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| Benchmarking is a critical component that all materials managers need to help control supply chain costs. But as important as benchmarking information is, it also can be difficult and time-consuming to collect and maintain. AHRMM and Arizona State University have created a solution called SCMetrix to address the problem, which includes a definition of supply expense using HFMA standards. Any hospital that wants to access the system is able to do so free of charge in exchange for submitting their organization’s data. |
Performance benchmarks help assess the efficiency and effectiveness of supply chain operations. However, with the wide variations among U.S. hospitals, no “one-size-fits-all” set of indicators is appropriate.
What the industry has long needed, experts agree, is a set of metrics with plenty of flexibility to accommodate a wide range of variables combined with the ability to snap back into a standard format useful for measuring progress.
Now there’s SCMetrix. Around the first of October, the Association for Healthcare Resource & Materials Management (AHRMM) unveiled this new Internet-based system, designed to provide benchmarks appropriate to each hospital’s size, patient mix and organizational structure. Users will be able to illustrate where their supply chains are functioning well, and, even more critical, where and how they can improve. Hospitals can tap into it free of charge, provided they agree to submit data for comparison. Participation is open to both AHRMM members and non-members.
The system is the result of collaboration between AHRMM and Arizona State University’s W.P. Carey School of Business, Phoenix. On the AHRMM side of the team is John Mateka, executive director of supply chain operations at Greenville (S.C.) Health System. Greenville includes five hospitals totaling 1,200 beds, with an annual purchasing volume of $180 million.
Mateka was part of an ongoing AHRMM panel that developed performance indicators for the supply chain and other operations. It came up with a steady stream of indicators, Mateka recalls, but something was missing.
“It eventually became apparent that the data and information were informative and useful,” he says, “but they did not reflect usable benchmark information.”
A standard definition
The problem was that hospitals categorize supplies differently—some include everything from food and linens to cath labs, and others stick to medical-surgical supplies. Some are integrated delivery networks with centralized purchasing; others are small rural hospitals.
In 2004, AHRMM established a benchmarking task force, chaired by Mateka, to sort through the differences. The first step was to develop a supply expense definition, using standards published by the Healthcare Financial Management Association (HFMA), Westchester, Ill.
For example, surgical supplies include implantable devices such as intraocular lenses, orthopedic implants, pacemakers, sutures, suture needles and surgical packs, as well as anesthesia materials. Instruments count unless they are part of capital equipment. General medical supplies, pharmaceuticals, and housekeeping and cleaning supplies are included as well. (See sidebar, pages 22 and 23.)
The definition specifically excludes some items that often are combined with general supply expense such as laundry supplies; maintenance supplies such as lights and paint; fuel for vehicles; copy center supplies; and capital equipment.
It does not cover travel expenses, training, professional fees, postage or depreciation of assets. Computation of supply costs must reflect deductions for rebates from manufacturers, distributors and group purchasing organizations.
It was a landmark achievement. The definition specifies which expenses and which supplies are to be included in the term “supply expense,” and which are better left in other categories such as service costs or labor.
That was a start, but the next hurdles proved to be difficult. As Mateka recalls, “After exhaustive research and creative brainstorming, it became apparent that we did not have the technical expertise, software development and funds to create a viable tool that would meet the needs of our members.”
Deliverance came late last year, when AHRMM associate executive director, Sarah Oaks, discovered that a group of academics was working on similar problems and was interested in a partnership with AHRMM. “Arizona State University had the means to help create a tool that would prove to be highly user friendly and successful,” says Mateka.
AHRMM and the university formed a partnership, and each invested funds in the project. “The nice thing about this is that both parties saw a win-win,” he says.
So far, so good
Since January, the team has been developing SCMetrix, and 200 people attended a demonstration at the AHRMM annual conference in August. Responses included “comprehensive,” “easy to use” and “slick.”
Leading the ASU team is Vicki Smith-Daniels, a professor of supply chain management. A participating hospital should not need to add staff to load the data, she says, but will be asked to appoint a site administrator to oversee data collection, and change general ledger codes to match the new definition.
“We believe SCMetrix offers hospitals the information they need to identify points to reduce supply expense and how to focus their time and efforts to achieve these cost reductions,” she says.
The theory behind SCMetrix is that while hospitals have long had experience with external benchmarking, based on financial data, they need to move toward internal benchmarking that will provide a picture of performance based on their particular structure and processes.
Currently, supply benchmarks focus on acquisition price, but do not indicate what specific actions hospitals can take to improve supply chain performance, according to a statement by the AHRMM-ASU team.
“Hospitals need statistical evidence that supply chain investments reduce supply costs and improve other supply chain value drivers,” the researchers note.
Smith-Daniels explains, “It is the goal of the ASU research team to partner with hospitals to bring evidence-based supply chain management to the forefront of the health care industry.”
SCMetrix aims to provide a method to obtain that evidence without the headaches of inventing a new internal system; and it has an abundance of features to do just that (see sidebar, page 20).
Included in the system’s capabilities is scalability. This is important to materials managers such as Dale Worthington, who also served on the development task force. Worthington is director of materials management at 25-bed Sparta (Ill.) Community Hospital.
“The scalability concept will allow Sparta Community Hospital to compare performance against hospitals of similar size and service options,” Worthington says. But he notes that the system’s usefulness will depend on participation from many different hospitals and adds, “I urge everyone to submit data and participate no matter the size of the facility or the scope of its services and procedures.”
