How Mercy Health consolidated its supply chain
Facing rising costs and inconsistencies, health systems are strengthening efficiency by vertically integrating their supply chains.
When Mercy Health began partnering with Medline, a medical supply manufacturer and distributor, in April 2017, products flowing through its medical-surgical distribution channel were 2% standardized. Now, they're more than 50% standardized. Mercy has also slashed its distribution centers from 14 to two and reduced its manufacturers by 50%, according to a Medline case study provided to Supply Chain Dive.
Mercy Health's integrated delivery network — which has about 500 health care facilities serving Ohio and Kentucky — is at the cutting edge of a growing trend among health systems. Battling rising costs and seeking greater patient satisfaction, health systems are forming partnerships to standardize a long-outdated and clunky part of their systems: supply chains.
Healthcare supply chains lag 15 to 20 years behind those of other industries, said Rob Austin, director and healthcare expert at Navigant. Labor constitutes the largest portion of health system costs, but supply chains take second place at as much as 30% to 35% of costs — and that percentage might be growing.
Faced with lower reimbursements and inpatient volumes, most health systems have already implemented standard cost-cutting measures, and now need new places to trim. Enter supply chain reorganization.
"Previously integration was more horizontal (across like organizations) where today integration is more vertical in health care and crossing state lines into different health care markets," said Barbara Giacomelli, vice president strategy of McKesson RxO, in comments provided to Supply Chain Dive. "The Affordable Care Act has impacted integration as health care organizations strive to provide a full continuum of care to patients."
Crucial to consolidation, partnerships take different forms. Some are between health systems while others are between health systems and manufacturers. Besides Mercy and Medline, Ascension and Ramsay Health formed a global supply chain joint venture this past spring, and Intermountain Healthcare partnered with Ascension, SSM Health, and Trinity Health to form a non-profit drug company earlier this year.
But these partnerships are "the exceptions, not the rule," Austin said. To date, partnerships are helping systems reorganize and simplify their supply chains various ways.
Standardizing inventory boosts efficiency and patient care
What hospital needs 10 kinds of tongue depressors or 12 different types of toothbrushes? Traditionally, that type of question hasn't been at the top of hospital executives' lists.
But when Medline came to help Mercy consolidate, they tackled inventory problems along these lines. With Medline, Mercy reduced its SKUs by 21% and standardized its inventory storage. The standardization could result in a 10% reduction in acquisition costs for commodity supplies, according to the Medline case study.
"As you consolidate and aggregate into fewer locations and items, the flow rates and inventory management gets that much better," said Jim Boyle, senior vice president for acute care at Medline, in an interview with Supply Chain Dive. Excess inventory can hike up financial costs when items expire or go unused, and it disrupts consistency.
Mercy Health and Medline's partnership enabled significant supply-chain consolidation
|Before Change||After Change|
|Staff with purchasing responsibilities||3,200||80|
Mercy reduced its manufacturers and SKUs by 50% in addressed categories.
Many health systems are tracking higher-value items with RFID technology, which offers "visibility across the chain of custody" and automated replenishment and billing, said Robert Jones, director of sales logistics at Medline, in an interview with Supply Chain Dive. For lower-value items, a Kanban method — a two-bin replenishing method — is more popular.
In general, health systems are using more automation to streamline data, reduce inaccuracies and improve interfaces.
Standardizing inventory products not only helps physicians and nurses, who often work at various locations, but also patients, who "may benefit from consistent medical supplies and clinicians’ care received regardless of the care setting of the IDN they visit," Rochelle Waterhouse, director of marketing for acute care at Medline, told Supply Chain Dive.
Furthermore, standardizing inventory storage — not just products — helps clinicians spend less time hunting down items in the hospital's central storage room and more with their patients, Waterhouse noted.
Leveraging procurement and distribution to streamline deliveries
Before its partnership with Medline, 85% of Mercy's supply chain staff had to procure and distribute commodity products such as gloves and plastics — which constituted a mere 17% of the budget. And clinical, not supply-chain, staff members were responsible for ordering more expensive items for operating rooms.
