Go beyond price and standardization to save more in less time

Traditionally, healthcare organizations have focused their value analysis efforts on lowering the price and standardizing on the products, services and technologies that they are purchasing.  This attitude has carried over to the evaluation of group purchasing contracts where price, standardization and suitability are the key factors in a hospital, system or IDN’s product, service or technology selection. 

Yet, these tactics are only saving healthcare organizations 1%, 2% or 3% on their total supply expenses annually. This is a meager contribution to your healthcare organization’s bottom line, when you consider that by also attacking your utilization misalignments, you can save even more (7% to 15%) in less time. We like to call this line of attack closing the door on the “Supply Chain Triangle” where value analysis teams focus their efforts on price, standardization and utilization as a continuum, not as separate distinct events. 

Reduce Consumption

What typically isn’t understood in value analysis circles is that 79% of all new supply expense savings will be uncovered in utilization, not price or standardization.  This is because we as an industry have rung the towel dry on price savings in the last few decades with our GPO and local contracts, and standardization has been substantially achieved on most commodity groups. There is nowhere else to go for savings!

This could be a shock to value analysis leaders and team members who haven’t thought about how products, services and technologies are deployed in their healthcare organization. Everything that may appear to be a routine clinical or operational supply chain practice, in actuality, can be very wasteful and inefficient.

Take, for instance, the practice of hospitals loading up their patient rooms with boxes (100/box) of disposable examination gloves, which often results in glove waste  because gloves become unusable if they fall on the floor. A better way to provide these gloves and solve this wasteful practice would be to either supply your nursing and ambulatory units with gloves packed 50 to a box or to purchase foolproof glove dispensing systems that are now on the market. In doing so, your healthcare organization can save up to 33% in this category of purchase alone.  

Based on our 16 years of experience in supply utilization management, we have helped our clients uncover wasteful and inefficient practices in thousands of their supplies and purchase services; therefore, we can categorically state that utilization misalignments are epidemic in healthcare organizations today. It doesn’t need to be this way!

Control Waste

Sixteen years ago, we stumbled on the realization that most of the savings (about 79%) we were identifying for our clients weren’t price or standardization, but utilization savings. That’s when we coined the term “Utilization Misalignments” to distinguish price-oriented savings from utilization or “in-use” savings. This was a new source of savings for clients who hadn’t realized these savings were available to them.

This was a big leap forward for us and our clients, since these new utilization savings represented 7% to 15% in savings and went far beyond the 1%, 2% or 3% savings they were receiving on price. We then realized that it wasn’t good enough to just uncover these utilization savings, but that we now needed to control them before they damaged our clients’ bottom line. 

This was the genesis for developing the new tool that we called “Value Analysis Analytics” that identifies, manages and controls our clients’ utilization misalignments. It’s based on an Activity-Based Costing Model that had been successfully employed in the industry for many years. 

Quite simply, this new tool enables us to isolate our clients’ utilization misalignments from the thousands of products, services and technologies that they purchase annually. We can then quickly eliminate them with the assistance of our clients’ value analysis teams. 

A good example of how our Value Analysis Analytics worked for one of our clients is that it identified that their anesthesia trays’ cost per surgical case (CMI adjusted) had jumped 27% over four quarters, while their surgical volume decreased by 2%.  When our client’s supply chain manager researched this anomaly with his director of anesthesia, it was uncovered that one or two trays (10 trays to a case) were damaged and unusable when received from their supplier and his staff were promptly throwing them away. Once the supply chain director solved this quality issue, the utilization misalignment disappeared from our client’s radar screen and $17,926 in cost avoidance annually was achieved.

This is just one of numerous analytical techniques that you, too, can use to track, trend, and then measure your entire formulary of products, services and technologies to determine your favorable and unfavorable consumption patterns, quarter to quarter, to uncover anomalies that can’t be seen with the naked eye.

