Hospitals paying different prices for identical items from different suppliers due to inefficient supply chain, report posits

By Rick Dana Barlow

A new study conducted jointly by Cisco Systems Inc. and Neoforma.com Inc. found hospitals, on average, experience a 75% discrepancy in prices for identical items from different suppliers and needlessly pay $140 to process a single paper invoice, two problems that can be solved by using the Internet.

Those observations were posited in the Cisco-Neoforma report, “New World Supply Chain Management: A Model for Health Care Organizations,” released today. The new white paper, co-written by Cisco’s Rebecca Whitehead Munn and Neoforma.com’s Crystal Nisly, focuses on how healthcare organizations can use Web-enabled business management processes to improve the delivery of patient care and reduce operational costs at the same time.

The report also estimated that a typical hospital buys $50 million in supplies from 22,000 suppliers annually. Three-fourths of the products are purchased through contracts with a minimum of 2.4 group purchasing organizations.

“The use of Web-enabled supply chain management is a major advance toward enabling healthcare organizations to concentrate on their core competencies and patient needs,” said Munn, manager, Solutions & Business Development, for Cisco's Internet Business Solutions Group. “The cost and productivity savings made possible with Web-enabled supply processing and fulfillment can amount to millions of dollars and incalculable staff time that can be re-directed to patient-centric needs.”

To illustrate how the Internet can lead to operational efficiency, the report cited the success of Virtua Health System (Marlton, NJ), which accounts for a 50% market share in its service area. The integrated delivery network’s supply chain strategy projected a $10 million savings during a two-year period, representing a 16% overall reduction in cost.

Nicholas Toscano, Virtua’s vice president, strategic support services, noted at the HealthCareUSA 2000 conference in Atlanta in late May that their strategy to achieve these savings extends well beyond price and into total delivered cost, which represents “real” outcomes management data. “Total delivered cost requires more information on utilization and not just price,” he said.

Toscano noted that one manufacturer Virtua works with employs 280 people just to manage rebates to make sure they’re current. “How efficient is that?” he asked. “We need to focus on managing products and processes.

“The problem is we don’t know what expenses are in certain areas and how we relate to competitors in terms of total delivered cost to patients,” he continued. “We can’t do this alone as providers, however. We need to leverage the abilities of the suppliers and the dot-coms as well.”

Virtua focused its supply chain on a shared services or “hub-and-spoke” model supporting 33 locations from a centralized support services center. Virtua also is negotiating with other provider groups in the area to offer its shared services system to them.

Virtua's support center provides lowest unit of measure (LUM) material distribution services, mail and copy center services, a system-wide transportation network, and other outsourced support service activities. Over the long term, Virtua plans to evaluate the effectiveness of its program based on financial savings, growth, employee satisfaction, customer satisfaction and quality.

In the report, Munn and Nisly advised that managers periodically evaluate their progress and make sure their goals are aligned with the new Web-enabled system. They offered several strategic tips. They are:

• Leadership: Is executive leadership driving transformation? Is generating competitive advantage via e-business a top priority? Indeed, Toscano said “The CEO needs to get more involved in the value that the supply chain brings to a healthcare organization. The CEO at Virtua recognized that here and that’s why the supply chain has been elevated to a strategic position.”
• Governance: Have decision-making authority and roles/responsibilities been clearly defined for e-business? Are there established metrics for measuring Internet initiative impact?
• Technology: Have standards been defined and enforced across the organization? Are the defined Internet solutions flexible enough to accommodate change? Across the entire industry, it’s certainly a problem, according to Toscano. “No other industry aggregates buyers in very large GPOs like healthcare, yet buyers can’t leverage the industry to create standards,” he said.
• Competency: Can the organization adapt and drive change quickly? Do implementation competencies exist to execute in three months or less? Information-sharing between providers and suppliers represent the next critical step in generating process efficiency.

“The current market for medical equipment and supplies is vast and fragmented, contributing to the dilemma for healthcare staff,” said Nisly, Neoforma.com’s regional sales manager. “E-business mechanisms successfully address access, pricing and inventory issues that formerly impeded supply and equipment purchase within healthcare enterprises.”