Healthcare, Technology, and the Supply Chain

Stephen DeAngelis

August 10, 2010

In a lengthy two-part post on healthcare supply chains, Dawn Mathew Varghese discusses how improvements can benefit everyone from suppliers to patients [“Rx for Healthcare Supply Chain,” and “Rx for Healthcare Supply Chain part 2,” Supply Chain Management, 8/9 July 2010]. Varghese writes:

“Healthcare has been a market defined by its own challenges. It also has customers (its patients), and being in business of saving lives, the emphasis on value creation, customer service and profit motive is in no way insignificant to other sectors. Even so, it remains strikingly similar to the conventional market place. … Having a huge number of intermediaries, high value of products and service levels needed to accommodate highest levels of emergency etc., underlines the battle which supply chain personnel wage on an hourly basis. The sheer nature of this industry makes supply chain inefficiencies a matter of life or death.”

In a future post, I will discuss studies and test cases that have demonstrated how greater efficiencies not only save money but improve patient care as well. Varghese continues:

“Supply Chain Management (SCM) … in Health Care is quite often considered by practitioners to be more complex and an interesting management concern. This is more so because it deals with a ‘bouquet’ of products and services that make up the philosophy of ‘Patient Care’. It starts with necessary dietary/food supply chain for a hospital, drugs, medicines and goes on to encompass the gamut of medical devices and equipments needed to service the patient. This bouquet is extended further with the portfolio of services including procurement and transportation, taking into consideration the constraints signature to the industry. Supply Chain segmentation is a methodology which helps … answer how many supply chains … [an organization should run] and what kind of distinct interventions are needed across the product/service portfolio.”

Varghese defines SCM segmentation as a means to categorize “products and services with the customer and his/her requirements in mind.” SCM segmentation, she notes, should leverage different channels “to serve different customers (for example retail /institutional customers).” She goes on to discuss six essential SCM segments.

“1. Inventory Management and Rationalization

Surgical equipments, drugs, patient support equipments and devices need to be subjected to inventory management techniques on a routine basis. The problems faced by traditional pharmacies include the lack of a standardized process for stock taking, visual inspection of on-hand quantities and reconciliation of received goods against the bills. A rationalization can be carried using the velocity – value analysis more commonly known as ABC analysis. Here, the categorization can be carried out based on the velocity and value and different stocking benchmarks can be set for each of these categories. On a different note some experts look at this as just a mathematical model and argue that in healthcare every drug is important, but this method approaches the issue scientifically. The unique challenge here to have an efficient process to analyze, monitor and manage the lead times of SKUs needed. A classification for SKUs can be carried in terms of the supply lead times taking into consideration the critical, non-critical and scheduled pre-operative cases the healthcare organization is going to deal with. Applying the classic concepts like EOQ for inventory benchmarks can make up for lost time in emergencies.”

To underscore what Varghese is saying, a New York Times‘ article recently reported that changes in the supply chain at Seattle Children’s Hospital have demonstrated how greater efficiency can save lives [“Factory Efficiency Comes to the Hospital,” by Julie Weed, 9 July 2010]. Weed reports:

“On a busy day last month [June 2010] in the I.C.U., it took [Susanne Matthews, a nurse in the intensive care unit], just a few seconds to find the specialized tubing she needed to deliver medicine to an infant recovering from heart surgery. The tubing was nearby, in a fully stocked rack, thanks to a new supply system instituted by the hospital early last year following practices typically used in manufacturing or retailing, not health care. … Manufacturers, particularly in the auto and aerospace industries, have been using these methods for many years. And while a sick child isn’t a Camry, Seattle Children’s Hospital has found that checklists, standardization and nonstop brainstorming with front-line staff and customers can pay off. ‘It turns out the highest-quality care also is the most cost-effective because we make fewer mistakes and create better outcomes,’ says Patrick Hagan, the hospital’s president. The program, called ‘continuous performance improvement,’ or C.P.I., examines every aspect of patients’ stays at the hospital, from the time they arrive in the parking lot until they are discharged, to see what could work better for them and their families.”

