Supply Utilization Management: Flavor of the Month Fad or the Next Mission-Critical Cost and Quality Control System?

Robert W. Yokl, Senior Vice President, SVAH Solutions

Supply utilization management (SUM) has its origins in the accounting world where it is known as activity-based costing (ABC). The best mainstream adoption of this ABC methodology in healthcare to date is in the form of budget to FTE reports. If you have ever managed employees at your healthcare organization then you have probably seen your share of productivity management reports in the form of full-time equivalent employee (FTE) reporting. This can be comparing budget, which is volume-based, to the department’s actual cost per operating metric, and is normally run on a monthly basis. Just about every healthcare organization runs some form of this report to keep track of their productivity and labor budgets. If you have not seen one of these reports, ask your boss to share their report with you. I guarantee they receive one at least once a month.  

Your CFO’s Trusted Report Methodology Can Work for Supply Chain

A typical budget to FTE report issued by your Finance Department is based on projected volume (budget is projected) as compared to your actual volume at which your department is really performing. Many hiring and employee replacement decisions are based first on looking at these reports to ascertain whether the position is needed based on budget and volume requirements. If, for example, a respiratory department that is running 2 to 3 FTEs below their normal strength and are requesting just one new hire as a replacement, then the CFO/COO and HR department have no problem approving the position for hire. Why? Because they are showing that they are truly running below standard. However, if you don’t hire at least one or two full time employees, then your respiratory department could have trouble covering all the procedures and maintenance that is required at the hospital. Delaying or doing nothing could result in a huge quality problem due to lack of manpower.

Easier to Pinpoint Supply Budget Overruns

Supply utilization management is not yet in the mainstream of mission-critical systems, but it can certainly perform the same functions as the budget to FTE example that is in fact a mission-critical report at hospitals. All hospitals have supply budgets that are set out to monitor the fluctuation of costs by department. But, these are global measures that are non-specific beyond telling you how much you are over budget. For example, OR, ED, and ICU are running over in their supply budgets – now what? Keep in mind, hospitals purchase anywhere from 5,000 to 25,000 products, services, and technologies on a continuing basis, therefore, a supply budget report is not specific enough to take focused action on products, categories of products. These individual departments could use 2,000 to 5,000 products between them all. We need better systems to help pinpoint the root causes, and the solution is SUM.

Utilization Case Study Highlights Not Only Cost Issues but Quality As Well

Once a department goes over budget it is difficult to ascertain where and when this cost increase occurred, not to mention what products are affected. One of our client hospitals was running at near best practice levels on their cost per adjusted patient day on blood collection needles, but then this suddenly increased over a 6-month period by over 200%. They had a major increase in cost based on volume of the department, but they should also have looked at this from a quality and performance perspective as well. Does a 200% increase mean that the hospital’s phlebotomists are sticking their patients twice as much? Could this increase be a quality problem with the safety blood needles or their associated vacutainers? Or, is the proficiency of the phlebotomists decreasing (which would require in-servicing or additional training)? Let’s also think of it this way: If phlebotomists are sticking more, the possibility of bloodstream infections increases which could cause the hospital to lose reimbursement.

Value Analysis Root Cause Analysis System for the Future

If your departments are over budget, and certainly there are some that are, wouldn’t it be nice to know what products or category of products or services are causing these departments to be over budget? SUM can be that simple root cause analysis report to aid supply or value analysis professionals in assisting their departments with their budget overruns. Plus, it will help negate the inevitable “supply chain needs to get us better pricing” excuse that we hear from our departmental leaders when they go over budget. In the blood collection needle example above, if supply chain was able to eke out an additional 10% to 15% in price savings (which are already pushed to the limit), the department’s overall cost would still be 85% over where it should be. No supply or value analysis team pricing improvement can win that cost battle alone.

Trusted Mission-Critical ABC Systems are Used Throughout Our Hospitals, Systems, and IDNs, but Are Still Missing from the Supply Chain – Why?

We use activity-based costing in our day-to-day operations to manage productivity and performance at our hospitals, systems, and IDNs, so why don’t we use this mission-critical system in our supply chain in the form of supply utilization management? When we are able to uncover a major utilization management issue through a VA study, we are ecstatic with the savings we bring about and the results we find. Why don’t we report on all products then? We use procedural-based, activity-based costing for specific surgical cases and procedures that works very well, such as cost per orthopedic case or cost per endoscopy procedure. These are activity-based costing systems that are mission-critical at our hospitals. So, why aren’t we adopting supply and purchase service utilization systems at our hospitals, systems, and IDNs as the next level of mission-critical cost and quality control of our products, services, and technologies? Only you can answer that question!