Worthington joined the AHRMM benchmarking task force in early 2005. At that time, he recalls, “There was much discussion on AHRMM’s listserv concerning benchmarks and benchmarking practices.”
When ASU professors became part of the team this year, he says, “AHRMM, HFMA and ASU all believed that this was a good opportunity to pool resources to create something useful while the momentum was swinging in this direction.”
There will be savings, but it is difficult to estimate any dollar amounts. Mateka predicts, “To say it will eventually save millions would not be an exaggeration.” It will take time to build a meaningful database that will generate statistically significant information, and Mateka says the development team expects more than 500 hospitals to sign up.
Worthington agrees that savings cannot be predicted at this point, but adds, “You can bet that if I am on the high or negative side of the results compared with like facilities, that I will be very motivated to find out why and to do something about it.”
According to Smith-Daniels, after launching SCMetrix, the team will work to encourage hospitals to participate. As data become available, the team will begin to assess and document the system’s impact on the supply chain.
A benchmarking tale
Another member of the SCMetrix development team was John Gould, director of supply chain operations for Catholic Health Initiatives (CHI), Denver. With 70 hospitals from which to generate data, CHI expects to use the system as a starting point in developing its own internal benchmarks.
Gould joined the team as a non-AHRMM representative, and he sometimes offers the skeptic’s point of view. “First,” he warns, “benchmarking is a tool. Use it incorrectly and you can hurt yourself—like using a hammer to cut glass. It has its purpose and it has limitations.”
While SCMetrix reports reveal a wide range of possible supply chain benchmarks, some of the old generalities still hold, and there will always be a need to translate performance into financial results.
As Mateka explains it, “Unfortunately, there is no one number that really paints the overall picture. What I have found is a combination of a couple of numbers.” Most materials managers, he says, track the total supply cost per adjusted patient day. “But that number by itself isn’t the whole story,” he says.
The ratio of supply costs per adjusted patient day can suddenly rise significantly, he notes, but that does not mean much until you know what is driving the increase.
For example, new technology that improves patient outcomes and ultimately reduces length of stay could trigger an increase, Mateka notes. “People usually view it as negative, but that may not be the case.”
However, it is not uncommon for a materials manager to get a call from the hospital’s chief financial officer asking for an explanation of an increase in supply costs per adjusted patient day.
To gain a clearer picture of how the materials management function contributes to a hospital’s financial health, Mateka recommends adding one of two other indicators: “I am particularly fond of supply cost as a percentage of net revenue and supply cost as a percentage of total operating expense.”
With the rapid introduction of new technology, hospitals have to expect higher up-front device and equipment costs, meaning supply costs will take a bigger bite out of operating expense.
So Mateka favors using revenue as a comparison point. “Naturally, the supply cost is going up, but if we’re getting favorable revenue, that increased cost is not necessarily bad. “When I get that call [from the CFO], I say, ‘What is my supply cost as a percent of net revenue?’ I need to know that.”
SCMetrix includes data representing supply expense in the following ways:
- As a percentage of total net patient revenue
- As a percentage of adjusted operating expense
- Per adjusted patient day
- Per adjusted discharge.
However, it does not stop there. It drills down to the sources of the expense and revenue. As Gould explains, “Previous efforts looked at high-level numbers without enough attention paid to the sources of the data or the differences between facilities.”
For example, he says, “To say that supply expense is 14 percent of net revenue is great if you are a large, tertiary medical center with heavy orthopedic and cardiovascular [activity], but not so good if you are a small community hospital with obstetrics as your major service line.”
Gould says even though detailed industry benchmarks will not be available until the new data standards are in operation, every hospital can compare performance among its own service lines.
SCMetrix asks participants to report expense numbers for each service line. For example, the emergency department reports supply expense per ER visit and as a percentage of the hospital’s total supply expense. For surgery, numbers are crunched in six ways, from supply cost per surgical case to total inpatient and outpatient supply costs.
Beyond expense numbers
Using a long list of what it terms “operational indicators,” SCMetrix creates a detailed picture of each participating facility. A sampling of these indicators includes:
- Number of beds in service
- Number of operating rooms
- Storeroom, OR and central supply inventory turns
- Average dollar value of consignment inventory
- Percentage of orders delivered on time to each department
- Number of items in the item master
- Off-site warehouse inventory as a percentage of total facility inventory
- Proportion of supply spend that is not under contract.
In addition, the system provides some supply benchmarks for a limited number of diagnosis-related groups (DRGs), by asking for the supply expense per case and the number of vendors that together account for 80 percent of that total.
Moving beyond the financial items, SCMetrix asks participants to describe their supply chain structures and relationships with clinical and administrative counterparts.
It is here that, if the expected 500-plus hospitals sign on and provide data, that the system will generate benchmarks that are truly internal and prescriptive. For example, it asks the question: “To what extent does your supply chain unit have authority and responsibility for making supply chain decisions in areas such as contracts, vendor site management [and] physician preference items?”
It also asks about automation and group purchasing participation. There is even a section where participants can describe the extent to which they use performance benchmarks.
As Gould explains, “Because facilities vary by their volumes within service lines, and this has a dramatic impact on their supply expense metrics, much of the data collection effort is designed to get to valid comparisons that point to service lines. That is why so much attention is paid to the facility profile.”
According to Mateka, an analysis of service line results can also form the basis for financial decisions that can benefit the hospital or IDN.
“You can play ‘what-if’ scenarios; you can slice and dice,” he says.
Paula DeJohn is a freelance writer based in Denver.
This article first appeared in the October 2007 issue of Materials Management in Health Care.
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