While saving lives may the most important outcome of more efficient supply chains, it is not the only result. Weed reports that “last year, amid rising health care expenses nationally, C.P.I. helped cut Seattle Children’s costs per patient by 3.7 percent, for a total savings of $23 million.” She goes on to note that “the hospital avoided spending $180 million on capital projects by using its facilities more efficiently. It served 38,000 patients last year, up from 27,000 in 2004, without expansion or adding beds.” Those metrics should convince anyone involved in healthcare supply chains that efficiencies are worth implementing. Varghese’s next SCM segment involves supply chains with unique requirements.

“2. Temperature controlled needs

The American Pharmaceutical Review points to the fact that roughly more than half of the total pharmaceuticals sold in the world have temperature sensitive transportation and handling needs. Regulatory enforcements from bodies like IATA, United States Pharmacopeia have enforced special rules for handling, storage and transportation of temperature sensitive products. In a report by WHO, 25 % of all vaccine products reach their destination in a degenerated state. This further emphasizes the need for system-enabled cold chain data management, monitoring and transportation services to ensure perfect order fulfillment in the desired state.”

Maintaining a cold chain for medicines is neither easy nor cheap. It is especially a challenge when supplying medicines to developing countries with little or no infrastructure. Without constant monitoring, medicines that spoiled somewhere along the supply chain could be inadvertently administered to patients with no effect. Not only is this wasteful, it could be lethal. Varghese next turns to a supply chain that those outside of the healthcare system seldom think about but is a big concern for those in the industry — waste management. She writes:

“3. Reverse Logistics for waste management

Often neglected yet the environmentally responsible side of healthcare supply chain is the reverse flow of waste including disposal, recycling and picking up from the point of usage. Here the intervention is in the form of a well defined reverse logistics policy post-classification of the waste, for example – radioactive, hazardous, bio degradable or infectious. Each of these categories could have differentiated handling policies including mode of transport.”

Although the main concern in medical waste management is preventing the spread of disease and infection, radioactive medical waste is an oft-mentioned potential source of material for dirty bombs that could be used by terrorists. Once again constant monitoring and tracking of dangerous material is essential for this segment of the supply chain. Varghese believes there is a great need “to collaborate better” throughout the healthcare supply chain. She writes:

“The Association for Healthcare Resource & Materials Management (AHRMM) and Centre for innovation in Health Care Logistics (CIHL), at University of Arkansas conducted a survey of Healthcare professionals to assess the state of health care supply chains. One of results that stands out is that, more than half of respondents indicated working in an immature supply chain with fewer than one in twenty respondents indicating the existence of an extended supply chain.”

Based on the information discussed above, the public has every right to be concerned and expect more from healthcare supply chains. To improve this situation, Varghese next turns to “the importance of player inter-relationships.” She continues:

“4. Procurement and relationships

Relationships with trading partners hold the key! Most efficiency is derived by strong relationships between suppliers, wholesalers, and healthcare pharmacies. Typically it has been observed that wholesalers dominate the relationship with the buying and selling organization. The contracts are managed in such a way that the pharmacy is eligible for volume discounts as well as system related support for the much needed enablement of automatic order capturing and processing. This would pave way for processing larger amounts and volumes. From a manufacturer’s perspective it is of foremost importance to get in to the demand driven mode and eventually develop strong relationships with its customers.”

