More ThanLow-Hanging Fruit:

More ThanLow-Hanging Fruit:

Successful Value Analysis, Phase II

Successful Value Analysis, Phase II

WSHMMA Spring ConferenceTacoma, WA

April 27, 2006

WSHMMA Spring ConferenceTacoma, WA

April 27, 2006

Garrett W. Hoover, MHA, MBA President / CEONason Hospital Roaring Spring, PA

and

John E. Siedlinski, MHA, RT(r)President & CEOMaterials Management Consultants / RPINaperville, IL

Geographic BackgroundGeographic Background

Roaring Spring, Pennsylvania closest to Altoona; 2 hours east of PittsburghRoaring Spring, middle of the state, an hour from State CollegeHospital has been in business since 1896 – 109 years

Roaring Spring, Pennsylvania closest to Altoona; 2 hours east of PittsburghRoaring Spring, middle of the state, an hour from State CollegeHospital has been in business since 1896 – 109 years

Hospital BackgroundHospital BackgroundNason Hospital is an acute care facility, licensed for 42 beds with an average daily census of 27Medical Staff of 100, representing the specialties of:- Orthopedics - EENT- Urology - General Surgery- Podiatry - OB/GYN- Pediatrics - Gastro-Intestinal- Ophthalmology - General Practice

Nason has a total of 260 FTE’s,comprised in head count of 283

Nason Hospital is an acute care facility, licensed for 42 beds with an average daily census of 27Medical Staff of 100, representing the specialties of:- Orthopedics - EENT- Urology - General Surgery- Podiatry - OB/GYN- Pediatrics - Gastro-Intestinal- Ophthalmology - General Practice

Nason has a total of 260 FTE’s,comprised in head count of 283

Payor Payor Payor

Payor Mix % Reimb.

% (I/P) Reimb.

% (O/P)

Blue Cross/Blue Shield 33.20% 50.00% 50.00%

Medicare 46.10% 65.00% 40.00%

Medicaid 4.90% 75.00% 27.00%

Commercial: UPMC 49.00% 49.00%

Commercial: Geisinger 41.00% 41.00%

Commercial: Preferred Healthcare 68.00% 68.00%

Commercial Totals 13.30%

Self-Pay * 2.50% 98.00% 98.00%

100%

NOTE: Self-Pay reimbursement will be reduced by an allowance for Bad Debt, equivalent to approximately 2%.

The Problem…The Problem…

Like many Pennsylvania hospitals, Nason had experienced declining admissions, a resurgence to O/P care and declining reimbursement

Like many Pennsylvania hospitals, Nason had experienced declining admissions, a resurgence to O/P care and declining reimbursement

NASON Reimbursement Percentages

The Problem …The Problem …

70% of Pennsylvania hospitals lose money on patient care

50% of Pennsylvania hospitals have negative operating margins

For the first time in its 108-year history, Nason Hospital wasprojecting a$1.4 million shortfall

70% of Pennsylvania hospitals lose money on patient care

50% of Pennsylvania hospitals have negative operating margins

For the first time in its 108-year history, Nason Hospital wasprojecting a$1.4 million shortfall

Meeting the Problem Head On …..Meeting the Problem Head On …..

Discussed a business relationship with RPI to turn Nason Hospital aroundRPI developed Project Plan to address both staff & supply resource managementBased on Hospital Board acceptance of the Project Plan and resulting Project Proposal, RPI was given the go-ahead to proceedAn estimated 5 – 10% was going to be carved from current staffing costs using RPI’s Management Control SystemPerformed a Supply Chain Assessment in Summer, 2003 which listed improvement opportunities & Road Map for implementation via Value Analysis Team process

Discussed a business relationship with RPI to turn Nason Hospital aroundRPI developed Project Plan to address both staff & supply resource managementBased on Hospital Board acceptance of the Project Plan and resulting Project Proposal, RPI was given the go-ahead to proceedAn estimated 5 – 10% was going to be carved from current staffing costs using RPI’s Management Control SystemPerformed a Supply Chain Assessment in Summer, 2003 which listed improvement opportunities & Road Map for implementation via Value Analysis Team process

