Banner Health cuts $41.5M from the supply chain
Major improvements made in one year
Banner Health, one of the largest nonprofit hospital systems in the country, cut $41.5 million from its supply chain costs in 2011. Doug Bowen, Banner’s vice president of supply chain management, spoke recently with Healthcare Finance News Editor René Letourneau about how they achieved such big results in just one year.
What were the main areas of focus for supply chain cost improvement?
In fiscal year 2011, Banner worked with our (group purchasing organization) Premier on the Supply Chain Improvement Plan and the savings totaled more than $41.5 million. This is a result of Banner’s supply chain focus on three areas: utilization improvement, supply expense management and physician preference contracting.
Banner Health incorporated supply utilization as a strategic initiative in 2011 to address utilization variances in the operating room and realized savings of over $3 million. Utilization savings are the next frontier of savings in healthcare.
Banner Health’s 2012 Strategic Initiative for Supply Utilization has grown from a $2 million base target to a $14 million base target, and from a $3 million stretch to a $17 million stretch target. The objectives are to foster the shift in thinking to adapt supply utilization as a cultural change to make it everyone’s business and to effectively engage staff and physicians in the change.
Around supply expense management, we are aggressively contracting for all supplies and services. For example, we’ve seen a $4 million savings in pharmacy contracts by using generics instead of brand name drugs whenever possible and by using oral medications instead of IV medication whenever possible.
With physician preference contracting, Banner saved over $5 million in cardiology and cath lab contracts. Banner uses a ‘capped pricing’ concept for physician preference items. Medicare pays Banner a capped price (fixed price) using the DRG system. It makes sense to require vendors to follow the same rules. Banner sets a fair price, and we contract with all qualifying suppliers that want to participate.
Banner is committed to an all-play, physician-driven, free-market strategy. Surgeons are assured professional independence to use the products that best meet their patients’ needs. All vendors are asked to meet the fair price points in all product sales to Banner facilities. Non-contracted vendors are not allowed to conduct business at Banner. This gives us reasonable control of product costs consistent with current market and reimbursement levels.
How important is the supply chain to providers looking to cut costs?
Supply chain is a strategy, not a department. The key to achieving superior performance is to reposition the supply chain to a strategic focus in the organization. Supply chain strategies directly impact a hospital’s competitive capability. Supplies are typically the second largest cost after labor. More and more hospitals are increasingly recognizing the value that the supply chain can bring to their organizations and have moved to add supply chain strategic initiatives to their overall goals.
What trends are you seeing?
Organizations are starting to think of the supply chain as a strategic advantage. Supply chain leaders are being included at the executive officer level as providers realize the strategic importance, and I think that will continue to be the trend. We’re in an era of healthcare where we’re going to see more and more emphasis on the supply chain.
The two most important factors in healthcare today are cost and quality. We should foster thinking about the supply chain and its impact on cost and quality. As we allow products into our supply chain, it has a direct effect on cost, quality and patient safety.