Although “volume discounts” are likely to remain part of the picture, there could also be something new coming down the pike with regards to drugs that could change how they are manufactured and dispensed [“Printable prescription pills will be safer and faster-acting,” by Darren Quick, Gizmag, 6 June 2010]. Quick reports:

“About two-thirds of all prescriptions are dispensed as solid dosage forms and half of these are compressed tablets. What may surprise many people is that nearly 99.9 percent of most prescription tablets are actually filler. The active ingredient is usually just one thousandth of a pill, so has to be mixed with other ingredients to bulk it out to pill size to make the medicine big enough to pick up and swallow. Now researchers are looking at a fundamental shift in the way pills are produced which promises to create safer and faster-acting medicines – ‘printing’ pills to order. GlaxoSmithKline (GSK) has developed a way of printing active pharmaceutical ingredients onto tablets. Currently the process can only be applied to just 0.5 percent of all medicines used in tablet form, but a collaboration between GSK, the University of Leeds and Durham University hopes to see this increase to 40 percent. … Drugs produced in this way would be faster acting. With the active ingredient on the pill’s surface, it would no longer need to be broken down by the digestive system before the drug can enter the bloodstream. Ultimately it would also be possible to print several drugs onto one pill, reducing the number of tablets to be swallowed by patients on multiple medicines. Such a system would also see an end to the one-size-fits-all process now used by medicine manufacturers. Currently, ensuring each tablet contains the correct dose relies on statistically checking samples from each batch of pills post-production. Printing active ingredients onto pre-formed tablets would speed up and improve quality control, as each tablet contains exactly the correct dose for the patient. The new system would therefore both speed up production and provide a greater quality assurance and consistency of dosage than are currently possible under even the highest pharmaceutical standards. With some of the current quality assurance procedures rendered unnecessary, new drugs would also reach patients much faster.”

Varghese next reminds us that no matter how automated or technological a system may be, people still play a major role in making it work. She explains:

“5. Logistical and behavioral aspects

A lot depends on who manages the show. Anybody would agree that to deal with uncertainty, keeping the buffer stock near the consumption point, i.e. postponing the push-pull boundary in the supply chain to the maximum extent. In a ground breaking joint study conducted by MIT and World Bank, named the ‘Zambia pilot’, it was revealed that in pharmaceutical supply chains, a cross-dock level postponement was a better alternative than point of consumption. The reason cited for this ‘counter intuitive’ result was the behavior of the staff at pharmacies that had become ‘complacent’ that the inventory was not far away. This added to the laxity in the ordering process which negated the advantage of local inventory positioning. Getting a pulse of stakeholders, partners including pharmacists and physicians is found to be of a great benefit to improve efficiencies. There is a need for bidirectional knowledge transfer between partners on operational methodologies, guidelines and strategies to be followed.These processes (for example, inventory replenishment) can be streamlined to a great extent by technology-enabled SCM interventions.”

In the Seattle Children’s Hospital system mentioned above, the method for deciding when to reorder something is fairly straightforward.

“There are two bins of each item; when one bin is empty, the second is pulled forward. Empty bins go to the central supply office and the bar codes are scanned to generate a new order. The hospital storeroom is now half its original size, and fewer supplies are discarded for exceeding their expiration dates.”

The Seattle system mitigates any tendency towards “laxity in the ordering process.” Systems don’t have to be elaborate to be effective. Varghese final subject is one I’ve written on a lot in the past — the importance of standards.

“6. Standards Adoption and transaction improvement

Last but not the least, there is a need to adopt global standards to improve day-to-day transactions. Pioneering this initiative is GS1, a not-for-profit organization globally responsible for making information exchange and traceability of goods seamless. This is particularly significant in this complicated value chain inundated with intermediaries. For decades Hospitals and suppliers have been playing the cat-and-mouse game over price, volume and scheduling discrepancies resulting in manpower loss. The aim of this initiative is standardizing the electronic vocabulary and to take this sector to similar milestone where retail industry is pertaining to bar code scanning. The use of Global Location number and Global Trade Item Number would give the much needed fillip to the collaborative nature of the business. The Success story shared at the GS1 site, shows that adoption of GS1 standards is a positive step in eliminating costly EDI errors in pursuit of the perfect order. This example is a much needed encouragement and motivation for stakeholders and decision makers to champion the need for greater collaboration in their organizations.”