Value Analysis Gets A Green LightValue Analysis Gets A Green LightVAT structure & Chairperson is selectedREW Form is developed & testedOpportunities are tracked through to final dispositionCost Savings tools are developedCost-Benefit Analyses templates aredeveloped & implemented“Got the word out” regarding Value Analysis Team processTraining scheduled for VAT attendeesFirst VAT Meeting was scheduled;VAT staff are trainedVAT Kick-off has begun

VAT structure & Chairperson is selectedREW Form is developed & testedOpportunities are tracked through to final dispositionCost Savings tools are developedCost-Benefit Analyses templates aredeveloped & implemented“Got the word out” regarding Value Analysis Team processTraining scheduled for VAT attendeesFirst VAT Meeting was scheduled;VAT staff are trainedVAT Kick-off has begun

The Need for Value AnalysisThe Need for Value Analysis

“There is a silver lining. Trimming Supply costs is a fairly high impact way to boost profitability or get a balancesheet out of the red.If you increase revenue$1.00, you might make5 cents off of it.But almost every dollaryou save in supply costsgoes to the bottom lineand you don’t have to fireanybody or lay anybody off.”

“There is a silver lining. Trimming Supply costs is a fairly high impact way to boost profitability or get a balancesheet out of the red.If you increase revenue$1.00, you might make5 cents off of it.But almost every dollaryou save in supply costsgoes to the bottom lineand you don’t have to fireanybody or lay anybody off.”

Health & Hospitals Magazine, May, 2004 - Richard Kunnes, M.D., Vice-President of Consulting Services for VHA,

Inc.

Nason’s Value Analysis Team -Structured for Success

Nason’s Value Analysis Team -Structured for Success

Garrett Chairs each SessionMulti-disciplinary task forceOrganized approach; Departmentheads interviewed regularlyfor staffing, process & supply costreduction opportunities Physicians approached on ad hoc basisVendor negotiations woven into VAT process Successes communicated toBoard, medical staff &the community

Garrett Chairs each SessionMulti-disciplinary task forceOrganized approach; Departmentheads interviewed regularlyfor staffing, process & supply costreduction opportunities Physicians approached on ad hoc basisVendor negotiations woven into VAT process Successes communicated toBoard, medical staff &the community

NasonVAT

VAT Chair Commitment isKey to its Success

VAT Chair Commitment isKey to its Success

VAT meetings held in Boardroom or Garrett’s office – Confirms VAT importanceGarrett attends & actively participates in all vendor strategy / contract negotiation sessionsStaff attend, on time & are preparedGarrett sets the tone and the agendaGarrett reports savings to-date prior to each meeting and summarizes & assigns“to-do’s” prior toVAT adjournment

VAT meetings held in Boardroom or Garrett’s office – Confirms VAT importanceGarrett attends & actively participates in all vendor strategy / contract negotiation sessionsStaff attend, on time & are preparedGarrett sets the tone and the agendaGarrett reports savings to-date prior to each meeting and summarizes & assigns“to-do’s” prior toVAT adjournment

VAT Opportunity Reviewed: Mobile MRI Services VAT Opportunity Reviewed: Mobile MRI Services

Develop an RFP for Mobile MRI Services, to be on-site 3 - 4x/weekAlliance Imaging was the incumbent Mobile MRI providerMet with several local providers of this serviceLeveraged vendors against each otherRenegotiated new agreement with Alliance ImagingOne yearCost Savings:$258,700

Develop an RFP for Mobile MRI Services, to be on-site 3 - 4x/weekAlliance Imaging was the incumbent Mobile MRI providerMet with several local providers of this serviceLeveraged vendors against each otherRenegotiated new agreement with Alliance ImagingOne yearCost Savings:$258,700

