." The problem with bed rentals is that when a patient no longer needs the bed, the hospital pays for it to sit in a hallway or get stored somewhere else, until someone realizes it's a rental and it's returned. "If we own the bed, we can move it in our system much better."
Houston Methodist has 2,400 beds, with around 180 beds moving around the system at any given time. Special bed types might accommodate a bariatric patient or a post-orthopedic procedure patient, and these beds are not typically kept in the rooms. Sometimes the health system rents hospital beds, like during the COVID-19 surge, when extra beds were needed. Peck estimates that there's an 18-month pay-back when buying a bed. Buying 100 beds costs $1.3 million, and the savings can add up.
The hospital system sends 7,000 lines of product a night to the distribution warehouse for product picking. Of those, 6,300 are ordered at the lowest unit of measure, so each item is individually picked instead of gathering a case or pallet. Each evening, the Swisslog robotic picker selects the items for the medical-surgical floors, like Band-Aids, to be delivered at night.
Houston Methodist is increasing warehouse capacity to put in OR supplies, and it will provide a purchase order, and that case will be picked individually, with items put in a tote for hospital delivery. "We’re a year away from doing that," he says. It involves ensuring the surgeon's preference cards are correct, a process taking place now. "It will take one case at a time, one hospital at a time to make sure we do that right."
Houston Methodist is exploring an opportunity with Zipline to use drone aircraft for quick deliveries or lab deliveries from the CSC hub to Houston Methodist at Texas Medical Center. Due to traffic, driving 40 miles in Houston can take 1.5 hours. The drone can be deployed to help with these pickups and deliveries throughout Houston. The drones have a 100-mile range, so they can make it from the CSC to a hospital, pick up or drop off the package weighting 10 pounds or less in a designated parking spot, and then return to the hub's landing zone or capture site. "We're figuring out the best way to do all this," he says. Peck estimates that the health system is six to eight months away from putting the drones in action, and at interview time, were finalizing the contract. Houston Methodist will likely start with two drones and expand as needed.
During the early months of COVID-19 in 2020, Houston Methodist was caught short on PPE like all hospitals. The health system developed a "pretty robust 3PL program and have partnered with local manufacturers in Houston to produce all of our isolation gowns, and all PPE except for N95 masks," he says. Houston Methodist no longer relies on Chinese manufacturing for PPE except for 3M's N95 masks. "We've gone from less than 5% onshore production to U.S.-made products," he says. Accounting for North American production, including Mexico, the hospital system is at close to 30% of its med-surg products manufactured on this continent. It worked with a manufacturer to pilot and produce nitrile gloves in Houston as well. Houston Methodist will buy 14 million pairs a month, or 25% of the gloves made, and the rest will be sold to other buyers.
The medical system is also working with a local company to produce saline. "We were all caught short in 2017 when Puerto Rico was wiped out in the hurricane," he says, as Puerto Rico is a key saline manufacturer. The local company is working with the FDA to get clearance for its product, Peck says. "The FDA is fully supportive. This will be the first onshore (saline) manufacturing company in the U.S." Efforts like these are helping Houston Methodist mitigate potential supply shortages and become more resilient, rather than relying on China and other Asian countries, he says.
Like many health systems, Houston Methodist is looking to standardize more of its inventory to lower costs. Its $50 million initiative, completed during the pandemic, involved renegotiating contracts and analyzing data to understand physician practice utilization. One analysis involved supplies for a laparoscopic cholecystectomy. The health system found that the average cost was $30.25 for all products used in the procedure. The physician champion for reducing supplies for this procedure was the second-lowest cost user of product, 10 to 15 cents ahead of the lowest-cost user. "He went to that physician to see what he was doing differently," Peck says. That physician used Band-Aids instead of sutures on the three incisions. The physician champion tried the Band-Aid technique and it worked.
Supply chain expenses at Houston Methodist are $1.4 billion a year. "We're number two behind labor," he says. "I tell the HR senior VP, as long as you’re spending more than I am, I don't have to worry."
Deborah Abrams Kaplan is a contributing writer for HealthLeaders.
Use data to understand product costs for similar procedures; the doctors can then try to optimize their usage.
Standardize products and renegotiate contracts for increased savings.
Compare the cost to buy equipment like beds, versus renting.
Work with local partners to manufacture critical products, to decrease reliance on other countries.