It All Adds Up

Date: March 1, 2014

1 2

Together We Save: Alison Arnott, Ron Werthman, Ken Grant and Paul Khanuja are helping lead a project to reduce spending across the Johns Hopkins Health System.

It was a moment for the annals of number crunching: Dozens of senior executives, financial leaders, physicians and department leaders from the Johns Hopkins Health System’s six hospitals were meeting to discuss a precedent-setting proposal. Could they agree to increase their purchasing power as a health system by buying their supplies and services jointly instead of individually?

The stakes were high, says Ron Werthman, the health system’s chief financial officer. By implementing consultants’ recommendations to more effectively manage supply and purchase service agreements and to use supplies more wisely, the health system could save as much as $72 million a year. PricewaterhouseCoopers, who prepared the report, projected that the cost reductions would occur within three years of executing the proposal.

It was hardly a slam-dunk decision, however. The six hospitals already had long-term relationships with vendors that they valued. Each institution was also doing well with its own pricing strategies when compared with its peer institutions.

On the other hand, health systems like Mayo Clinic and Intermountain Healthcare were well ahead of Johns Hopkins Medicine in centralizing and integrating their supply chain operations. Cost reductions from a system-wide integration would bring Johns Hopkins closer to its strategic goal of finding an additional $150 million a year in net operating income.

The discussion was as lively as Werthman expected of “a decentralized culture like ours.” But when he finally asked if they were ready to take on the challenge, all 42 leaders responded, “Yes!”

Going forward, the entire health system would work with Premier Inc., a group purchasing organization in North Carolina already working with members of the health system. For the past decade, Howard County General Hospital, Sibley Memorial Hospital and Suburban Hospital had used Premier’s services to improve supply chain efficiency and reduce costs. The 2013 decision “to speak with one voice to the marketplace” marked a step toward greater savings as well toward creating a shared service center at Johns Hopkins at Keswick. Moreover, it demonstrated the growing trust and collaboration between the system’s member organizations.

Marty Basso, chief financial officer of Suburban Hospital and Sibley Memorial Hospital, was impressed by the speed at which the group of leaders was mobilized. “What struck me most is that when this organization really has to get something done, and do it in a very open, collaborative way, it is able to do that—and to produce value and savings,” he says.

The health system is already on schedule to save $10 million in supplies and services by June.

Targeting ‘Stuff, Not Staff’

Linens, cleaning supplies, heating fuel, food, building materials, medical equipment, computers, surgical instruments, office supplies, lab supplies, waste management and so on—the list of supplies and services that make hospitals resemble small cities can seem overwhelming. But if you’re a bottom line type, finding ways to trim the $1.6 billion that Johns Hopkins Medicine spends on such “stuff” every year is a mighty tasty assignment.

The current project is part of JHM’s Strategic Plan to improve financial performance. In a health care landscape of flattened and shrinking revenues, the organization needs extra funds to preserve its missions of research, education and clinical care, and to invest in strategic priorities, technology and facilities.

During the past few years, Johns Hopkins Medicine implemented a hiring freeze that continues to reduce labor costs without major layoffs. Now, the five-year supply chain integration project will reduce prices paid for materials and generate further savings by increasing standardization and eliminating waste in products and services system-wide.

“I’ve said for some time that you can either deal with ‘staff,’ or you can deal with ‘stuff,’” Werthman points out. “If you’re talking about saving $100 million a year and an average employee makes $50,000, you’re talking about 2,000 jobs. Although you can never say ‘never,’ we always try to deal with ‘stuff’ first.”

Staff members across the system are serving on supply chain integration teams that include quality oversight provided by the Armstrong Institute for Patient Safety and Quality, human resources; policies and procedures; information technology, staff development and training, finance, and communications. Teams of experts from various departments are reviewing cost categories such as computers, communications, linen, food and laboratory to review best practices and evaluate costs charged by current vendors.

Ken Grant, vice president of general services for The Johns Hopkins Hospital and vice president of supply chain management for the Johns Hopkins Health System, helped integrate the supply chains of The Johns Hopkins Hospital and Johns Hopkins Bayview Medical Center 20 years ago.

“It’s a lot easier to go to the market as one entity, and it makes good sense to make sure we have done all we can to spend the least amount for our high-quality products,” he says. “Becoming fully integrated means that everyone follows the same guidelines, policies and procedures. There is a well-defined reporting structure, and everyone involved with supply chain deals with it from a centralized and integrated approach.”

Putting Patients First

As supply chain integration moves forward, the Armstrong Institute will help guarantee that the safety and quality of patient care come first in purchasing decisions.

Physicians must approve medical devices and medical equipment—along with ways of standardizing care—before any agreements are final. Armstrong Institute Director Peter Pronovost says that the clinical communities assembled across the health system not only work to eliminate preventable harm and to standardize clinical quality, but they also seek to reduce waste and health care costs.

One new clinical community, led by orthopaedic surgeons Paul Khanuja, director of joint replacement at Johns Hopkins’ Department of Orthopaedic Surgery, and Anthony Unger at Sibley Memorial Hospital, seeks to improve joint replacement surgery throughout the health system. Recently, surgeons worked closely with supply chain staff to implement a capitated price program for total joint implants, which will save the system’s hospitals $1.5 million per year.

Even greater savings can come from agreeing to standardize those devices. Surgeons use implants from a total of 14 different companies for the 3,000 hip, knee and shoulder replacements performed throughout the health system each year, Khanuja says. Choosing one implant manufacturer would dramatically reduce costs. However, it would require many physicians to alter long-standing formulas of success.

 “Every physician wants what’s absolutely best for their patient,” says radiologist Jonathan Lewin, JHM’s senior vice president of integrated health care delivery. “But many of our colleagues are also willing to put aside personal biases to look at things from an open perspective.”

Physicians recognize the need for streamlining protocols and adopting procedures that offer the best outcomes for patients, Lewin says. Now they are learning that improving treatment can also benefit the bottom line.

—Linell Smith

Read more about the strategic priority for performance online at  hopkinsmedicine.org/strategic_plan/

-----------------------

Together We Save

• The Johns Hopkins University and Johns Hopkins Medicine were spending $10.7 million a year on office supplies. By teaming up to use Office Depot, they will save almost 30 percent this year. (That’s a savings of almost $1.1 million for the Johns Hopkins Health System alone.)

• Orthopaedic surgeons throughout the health system saved $1.5 million by supporting a capitated pricing agreement for joint implants.

• Radiology imaging centers and practices across the enterprise saved as much as 20 percent on equipment by negotiating close partnership pricing from a limited set of manufacturers.