Consulted with Medical Staff regarding pro’s & con’s of this approachReviewed financials and reimbursement potent-ialsLeveraged competitor’s pricing & current volumes with incumbent Mobile MRI providerVAT voted to choose Mobile MRI service with the lowestunit costs

Consulted with Medical Staff regarding pro’s & con’s of this approachReviewed financials and reimbursement potent-ialsLeveraged competitor’s pricing & current volumes with incumbent Mobile MRI providerVAT voted to choose Mobile MRI service with the lowestunit costs

BACKGROUND SOLUTION

VAT Opportunity Reviewed: Owens & Minor Mark-up VAT Opportunity Reviewed: Owens & Minor Mark-up

Owens & Minor is incumbent prime distributor for Med-Surg productsLeveraged incumbent book of business against Cardinal, Burrow’s & other suppliersIn addition to NovationDistributors (ADA), alsoconsidered non-contract onesSavings Targeted:$15,000

Owens & Minor is incumbent prime distributor for Med-Surg productsLeveraged incumbent book of business against Cardinal, Burrow’s & other suppliersIn addition to NovationDistributors (ADA), alsoconsidered non-contract onesSavings Targeted:$15,000

Cost-plus mark-up was verbally agreed to at 6.5%a long, long time agoNegotiated the mark-up from 6.5% down to cost + 5%Negotiated to receive the full WISDOM Program, and its Reports, included at no cost for 1 year

Cost-plus mark-up was verbally agreed to at 6.5%a long, long time agoNegotiated the mark-up from 6.5% down to cost + 5%Negotiated to receive the full WISDOM Program, and its Reports, included at no cost for 1 year

BACKGROUND SOLUTION

Phase I - VAT SuccessesPhase I - VAT SuccessesAlcon Contract = $9,280Stryker Pain Pump = $2,892Forcep & Instrument Repairs = $4,192Switched from Reglan to generic drugs = $1,100Renegotiated Reference Lab Contract = $33,000Blood Bank transfer process change = $11,100CME giveback days = $2,700Policy Change - CRNA monitoring of Epidurals = $50,000Cancelled subscriptions AJN & Respiratory = $145

Alcon Contract = $9,280Stryker Pain Pump = $2,892Forcep & Instrument Repairs = $4,192Switched from Reglan to generic drugs = $1,100Renegotiated Reference Lab Contract = $33,000Blood Bank transfer process change = $11,100CME giveback days = $2,700Policy Change - CRNA monitoring of Epidurals = $50,000Cancelled subscriptions AJN & Respiratory = $145

Switched GPO FoodService Contract= $4,367Employee Pension Plan = $206,000New contract for Smith & Nephew Burrs, Bits, Blades = $3,500Examine the frequency of Bed Changes = $7,306Better Scheduling of RSV Vaccinations = $16,413Orthopedic Prostheses Standardization = $30,000Pacemaker Standardization = $15,000

Switched GPO FoodService Contract= $4,367Employee Pension Plan = $206,000New contract for Smith & Nephew Burrs, Bits, Blades = $3,500Examine the frequency of Bed Changes = $7,306Better Scheduling of RSV Vaccinations = $16,413Orthopedic Prostheses Standardization = $30,000Pacemaker Standardization = $15,000

Phase I - VAT SuccessesPhase I - VAT SuccessesElectronic Delivery System = $7,784Negotiated New Electrode Agreement = $1,300Physician Benefits = $5,100Physician Vacation = $9,500Wound Care products & Urologicals = $1,600Print superbillsin-house vs.outside = $500Reduced pricing on Kodak MRI film = $1,518Elimination of O.R. Inventory = $3,663ACMI: Scope Repair contract = $2,400

Electronic Delivery System = $7,784Negotiated New Electrode Agreement = $1,300Physician Benefits = $5,100Physician Vacation = $9,500Wound Care products & Urologicals = $1,600Print superbillsin-house vs.outside = $500Reduced pricing on Kodak MRI film = $1,518Elimination of O.R. Inventory = $3,663ACMI: Scope Repair contract = $2,400

