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How
computers can cut hospital costs
Owens
& Minor leads way by using info tech to track supplies
by Laura Bland
At the University of Maryland's Shock
Trauma Center, nurses in one of the nation's busiest
emergency rooms used to make as many as eight trips
a day to the supply room. Time spent stocking and counting
supplies meant time away from patients and increased
costs for the hospital. Now hand-held inventory trackers
supplied by Richmond-based Owens & Minor mean highly
paid nurses don't have spend their time counting bandages
anymore. It's just one example of how technology is
joining forces with hospitals to drive down supply costs
and improve patient care.
Indeed, a quiet revolution is transforming
how traditionally low-tech hospitals spend precious
dollars on medical and surgical supplies. Using new
data mining and warehousing technology as well as fresh
Internet purchasing tools, medical supply companies
are throwing financially pressed hospitals a life jacket.
In hospital supply, the best players aren't those who
move boxes the best anymore; they're the ones with the
best supply and distribution technology. Taking a cue
from the grocery and banking industries, med-surg supply
firms are helping customers pare down critical costs
by using data to secure the best deals, rein in rogue
spending and improve inventories through accurate, up-to-minute
tracking of supplies.
A number of medical supply companies with Virginia ties,
including Owens & Minor, McKesson Medical-Surgical
and Allegiance Corp. - the medical-surgical manufacturing
and distribution arm of Cardinal Corp. - are doing just
that. McKesson is pushing its hospital customers to
use bar code technology, on-line ordering tools and
robotics. Owens & Minor is winning national kudos
from stock market analysts and trade magazines alike
for its way of linking new info tech systems with supply
distribution.
There's ample reason for hospitals to jump at the chance
for better technology and inventory control. National
spending on health care is projected to skyrocket to
an estimated $2.6 trillion by 2010. Employer premiums
for health insurance have risen 11 percent this year,
the largest increase since 1992. At the same time, hospitals
face a perpetual financial squeeze aggravated by shifting
managed care trends, new regulations, a shortage of
nurses and pharmacists and an aging population.
Hospital supply companies see obvious markets. "It's
pretty well-known," says Fran Dirksmeier, president
of Richmond's McKesson Medical-Surgical, "that
there is a pretty good inefficiency in the supply chain
as a whole. The (health care) industry … tends
to be low-tech. What technology does today is offer
an opportunity to capture information." Dirksmeier's
company, which employs about 400 people in Richmond,
is part of McKesson Corp., one of the country's largest
medical suppliers. It competes with Owens & Minor
in the $12 billion hospital medical-surgical supply
distribution market. "The Internet," adds
Dirksmeier, "will revolutionize all business, not
just our business. It will evolve as a tool that can
help this industry understand utilization ..."
Supply companies already have a home
court advantage because they have a deep understanding
of how and why hospitals tend to make inefficient purchases.
Among the culprits? Conflicting computer systems, supply
hoarding and obsolete inventories. Another problem is
that separate hospitals in one chain may not realize
they're ordering supplies at a more expensive price
than another. Consider the purchase of stents - devices
used to treat patients with clogged heart arteries.
If a hospital system has five facilities, "those
hospitals may all be paying five different prices. The
hospital that uses them the least may be paying the
lowest price versus the high-end user. In many instances,
the five hospitals don't even know the price they're
paying for that product," says Craig R. Smith,
president of Owens & Minor, a Fortune 500 supply
company. Rather than placing orders through a central
purchasing department, separate hospital facilities
within a system might phone in orders. If one hospital
doesn't have a purchasing history even though others
in the chain may have ordered vast quantities in the
past, that facility loses leverage to bargain for a
better price. "It really is an industry that is
starved for information so they can make purchasing
decisions, so they can make inventory decisions, so
they can (deal with) order optimization issues,"
says Smith.
Owens & Minor leads the pack in using info tech
to provide hospital supplies. Industry analysts are
convinced that the company's technology strategy has
legs. Revenue increased 10 percent in 2000 to $3.5 billion,
a company record, compared with overall gains by competitors
at about half that rate. "Owens is taking market
share in an industry that isn't growing that fast,"
observes Christopher D. McFadden, vice president of
global investment research for Goldman, Sachs &
Co. in New York. "Distributors of products don't
have much say in prices, but they can help hospital
facilities manage their costs by focusing away from
product costs."
The trade press has noticed as well. InformationWeek
magazine recently rated Owens & Minor the No. 1
most innovative user of information technology among
500 companies it surveyed in the nation. The Richmond
firm shot to the top slot from 106th place in 1999 and
15th place last year. In this year's competition, Owens
& Minor beat out such national notables as Boise
Cascade, Compaq Computer Corp and Sprint.
Owens & Minor CEO G. Gilmer Minor III says his fascination
with computers goes back to 1954 when he was only 14
years old, and his father invested in an early IBM mainframe.
By 1995, he came to realize how well they could serve
the company. That year, Owens & Minor was having
trouble digesting its acquisition of Stuart Medical.
So the company raised its prices. Minor made a promise
then that he wasn't sure he knew how to keep: "My
personal commitment was that if we could implement this
1 percent price increase, we would give back to our
customers something that would help them recoup that
through improved efficiency. I didn't exactly know how
that was going to work out, but … we had to come
up with a way to give them back some value."
So Minor hired a management team from Richmond's Best
Products, which was developing a data-sharing and Internet-based
information system. That team eventually created a data
warehouse and mining tool called Wisdom, which has become
a standard for the medical supply industry. It helps
hospitals monitor purchasing data and contract compliance
via the Internet. Hospitals can place an order from
anywhere using OM Direct, an on-line purchasing system.
