What health care supply chain can learn from other industries

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December 11, 2012

The retail industry offers the first success story to model after. Retail offers several innovations that can help health care, in particular, point of use systems used in retail stores based on a simple, yet powerful bar code technology. The standards used are universal and readily applicable to health care where bar code use can help track consumption of supplies and devices at the point of use. The software standards used for accomplishing this have been around for ages. The hindrance here is that many companies create proprietary software that locks customers into their system. But as costs and efficiency come under greater scrutiny, it may change. Imagine that all inventory locations in a hospital are monitored and items are scanned as they’re being used. They are scanned and an order is sent to the warehouse so that the inventory can be replenished – plus an invoice would be generated and sent to the billing system simultaneously. In other industries, especially in manufacturing, it’s standard practice, but in health care, we are manually tracking par levels or using a basic technology that doesn’t link well into our ERP or materials management system let alone the charge master. The purpose of standards is to simplify, improve efficiency and reduce costs – all major goals for the health care system.

Product Design
There is a term in manufacturing called “design for cost” which considers the design of a product based on a market cost target that must be met in order for that product to be viable. The market demand must be enough to hit the volumes necessary for breakeven and ultimately, profit. The computer technology sector is a good example of a working “design for cost” model.

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In the late 1980s and early 1990s, the PC revolution began and desktop PCs were expensive, around $3,000 to $4,000 and laptops didn’t even exist. Then, technology development and design for cost were applied to make computers more affordable for the average consumer. Now, you see desktops and laptops for around $350 and the technology is such that it far surpasses the performance of computers produced two decades ago. Memory, CPU, HD monitors and other associated technologies are all more powerful, yet less expensive and affordable to the point where many families have multiple computers in their homes. The design for cost concept is based on a target price point to give the product mass appeal. Cell phones followed a similar pattern. How would this be applied in health care? Medical device implants would be a good area to start with in terms of identifying a target price point, except that it wouldn’t be based on the price a consumer would be willing to pay, but rather what the reimbursement rates would deliver. Obviously Medicare reimbursements would be an ideal starting point to crunch the numbers. The design for cost concept applied to health care would look like a Profit and Loss for a hospital provider for a given procedure, except that there would be a cap on what each component would cost based on the reimbursement. For example, with a reimbursement amount of $10,000, there would be a variable cost (operating room, labor) and supply cost, plus implant cost. If supply cost was 2 percent of reimbursement, implant cost was 50 percent and variable cost was 40 percent, then you would have $9,200 in costs against a $10,000 reimbursement yielding a contribution margin of $800 – this would not include bad debt or charity, which would bring down overall net income.

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