Increased use ofO & M Medi-Choice(private label) products= $6,249Development of BNP test for CHF (in-house vs.outsourcing) = $14,000New contract for GeneralLab Supplies = $24,000Changes to Pharmacy Formulary (Activase to Retivase) = $11,000Learning Harbor Education(in-house vs. outsourcing)= $12,000Office Supplysavings= $2,000

Increased use ofO & M Medi-Choice(private label) products= $6,249Development of BNP test for CHF (in-house vs.outsourcing) = $14,000New contract for GeneralLab Supplies = $24,000Changes to Pharmacy Formulary (Activase to Retivase) = $11,000Learning Harbor Education(in-house vs. outsourcing)= $12,000Office Supplysavings= $2,000

How Do We Get The DocsTo Play Along?

How Do We Get The DocsTo Play Along?

Meet them on their turf & appeal to their business sense by showing them all current financial & quality dataThey now understand the importancethat Value Analysis hasWe continue to target eachopportunity; “their” productsmay be under scrutinyWe make sure they do notnegotiate any contracts outsideof Value Analysis Team process

Meet them on their turf & appeal to their business sense by showing them all current financial & quality dataThey now understand the importancethat Value Analysis hasWe continue to target eachopportunity; “their” productsmay be under scrutinyWe make sure they do notnegotiate any contracts outsideof Value Analysis Team process

$1.0 Million Savings Achieved!$1.0 Million Savings Achieved!

On 7/14/05, Nason Hospital exceeded $1.0 million in cost savings by switching from branded Rocephin to a generic product alternative (conservative savings targeted = $23,385)

On 7/14/05, Nason Hospital exceeded $1.0 million in cost savings by switching from branded Rocephin to a generic product alternative (conservative savings targeted = $23,385)

Savings Implemented To DateSavings Implemented To Date

Phase I Target: 5/03 = $250,000 savings

Savings Identified, Quantified & Implemented to 7/26/05 = $1,008,978Licensed Beds = 42Average occupiedbeds = 27$ Saved / Average OccupiedBed as of thatdate = $37,370

Phase I Target: 5/03 = $250,000 savings

Savings Identified, Quantified & Implemented to 7/26/05 = $1,008,978Licensed Beds = 42Average occupiedbeds = 27$ Saved / Average OccupiedBed as of thatdate = $37,370

Phase II Target: 5/06 =$1.5 Million SavingsPhase II Target: 5/06 =$1.5 Million Savings

Relative Cost SavingsRelative Cost SavingsActual Cost Savings achieved to date at Nason =

$37,370 / average occupied bedActual Cost Savings achieved to date at Nason =

$37,370 / average occupied bed

$1.01

$3.74

$7.47

$13.08

$15.88

$0

$2

$4

$6

$8

$10

$12

$14

$16

Millions

Targeted Cost Savings

27 bed

100 bed

200 bed

350 bed

425 bed

How much would your Hospitalneed to save,

per adjusted occupied bed,to achieve

similar levels of success?

Phases of Value AnalysisPhases of Value Analysis

Lowest hanging fruitProduct standardizationVendor consolidationInventory reductionConsignment implementationGPO portfolio maximizationReimbursement optimization

Lowest hanging fruitProduct standardizationVendor consolidationInventory reductionConsignment implementationGPO portfolio maximizationReimbursement optimization

Contract renegotiation Extensive GPO assistance & interventionChanges to practice patternsDrastic culture changesProduct usageUltra-sensitive productsFormulary effectivenessMost time-consuming & difficultPhase

Contract renegotiation Extensive GPO assistance & interventionChanges to practice patternsDrastic culture changesProduct usageUltra-sensitive productsFormulary effectivenessMost time-consuming & difficultPhase

