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A Prescription for the Ills of Medical Supply Chains

Waste in the use of high-value medical devices amounts to some $5bn year. No wonder healthcare costs are soaring.

The number comes from a five-year old research study by PNC Healthcare and GHX. A more recent report, by UCSF Medical Center in the Journal of Neurosurgery, identifies nearly $3m in annual waste just from disposable medical supplies that go unused during surgical procedures.

Additional statistics paint an equally dismal picture. Thanks to a combination of shrinkage, recalls and expirations, between 7 and 10 percent of medical products are likely to expire on hospital shelves, according to Cardinal Health. Meanwhile, more than two hours of a typical nurse’s shift are spent searching for products that might or might not be used during a procedure. Bottom line: healthcare facilities are losing an average of 7 percent of annual revenues to “inaccurate charge capture,” Cardinal Health claims.

None of this is news; Steve Thompson, director of product and services development with Cardinal Health, says the problem is “chronic.” But as hospitals struggle to maintain margins and rein in costs, it becomes increasingly visible.

“Once upon a time, when a hospital was facing a cash crunch, you’d see headlines about nurses being laid off,” says Thompson. “No one has an appetite for more of that. The next biggest thing on the balance sheet is stuff.”

The culprit, he says, is a poorly functioning supply chain. Inventory is scattered in multiple locations, much of it in the form of “trunk stock” – items that are kept in the trunk of a car or someone’s garage. Thompson says between 300 and 400 days of inventory of expensive implantable devices is stored in the field. Such items are often “walked” into the hospital without a clear record of transfer. They become invisible to the facility, which can’t allocate product according to where it’s needed the most.

Relatively inexpensive items might be properly controlled and kept under lock and key, while pricier devices, supplied on a consignment basis, are more difficult to track, says Thompson. All of these inefficiencies get baked into the ever-rising price of critically needed medical supplies.

The degree of purchasing discipline varies from hospital to hospital. Often “bad” behavior will be motivated by the right reasons, such as discounts offered for bulk buys, even if multiple quantities aren’t needed. Other times, purchasers engage in what Thompson calls an “emotional stocking strategy” – the tendency to hoard product, or overbuy in order to guard against stockouts.

Ironically, hospitals are putting a premium these days on standardization. The trend is being driven by the consolidation of hospital systems, which in theory should make it easier to control the purchase and use of medical products. But many managers still lack the controls that would allow them to move product between facilities easily. The result, says Thompson, is lost “stuff,” a good deal of which reaches its expiration date before being used.

“Group purchasing organizations are doing a great job in terms of product choice, selection and pricing,” says Thompson. “Once a product is on location, however, it becomes someone else’s problem.”

Cardinal Health was determined to fix these deficiencies. A Master Black Belt in Lean practices with experience in the automotive industry, Thompson came to the company in 2006. His objective was to implement a continuous-improvement methodology that would attack waste wherever it lurked.

Cardinal’s actions weren’t entirely voluntary. It was motivated in part by the need to comply with the new Unique Device Identification law, enforced by the U.S. Food & Drug Administration with the aim of tracking all medical devices throughout their distribution and use.

Cardinal found the answer in radio frequency identification. In 2013, it acquired WaveMark, a specialist in RFID tracking and control for the healthcare industry, and formed Cardinal Health Inventory Management Solutions. Now implemented in some 4,000 hospitals in 41 countries, the technology has given users the ability to identify a product’s lot and product number, expiration date, where and by whom it was manufactured and where it is at any given point, all the way from supplier to patient.

RFID also aids in post-operative billing and recordkeeping. Previously, says Thompson, a nurse might emerge from the operating room with an armful of stickers, bearing barcodes for each item used. Now, the nurse need only wave each product past an RFID reader upon entering the O.R. The system also tracks all items that weren’t used in the procedure, Thompson says.

For high-priced implantable devices, Cardinal teamed with several large hospitals in a pilot program that shifted away from the consignment model, a key source of inefficiency. Almost two years into the initiative, it had zero expired products on hand, Thompson says.

Today, Cardinal can receive a box of multiple products, which it distributes to hospitals on an as-needed basis. Medical professionals get an assured source of supply, without excess inventory at the point of care. "We're turning inventory so quickly that nothing is sitting and getting old," says Thompson.

Cardinal first applied RFID to the highest-value items, such as implantables. But it hopes eventually to extend the technology to all products. "We're not there yet," says Thompson, "but we’re making greater headway every year."

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