All that changed when Medline came along. Mercy has moved from a geographically-based procurement system to a specialized model, cutting its buyers from 32,000 total to about three per location.
Consolidation among health systems allows them to streamline procurement and distribution methods, not just inventory.
"Instead of purchasing everything for a facility, our purchasers have become true experts in the areas they serve and their decisions impact the ministry as a whole," said Dan Hurry, chief supply chain officer at Mercy Health, in an email to Supply Chain Dive. "Because of the specialization, we’ve found that they can take on more focused areas and flex significantly to help ensure continuity."
Traditionally, hospitals have procured goods through group purchasing organizations (GPOs) to get discount rates. But though GPOs do some good, they're an impediment to simplification efforts, Austin said. GPOs require fees and "add another layer of administrative overhead." They typically negotiate in aggregate and use more vendors than hospitals need, prompting some health systems to bypass GPOs or to form their own smaller, regional GPOs, as Modern Healthcare reported this year.
Many healthcare providers are also turning toward self-distribution models; rather than using third-party distributors, they're storing supplies in their own warehouses. But geography is a major factor in determining whether that's efficient for a healthcare system, Jones said. Systems that are spread out across several states, like Mercy, can't very well provide service with their own distribution centers.
Some health systems have also formed co-management agreements with distributors in an effort to lower distribution costs, said Sudhi Rao, managing director at FTI Consulting, in an interview with Supply Chain Dive. A survey from the Health Industry Distributors Association found a growing number of hospitals are cutting costs by purchasing physician preference items (PPIs) directly from distributors. Mercy is working toward consolidating its PPI logistics model by having these items delivered to hospitals through Medline's distribution center, not separately, according to the case study.
Slashing layers in the distribution process allows health systems to streamline their deliveries, as Medline and Mercy's partnership attests.
Most of Medline's volume is in bulk distribution form, but there's a growing trend toward using a lowest-unit-of-measure delivery system, Jones said. Rather than having items delivered and stored in bulk, health providers are having their items delivered in just the quantities they need for the day, saving storage space for other hospital functions.
Medline has helped Mercy implement a "put-away-ready" program, in which Medline delivers supplies on carts that be rolled on the floors right after they leave the truck, Jones said. That allows Medline to manage routine supply so that caregivers can spend more time doing other task.
"In doing this we have removed many duplicative steps in the process ... this is about increasing efficiency in process and removal of waste," Jones said.
Healthcare providers face challenges but can anticipate change
Mercy still has room to improve its supply chain functions through its partnership with Medline, the case study noted. And Medline's assistance isn't the only big partnership for the health system, which has announced it is merging with Bon Secours Health System in the fall, a move that that will expand its reach across seven states and will likely have further implications for the supply chain.
For health systems making supply chain changes like Mercy, the biggest challenges to supply chain efficiency may come from within the health system itself. Physicians are used to using certain products and hesitant to change habits in the interest of standardization, and medical device companies are "really vested in marketing directly to the physician," Austin said.
Additionally, health systems will need to make sure their data and metrics are clean and that they know what to do with them, Rao said. In a study by Healthcare Purchasing News last year, 94% of provider executives cited data analytics as a focus area.
Inconsistent language and prices also form an impediment to consolidation, Hurry said, noting that consistency "would lead to superior analysis and tracking for both individual organizations and the industry."
Going forward, physicians, clinicians and nurses will have more say in the earlier stages of negotiation, Rao noted, which will help healthcare systems make better value-analysis and purchasing decisions. And in these decisions, supply chain leaders have to think about more than price: "[They] also need to understand system initiatives that support how delivery of care can impact the patient," Boyle said.
Plus, the industry faces potential disruptors in the marketplace, like Amazon, Rao emphasized: "They're pushing hospitals to say, 'What else can I do to make operations effective?'" Healthcare providers are forced to look at their procure-to-pay processes and standardization of terms and conditions.
The healthcare system is slow-moving, but the tide is shifting toward stronger supply chains, Austin said. "It's a slow trickle, but eventually the spout is going to be turned on, and the water will flow."