PHASE IPHASE I PHASE IIPHASE II

Losing The MomentumLosing The Momentum

Waning Executive or Administrative SupportNot enough Cost Savings soon enoughLittle direction; sense of purposeInitial efforts failedPerceived lack of interestNo financial incentiveDo not know how toget there from hereChanging membershipToo many priorities pulling staff in other directionsNo GPO / Distributor supportfor changeVAT burnout

Waning Executive or Administrative SupportNot enough Cost Savings soon enoughLittle direction; sense of purposeInitial efforts failedPerceived lack of interestNo financial incentiveDo not know how toget there from hereChanging membershipToo many priorities pulling staff in other directionsNo GPO / Distributor supportfor changeVAT burnout

Why Most Value Analysis TeamsNever Get To Phase II?

Why Most Value Analysis TeamsNever Get To Phase II?

NASON Hospital VAT MilestonesNASON Hospital VAT Milestones

5/03 = $0.00

12/03 = $425,000

8/04 = $836,357 (2004 AHRMM Presentation)

3/05 = $963,000

5/03 = $0.00

12/03 = $425,000

8/04 = $836,357 (2004 AHRMM Presentation)

3/05 = $963,000

7/14/05 = $1,000,000

7/26/05 = $1,008,978(2005 AHRMMPresentation)

12/05 = $1,250,000 (estimated)

5/06 = $1,450,000 (estimated)

7/14/05 = $1,000,000

7/26/05 = $1,008,978(2005 AHRMMPresentation)

12/05 = $1,250,000 (estimated)

5/06 = $1,450,000 (estimated)

PHASE IPHASE I PHASE IIPHASE II

Phase II VAT Opportunities We’re PursuingPhase II VAT Opportunities We’re Pursuing

Novation’s Orthopedic &Interventional Radiology AssessmentsAll Health to target other cost-savingopportunitiesAdditional staff reductions using theManagement Control SystemReprocessing of S.U.D.’s / RecyclingDemand-matching forOrthopedic prosthesesLinen loss & inventory shrinkageProduct usageSupply FormularyStrict, Closed-DoorDrug Formulary

Novation’s Orthopedic &Interventional Radiology AssessmentsAll Health to target other cost-savingopportunitiesAdditional staff reductions using theManagement Control SystemReprocessing of S.U.D.’s / RecyclingDemand-matching forOrthopedic prosthesesLinen loss & inventory shrinkageProduct usageSupply FormularyStrict, Closed-DoorDrug Formulary

Service Contracts: Capital Equipment & MaintenanceApplying Supply Chain leverage & Purchasing synergies via Pennsylvania Mountain Hospital Association (PMHA) - A local consortium of like-minded hospitalsBenchmarking Hospital & Materials Management operational statisticsNew & Emerging TechnologiesPlacing “Unprofitable” service linesunder the microscopeFurther stock reductions -M/S products & Pharmaceuticals

Service Contracts: Capital Equipment & MaintenanceApplying Supply Chain leverage & Purchasing synergies via Pennsylvania Mountain Hospital Association (PMHA) - A local consortium of like-minded hospitalsBenchmarking Hospital & Materials Management operational statisticsNew & Emerging TechnologiesPlacing “Unprofitable” service linesunder the microscopeFurther stock reductions -M/S products & Pharmaceuticals

Phase II VAT Opportunities We’re PursuingPhase II VAT Opportunities We’re Pursuing

VAT Tools: What Will Help Us Get There?

VAT Tools: What Will Help Us Get There?

Meeting frequency changed to Monthly – More time to identify new opportunitiesAccounts Payable annual spend list, sorted in descending orderDiscussions with All-Health/Novation,Owens & Minor, McKessonLeverage from Pennsylvania Mountain Hospital AssociationOngoing Education & CommunicationNew MMIS & ORMIS

Meeting frequency changed to Monthly – More time to identify new opportunitiesAccounts Payable annual spend list, sorted in descending orderDiscussions with All-Health/Novation,Owens & Minor, McKessonLeverage from Pennsylvania Mountain Hospital AssociationOngoing Education & CommunicationNew MMIS & ORMIS

VAT Tools: A/P Annual Spend List- Now What Do We Do With It?