Hospitals can even track and control their operating
room inventories of sutures - a huge expense that often
runs unchecked - using hand-held, bar code technology
to maintain a constant inventory. And three years ago,
Owens & Minor launched an aggressive initiative
called CostTrack that shifted hospitals away from their
traditional cost-plus model toward automated activities-based
management of costs and productivity, an approach financial
administrators understand well. CostTrack sales account
for about 25 percent of the company's total business.
"You've got to have the right information and you've
got to know what your costs are. It's common sense,"
says Minor.
Despite such obvious advantages of using
data-based control systems, however, Owens & Minor,
like its competitors, finds that it's often tougher
to sell essential data systems to hospital officials
more interested in discounts on medical and surgical
supplies. Financial decision-makers at hospitals sometimes
stubbornly refuse to see the bottom-line impact caused
by their notoriously inefficient supply chains. At times,
Minor says, having human hands and brains involved in
the ordering, billing, stocking and restocking and delivering
of products ends up adding 50 to 60 cents for every
dollar spent by a hospital on medical and surgical supplies.
Smith adds that technology tools like on-line ordering
and product tracking reduce human error. "They
can improve service levels throughout the whole supply
chain ... dramatically reducing the inventory holding
costs."
Still, it's not easy convincing hospitals that they
need to invest in technology that doesn't involve the
latest in surgical equipment. Major computer upgrades
can cost millions, and spending that kind of money on
materials management often isn't a priority. "They're
very focused on per-patient costs, on the supply side,
on the nursing side, how fast can you get the patient
in, on outcomes and that's not always on the technological
end," says Smith. "You're only going to get
so much money, and if it doesn't help them help the
patient get better quicker, it's probably not going
to be a high priority for them."
Companies that have invested in technology are seeing
a difference in their bottom lines. Unlocking data about
purchasing trends and improving inventory controls certainly
made sense to Gary Wagner, vice president of materials
management for Inova Health System in Northern Virginia.
He convinced the nonprofit hospital chain to buy into
Owens & Minor's technology offerings five years
ago. In 1995, Inova was like a lot of systems, with
a mish-mash of five separate hospitals phoning in orders,
keeping inventory records and stocking supplies. Using
both their own computer systems as well as Owens &
Minor's, materials management workers and health care
professionals now use 40 hand-held Palm Pilots and inventory
tracking gadgets. Of its $200 million in annual purchases,
Inova spends some $50 million on medical and surgical
supplies with Owens & Minor a year. The technology
has helped save about $1 million a year, largely through
reduced inventories. In addition, the hospital has cut
its supply staff by 15 to 20 people in the last six
years. "Ninety-eight percent of what we order they
ship the next day. There's no time spent on backtracking
orders or chasing down lost orders," Wagner says.
"…That frees us up to follow up on other areas
of cost reductions."
Minor is happy with the praise, but insists Owens &
Minor hasn't strayed from its original mission as a
mover of boxes. "I like the hype. We wouldn't be
here if the technology we have invested in didn't work,"
he says. Good, user-friendly technology strengthens
not only the business, but also the bargaining position
of Owens & Minor against competitors like McKesson
and Allegiance. Those two companies compete in the separate
markets of pharmaceutical wholesale and delivery, while
Cardinal, which owns Allegiance, also manufactures some
medical and surgical supplies. Yet technology aside,
"We are in the box-moving business," says
Minor. "That is our competency, that got us to
the dance - getting the order there on time every day,
properly billed, the way the customer wants it, it's
fundamental block and tackling. Believe me, if you mess
around with that, you're really going to fall on your
face." Still, Owens & Minor plans to continue
the development of its information technology business.
Last year, the company poured almost $17 million into
computer software and hardware development.
It's a strategy, which, compared with McKesson and Cardinal,
wins points with analysts like McFadden. Consolidation
and acquisitions in the last 20 years in health care
have created cross-platform models - combining med-surg
delivery with pharmaceuticals and information technology
- with mixed success. A recent survey by McFadden of
hospital executives showed McKesson lagging in its reputation
for service. "We think generally that these types
of multi-platform models create more diseconomies than
economies for their customers," McFadden says.
Rather than run with the pack, Owens & Minor has
focused on acquisitions like Medix, which it bought
in July 1999, that complement its core business.
Owens & Minor may be basking in
the spotlight for its technology innovations, but it's
not alone in trying to change the behavior of its customers
by using information technology. Both McKesson and Allegiance
try to persuade hospital customers to leap onto the
info tech bandwagon as a way of not only reducing costs,
but also improving patient safety. McKesson offers customers
Supply Scan, an automated point-of-use system that manages
supplies and captures inventory by using hand-held scanners
and bar code technology. Then there's Supply Management
On-Line, an Internet product procurement and reporting
port. One of its large customers, Spartanburg Regional
Healthcare System in South Carolina, estimates it will
save $2 million over five years using McKesson's combination
of inventory control technologies as well as robotic
drug distribution and bedside medication scanners.
Harnessing technology may be a way distribution companies
can help bridge the often-clashing cost-quality gap
as more hospitals face the brave new world of e-commerce.
"We can only have so much impact on our customers
by delivering the product," said McKesson's Dirksmeier.
"If we focus on the process as a whole, we can
make a significant, sustainable impact." And if
that rids consumer hospital bills of grossly over inflated
prices for things as simple as facial tissue and aspirin,
everyone will be happy.
Return
to Virginia Business - November 2001
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