Although we are all familiar with technologies in the medical field that have saved lives (e.g., dialysis machines, MRI scanners, etc.), most of those technologies increase the cost of healthcare. Varghese, I believe, is arguing for the implementation of technologies that reduce healthcare costs. Proponents of technology have argued for years that greater use of IT could reduce costs and save lives. Evidence is now piling up that they are correct. An article earlier this year reported that “doctors at a California children’s hospital have found the first evidence that using an electronic system to communicate their orders may save lives” [“Electronic medical orders may save lives,” by Frederik Joelving, Reuters, 3 May 2010]. Joelving reports that after introducing the electronic order system “in 2007, the hospital witnessed a 20-percent drop in mortality rate, the equivalent of 36 fewer deaths over a year and a half.” If you don’t think that is impressive, Dr. Chris Longhurst, of Stanford University and Lucile Packard Children’s Hospital in Palo Alto, California, may change your mind. They report that the mortality rate is now “the lowest rate ever observed in a children’s hospital.” Apparently a lot of hospitals are getting the message. “Spending on health-care IT by hospitals and doctors’ offices will likely rise to $13 billion by 2013, up 25% from last year, according to estimates by data tracker IDC” [“Dell Puts Hope in Health-Services Unit,” by Ian Sherr, Wall Street Journal, 6 July 2010].

I believe we have only begun to see technology advances that will create greater efficiencies and save more lives. For example, Fujitsu has just launched a new wireless outpatient registration and information system [“Fujitsu’s wireless outpatient guidance system launched,” by Paul Ridden, Gizmag, 14 July 2010]. Ridden reports:

“Should a user need to visit a medical center operating the system, slotting a chipped-card into a special device will wirelessly register the outpatient and provide information about a scheduled appointment, where to go and what wait time can be expected. The Outpatient Information Solution sees a visiting patient using an IC-equipped registration card. This is slotted into a card holder that wirelessly links up with Fujitsu’s HOPE/EGMAIN electronic medical record system to automatically register the user’s arrival. The device incorporates a color electronic paper display which offers patient-specific appointment details, advises the place in the queue and gives detailed directions to the appropriate examination room. If the patient stays within range, there’s no need to stay in a stuffy waiting area or crowded corridor – any peaceful and relaxing spot will do. When the time comes for the user’s appointment, the card holder gives both physical and visual notification and guides the wearer to the appropriate consultation area using the building’s patient navigation system. Upon arrival, the system also offers medical center personnel access to patient information such as details of previous visits and some medical information or patient history. The process can be used from automatic check-in through to the consultation itself and onto payment before leaving the medical center.”

If you can’t go to see the doctor in person, systems are now coming on line where you can visit him virtually [“The Doctor Will See You Now. Please Log On,” by Milt Freudenheim, New York Times, 28 May 2010]. Freudenheim reports:

“Spurred by health care trends and technological advances, telemedicine is growing into a mainstream industry. A fifth of Americans live in places where primary care physicians are scarce, according to government statistics. That need is converging with advances that include lower costs for video-conferencing equipment, more high-speed communications links by satellite, and greater ability to work securely and dependably over the Internet. ‘The technology has improved to the point where the experience of both the doctor and patient are close to the same as in-person visits, and in some cases better,’ says Dr. Kaveh Safavi, head of global health care for Cisco Systems, which is supporting trials of its own high-definition video version of telemedicine in California, Colorado and New Mexico. The interactive telemedicine business has been growing by almost 10 percent annually, to more than $500 million in revenue in North America this year, according to Datamonitor, the market research firm. It is part of the $3.9 billion telemedicine category that includes monitoring devices in homes and hundreds of health care applications for smartphones.”

As the healthcare industry changes, the supply chains that support it must change as well. A robust and secure information sharing regime will form the IT backbone that permits required adjustments to be implemented. Healthcare is not going to fade away as a topic that captures the public’s attention. Finding ways to get costs under control while still providing a compassionate level of care is going to keep analysts and healthcare personnel engaged for years.