VAT Tools: A/P Annual Spend List- Now What Do We Do With It?

Contact the Accounts Payable Supervisor or Controller; obtain 12-month list of who was paid in an MS-Excel formatThis list should include the Vendor #, Vendor Name and 12-month spendSort Excel spreadsheet in descending $ amount; eliminate vendors spent < $25.00Look for vendors with the greatest spendSort on Vendor name; add duplicative vendors together to obtain one totalAdd Vendor category for each entry in column to the right (i.e., Bank, Legal Service, Pharmacy wholesaler, Lab, etc.)Sort spreadsheet so vendortypes are together & totaled

Contact the Accounts Payable Supervisor or Controller; obtain 12-month list of who was paid in an MS-Excel formatThis list should include the Vendor #, Vendor Name and 12-month spendSort Excel spreadsheet in descending $ amount; eliminate vendors spent < $25.00Look for vendors with the greatest spendSort on Vendor name; add duplicative vendors together to obtain one totalAdd Vendor category for each entry in column to the right (i.e., Bank, Legal Service, Pharmacy wholesaler, Lab, etc.)Sort spreadsheet so vendortypes are together & totaled

VAT Tools: Accounts PayableAnnual Spend List

VAT Tools: Accounts PayableAnnual Spend List

Cut & paste the Vendor categories so they’re all together on one page eachHand out Vendor category lists at your next Value Analysis meeting with the questions:

1. Do we know who these vendors are?2. Is the amount we spend with each of these vendors a

surprise or is it expected?3. Can we standardize these vendor’s products with

another manufacturer’s products?4. If a service, do we need the service these vendors

provide? Can we perform these services ourselves?5. Do we have current contracts for

purchases from these vendors?6. It there any way we can reduce our

annual spend with these vendors?

Cut & paste the Vendor categories so they’re all together on one page eachHand out Vendor category lists at your next Value Analysis meeting with the questions:

1. Do we know who these vendors are?2. Is the amount we spend with each of these vendors a

surprise or is it expected?3. Can we standardize these vendor’s products with

another manufacturer’s products?4. If a service, do we need the service these vendors

provide? Can we perform these services ourselves?5. Do we have current contracts for

purchases from these vendors?6. It there any way we can reduce our

annual spend with these vendors?

Lessons Learned Lessons Learned

Without full Administrative support, you will have limited successThe better due diligence you perform on each cost saving opportunity, the easier they’ll be accepted and implementedThere’s no such thing as a “Sacred Cow”Question everything; nothing stays on tableThe reimbursement picture should be examined for each opportunity; if not, you’ve only got half the pictureOutside eyes helped us keep theVAT’s on track & target, whilechallenging the status quo

Without full Administrative support, you will have limited successThe better due diligence you perform on each cost saving opportunity, the easier they’ll be accepted and implementedThere’s no such thing as a “Sacred Cow”Question everything; nothing stays on tableThe reimbursement picture should be examined for each opportunity; if not, you’ve only got half the pictureOutside eyes helped us keep theVAT’s on track & target, whilechallenging the status quo

Lessons Learned Lessons Learned

Keep your Board regularly informed via Agenda itemThe #2 item in your hospital’s budget may not be as well-controlled as we’d like to thinkIf we’ve tried it before, let’s look into the opportunity again - due to a changing environmentMaterials Management needs support to do its job properlyYou cannot communicate enough– at ALL levels We did it - you can do it, too.

Keep your Board regularly informed via Agenda itemThe #2 item in your hospital’s budget may not be as well-controlled as we’d like to thinkIf we’ve tried it before, let’s look into the opportunity again - due to a changing environmentMaterials Management needs support to do its job properlyYou cannot communicate enough– at ALL levels We did it - you can do it, too.