Eliminate Waste

The best technique we know of to eliminate wasteful, inefficient and unnecessary supply chain practices in a healthcare organization’s supply stream is to concentrate your value analysis efforts on what you are purchasing now vs. just evaluating new group purchasing contracts or new purchase requests from your department heads and managers. 

One of our clients accomplished this goal by making sure that he has at least three current product, service or technology investigations on his value analysis team’s agendas each month. The reason for this, as I discussed earlier, is that GPO contracts are only generating 1%, 2% or 3% savings (if that), whereas utilization studies generate 7% to 15% in new savings gains. New purchase requests usually cost your healthcare organizations money, so why are you rushing to approve these purchases? Let’s face it, very few are mission critical or an emergency!

The secret to managing this three-fold evaluation, selection and investigation process is to prioritize your agendas by estimating the potential savings and identifying the importance (1-10 with 10 being highest priority) of your agenda items as shown in the following example: 

Agenda Item	Type	Annual Spend	Est. Savings or Increase	Priority
Oxisensors	Current	$220,395	($77,296)	10
Exam Gloves	Current	$129,293	($12,989)	10
Surgical Masks	Request	$14,982	$1,296	7
I.V. Sets	GPO	$193,566	($5,299)	6
Vacutainers	GPO	$26,777	($1,962)	5
B.P. Cuffs	Request	$12,328	$4,523	4

The priority can be assigned by your value analysis manager or team leader based on a combination of factors: savings potential, urgency, or increased cost. Although the priority assigned is subjective, it will still be a good guide for your value analysis team to assist in directing their efforts to the highest priority (vs. lowest) agenda items first.

Another idea for eliminating waste is to re-specify the top 20% (in dollars) of the products, services and technologies that you are buying. This is accomplished through functional analysis. Meaning, you determine the primary, secondary and aesthetic functions that are absolutely required for each of these products, services and technologies, and that’s your new specifications. The reason this is important is because your customers don’t need everything they are requesting now – but they don’t know it.

A few years ago, we did a functional analysis study on one of our client’s top purchases, which happened to be a General Requisition Form, with an annual spend of $189,536.  Since this was a form which had been used for years by the hospital on their nursing floors, we asked what its primary function or purpose was.  We were told that it was once used for “Results Reporting”, but over the last few years it was exclusively used for “Test Requests”. We identified no secondary functions or purpose for this form.

Our investigation pointed out that the General Requisition Form was now strictly employed for requesting tests (not results reporting), which clued us into the fact that this form was ripe for savings, now that the functions had changed. 

The aesthetic features of the form were: pin feed, eight punched holes for filing in a patient’s chart, 8 1/2 x 11, two peel-off labels, hospital’s name imprinted, and green and red bars running down the sheet. We were told that the labels alone were one-third of the cost of the form, or $127.08 per case, and nursing rarely used more than one label. 

With these facts in mind, and after consulting with the customers of this form (nursing, laboratory, environmental services, IT department and storeroom), we were able to write new functional specifications as follows: Blank, 8 1/2 x 11, continuous pin feed computer paper with one peel-off label. This exercise saved our client $67,107 without changing intent or reliability of the form.

The lesson here is that there are millions of dollars of savings at your hospital, system or IDN that can be achieved by re-specifying all of your top 100 or so products, services and technologies to reflect their true functionality today.

Save More in Less Time

All of the examples we have depicted in this article actually enabled our clients to save more in less time. For instance, to identify the $67,107 General Requisition Form savings I just talked about required about four to five hours of work to accomplish, including making the changes that were recommended. To rearrange your value analysis agendas would take an hour or so the first time around, but would become second nature to you going forward. 

The point here is that reducing, controlling and eliminating your wasteful and unnecessary supply utilization practices isn’t as time consuming as you might think.  All you need to do is go beyond price and standardization to open up a whole new world of savings for your healthcare organization. It will take you less time, effort and resources than you might think and the rewards for doing so (double-digit savings and quality improvements) will be well worth your effort!