By early 2000, the product standardization team at Swedish Health Services in Seattle managed to slash supply costs by $1.5 million over three years. Still, administrators wanted even more cuts.
Complicating that tough demand, the two-system, 970-bed Seattle provider was considering a merger with 400-bed, debt-ridden Providence Seattle Medical Center. This was all coming during a period of declining margins.
'You can't control declining reimbursements, so we had to control our own costs,' says Allen Caudle, vice president of supply chain management at Swedish Health. 'We already had been concentrating on labor for three years, so we started a system-wide focus on supplies and purchased services.'
Caudle said the standardization team met just once a month for two hours to review cost and utilization of med-surg supplies only. 'But that's only about one-fourth of what hospitals typically spend on supplies,' he says. 'The team wasn't getting into expensive items such as implants, pharmaceuticals or support services.'
Administrators soon realized they needed outside help. They turned to HealthCare Logistics Services, Westlake Village, CA, a supply chain and materials management consulting firm represented by Midwest division vice president John Siedlinski, who introduced the concept of value analysis teams (VATs) to Swedish Health officials.
The value analysis approach is designed to expand a single product standardization team to several teams comprised of clinical departments and support services. Departmental vice presidents chair the teams and bring together materials managers and other executives to make up the steering committee. That group handles politically sensitive matters like product standardization issues among surgeons, Siedlinski says.
'Traditionally, materials managers led standardization teams, so they didn't have administrative direction. [The teams] were heavy-handed and didn't often look at consolidation of vendors and products and new technology,' he says. 'Value analysis teams have a much broader stroke, in which the O.R. team, for instance, can concentrate on just O.R. items. It's the divide and conquer concept, in which instead of one product team looking at everything, several individual teams study clinical areas and service/maintenance contracts.'
Cost-cutting objectives
After establishing value analysis teams at Swedish Health, hospital officials projected cost reduction goals of 3 percent ($1.8 million) the first year and 5 percent ($3.8 million) the second year from the $59 million nonpharmaceutical purchasing budget of 2000. They accomplished both and, to date, are 5.8 percent below the 2000 budget.
An important move, explained Siedlinski, was terminating the contract between Providence Seattle Medical Center and the Irving, TX-based GPO Novation. This allowed Swedish to continue operating and buying solely as an integrated delivery network.
'We were doing a sporadic job of negotiating contracts that did not include a systematic look at our whole supply chain,' Caudle says. 'I wouldn't say we were an IDN. We weren't that sophisticated, but rather an overworked, demoralized department.'
Since the merger, Caudle now oversees three contract administrators and eight buyers who work for Swedish Health. 'We're getting as good or better contracts than what the GPO was doing for Providence, across the board. It was a big decision for us to get out of the GPO agreement,' he says.
'Providence took advantage of our agreement with Abbott Laboratories for lab supplies, solutions and other items. We combined the hospitals' buying power for better tier pricing,' Siedlinski says.
Another key revision was requiring that all purchases pass through the purchasing department and require that accounts payable approve all invoices before paying any bill.
'If purchasing didn't buy it, accounts payable wouldn't pay for it,' Siedlinski says. 'You can set up VATs, but without policies in place to support materials management, the teams can't do good work.'
As expected, some doctors resisted the standardization plans, insisting that their tried-and-true instruments were preferable for better patient care. In those situations, Siedlinski explains, the steering committee would authorize the team to study the instrument or service in question.
'The team does the math, looks at clinical trials and reads the literature to see if the instrument will save money in the long term,' he says. 'With value analysis teams, we've created a corporate culture over the last 20 months that makes the tough business decisions,' Caudle adds. 'We ask doctors, 'Which would you rather do? Cut labor or cost of supplies?' It's not labor. And when doctors realize that VATs are making decisions, then they want to be a part of them. In addition, I solicit people and say, 'We want to include you. VATs are not an exclusive club. Come on, join and be a part of this process.''
Bring purchasing on board
Jane Cramer, a senior internal consultant at Swedish Health Services, estimates that $27 million in supplies and services never went through purchasing due to departments forging their own contracts. This was before the new purchasing rules were formalized. 'The healthcare supply chain has been behind the times. We needed to control the process much more,' she says.
In support services, the work of the teams saved $150,000 by combining both hospitals' elevator repair and maintenance agreements into one competitive contract. Window washing and plant watering contracts were reviewed and even physician travel expenses came under the microscope, Siedlinski says.
'Physicians did not routinely fly first class, but no one was looking at their flight requests, such as last-minute arrangements. Nothing was too sensitive to look at,' Siedlinski adds.
Overall, Caudle says one of the key indicators of a successful value analysis program is the support of senior management.
'Without the CEO and CFO behind it, you get a ton of end-arounds by doctors and department directors. They go around any changes, but our mechanism of having VATs in place prevented that,' he explains.
