Growing Hospital Systems Stretch Supply Chains

July 25, 2016

This article originally appeared at on Jan. 30, 2016.

By Adam Rubenfire  | January 30, 2016

Hospital systems that have acquired physician practices and outpatient treatment centers are wrestling with how to integrate them into their existing supply-chain distribution system. The goal is to extend the low prices achieved through bulk purchasing to these geographically dispersed facilities.

In some cases, that's led supply-chain officials to serve their expanded network's need for drugs, vaccines, tests and other supplies from their own warehouses. They are saving money by buying in bulk and creating, in effect, a van-based distribution system to replace the services offered by distributors such as Henry Schein Inc. or McKesson Corp., which specialize in shipping to physician offices and other non-acute locations.

But others have chosen to outsource distribution. That often means their newly acquired facilities continue their long-standing relationships with existing distributors, who for years have specialized in serving the geographically dispersed physician and ambulatory surgical center market. But sometimes they forge new relationships to capitalize on growing competition in distribution, which can even come from combined manufacturer-distributors such as Medline Industries or Cardinal Health.

Either way, supply-chain officials are under pressure to quickly integrate purchasing and delivery for their newly acquired ambulatory-care facilities. They need to leverage their size and purchasing power to lower supply costs for the newly acquired physician offices and ambulatory surgical centers, which can help make the acquisitions pay off more quickly.

And they need to help demonstrate the benefits of system ownership to the formerly independent practices. Centralized purchasing and distribution can contribute to that effort by freeing physicians from mundane supply-chain tasks and allowing them to focus on what they do best.

Systems should “manage as much of the supply chain as possible (and) take the end user out of that supply-chain role,” said James Spann, global leader of the supply-chain practice and logistics practice at Simpler Consulting, a part of Ann Arbor, Mich.-based Truven Health Analytics. They should let physicians “get back to taking care of patients.”

There's been significant growth in hospital system spending on supplies from medical-surgical distributors for their non-acute-care facilities since 2014, said David Hargraves, vice president of strategic sourcing for Charlotte, N.C.-based Premier. Alternate sites were up 165% in 2015 and physician practices were up 536%. However, those orders still account for a fraction of supply spend. Acute-care spending remains 12 to 13 times higher than the rest of the continuum.

Still, technology is allowing health systems to see they can lower costs at their ambulatory settings by taking pricing out of local hands. “In the past if you were independent ... you made your product selection and you counted on (the distributor) to make sure you had good pricing,” Hargraves said. Now, purchasing “is done at the system level at a lower price point and the distributor is being paid for services they provide.”

Health systems that take the self-distribution route usually order items in bulk for their central warehouse. They break them down into smaller units and transport them directly to the point of care, whether that's within a hospital or at an outpatient location. This practice is used sparingly and varies widely among midsize to large health systems, experts say.

There are numerous roadblocks to creating a delivery service as not every system can afford the high upfront investment in labor, infrastructure, vehicles and warehouse space. Yet Akron, Ohio-based Summa Health System found that the move works well for its bottom line.

The system runs a centralized supply center that breaks down supplies for the system's five hospitals and a number of large outpatient centers. About six months ago, it began delivering supplies to physician offices along those routes, said Scott McCulloch, vice president of supply chain for Summa.

He estimated that the system will save about $50,000 annually by delivering to physician offices. It also improves quality by standardizing the products used by physicians across the system, McCulloch said.

However, Summa doesn't send its supply vans to roughly 20 locations that aren't along those routes. “You really need to look at the geography,” McCulloch said. “You don't want to have your drivers going on unnecessary routes to drop off supplies because it will end up costing you.”

It's not necessarily the size of the system that matters, said Scott Alexander, vice president of sourcing, innovation and marketing for ROi, the regional group purchasing and supply-chain organization owned by St. Louis-based Mercy. It could make sense for even a small health system to self-distribute, as long as its locations are within a tight geographical radius. Even with low gas prices, fuel is one of the biggest costs involved in self-distribution.


Watch a video on Medline's shipping process

ROi manages a distribution center that breaks down product for Mercy's 45 hospital campuses and other locations. It recently opened another distribution center to serve Baton Rouge, La.-based Franciscan Missionaries of Our Lady Health System, a member of its GPO. Some of Mercy's physician offices let the system handle their inventory, while others prefer to do their own ordering but use the system's delivery service.

Some systems in the self-distribution game choose to bring only parts of their outpatient facility supply-chain operations in-house. For example, Detroit-based Henry Ford Health System employs a third-party supply distribution company that labels and sorts supplies for more than 200 outpatient locations. It then transports them via cargo van from the system's hospitals in a hub-and-spoke model, said Jim O'Connor, the system's vice president of supply-chain management.

But most medium-sized systems have not opted for doing their own distribution for newly acquired and existing outpatient facilities. Columbia, Md.-based MedStar Health determined that the costs involved in self-distribution wouldn't make sense for the 10-hospital system, which has locations throughout the Washington, D.C., area.

A warehouse lease in particular would be expensive in the areas MedStar serves, said John Wright, the system's vice president of supply chain. Instead, MedStar contracted with a distributor that specializes in serving ambulatory facilities in order to serve its 253 non-acute locations.

Leaving the logistics to a distributor means MedStar doesn't have to worry about the fuel and labor costs that come with heavy traffic congestion common in and around the nation's capital, Wright says.

Major distributors are responding to the shifting ownership pattern by reshaping their business models and transforming their processes. Dublin, Ohio-based Cardinal Health sold its physician office supply business in 2014 to Melville, N.Y.-based Henry Schein, which historically has had success in servicing smaller locations, such as dentists' and veterinarians' offices.

Cardinal has traditionally focused on hospitals and continues to do so. In the new environment, it has made acquisitions to expand its reach in the post-acute and home-care markets, said Mike Duffy, Cardinal's president of hospital solutions and global supply chain.

Henry Schein's medical supply segment, on the other hand, showed significant sales growth in the past year as its traditional dental and animal health markets declined because of unfavorable foreign currency exchange rates. The company chose to specialize in serving the non-acute market and has benefited as the industry moved favorably in that direction, said Bill Barr, vice president of healthcare services for the company.


Hospital supply-chain officials are taking divergent paths in their efforts to provide newly acquired physician practices with lower-priced drugs, devices and other supplies.

As health systems have purchased physician practices and independent physician practices have been consolidated into larger entities, Henry Schein has realized efficiencies that come from working with handling larger orders, even if their drivers serve multiple addresses.

The evidence of a shift in the supply chain is visible in the size of boxes being shipped from the distribution centers of Medline Industries, a Mundelein, Ill.-based manufacturer and distributor of medical products. Previously, Medline had shipped most of its products—it offers a catalog of 350,000 hospital items—in bulk to hospitals, with only about 10% to 15% of orders being broken down to smaller units, leaders say.

Today, over 60% of Medline's “sales lines” are packaged in smaller quantities for physicians' offices and other outpatient locations, or the smaller shipments are delivered straight to the point of care at a hospital instead of a centralized storeroom. (Sales lines represent the different types of items that make up a provider's order, like each item in an online shopping cart.)

Until 2010 Medline relied on Henry Schein to serve physicians' offices. But it broke off the relationship when executives realized they could handle the segment themselves. It acquired DiaMed, a Canton, Ohio-based physician office supplier, to build up its physician office segment.

Producing small-batch specialized orders for smaller facilities is labor-intensive. But Medline's four—soon to be five—busiest distribution centers are equipped with robots that take items to a worker instead of forcing the worker to walk up and down aisles to grab items.

Privately held Medline will invest more than $500 million over the next 12 to 15 months to expand its truck fleet and equip its distribution centers with automation systems, said Bill Abington, president of the company's global operations. Much of that investment comes from the need to serve health systems' expanding facility networks.

“We're not having to answer to Wall Street bankers as to why we carry such a high level of inventory (or) why we're investing nearly half a billion (dollars) in infrastructure,” Abington said. “We do it because we see the changing landscape of what our customers are facing, and we want to be able to offer any type of solution they need to accommodate what they need to do.”


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