1965–83

Medicare and Medicaid were established in 1965 (Shi & Singh, 2017, pp. 69–70). Until 1983, inpatient facilities, including hospitals and nursing homes, were reimbursed on a retrospective basis. This meant that the previous year’s costs were used to determine the next year’s reimbursement. In this environment, there was little emphasis on controlling the costs of purchasing and materials management within hospitals or other long-term care facilities. Centralized management in these areas did develop during this time due to increasing expenses (Shi & Singh, 2017; Wolper, 2011).

1980s and 1990s

In 1983 Medicare began using a prospective reimbursement plan where preestablished criteria were used to determine the amount of reimbursement for specific services. No longer was reimbursement based on previous costs but was determined by diagnostic related groups for Medicare Part A in 1983, and since 2000 ambulatory payment classifications, resource utilization groups, and home health resource groups have been used. The importance of lowering supply-chain costs and increasing efficiency was emphasized (Shi & Singh, 2017, pp. 158–160).

During the 1980s and 1990s, emphasis was placed on developing group purchasing organizations. These are defined as “an organization whose primary product or service is the development of purchasing contracts with product and nonlabor service vendors that its members can access” (Burns, 2002, p. 60; Schneller & Smeltzer, 2006). In addition, the centralized management of inventories and reliance on supplier services evolved.

2000s

During the 2000s, there was a consolidation of supply-chain functions resulting in increased efficiency. This was also a time when many hospitals, outpatient facilities, and physicians’ offices merged, resulting in the potential for centralization of supply chain and distribution services. For example, Intermountain Healthcare has centralized all aspects of its supply chain into four areas of operations: category management, purchasing, logistics and materials management, support services, and business programs and services. This represents a change away from the traditional health-care organizations’ reliance on external suppliers (Intermountain Healthcare).

Originating departments

The process begins with originating departments in the health-care system. The requirements related to the supply chain must be coordinated, so each has what is required to care for patients directly or to support the care of patients indirectly.

Surgical services include orthopedics, cardiology, and many other surgical areas. This area requires expensive surgical supplies, instruments, and medical devices. In order to minimize the total cost of supplies for this area, it would make sense to standardize the medical devices used for the same procedures. However, physician preferences may result in medical devices being ordered from multiple sources. Many organizations have formed value analysis teams that include all stakeholders to review purchases to see where standardization and potential cost savings are possible. This area also houses the sterile reprocessing department with special equipment and supplies needed to sterilize everything used during surgery. Because of the high cost and complexity found in surgical services, there is often a supply-chain director or manager in charge of this area.

Obstetrical services include areas for normal deliveries, cesarean sections as well as a neonatal intensive care unit. Each of these requires specialized supplies and equipment for its patients. Just as in surgical services, the instruments used must be sterilized by the sterile reprocessing department and be ready for the next patient.

Oncology, cardiology, general medicine, and intensive care units all have different requirements in terms of equipment and pharmaceuticals used. The organization’s supply-chain management must stock standard supplies as well as specialized items as needed.

Allied health departments include professionals from occupational, physical, and speech therapy, diagnostic departments including X-ray, nuclear medicine, and ultrasound as well as radiation therapy. These areas also have specialized needs for equipment to provide diagnoses or therapy. Diagnostic radiology also may use contrast materials and radiopharmaceuticals. These must be managed and disposed of according to the procedures outlined by the hospital as well as regulators.

Laboratories and pharmacies have specific needs throughout the supply chain. It is important that samples and pharmaceuticals are maintained at specific temperatures from the time they are shipped to when they are delivered to the time they are used.

Support areas include the ordering, preparation, and delivery of food to patients and having clean linens available. Supplies are also needed for cleaning, disinfecting, and maintaining the environment as well as tools and equipment to repair the many systems in the organization.

Administrative areas require office and computer supplies and equipment. There may be training and meeting facilities that have audiovisual equipment that must be maintained either internally or as part of a maintenance contract.

The information technology department has become central to a health-care system’s operations. Computers in various forms are found throughout a hospital and in outpatient areas (ambulatory surgical centers, physician offices, and immediate care centers). Administrative systems are used for scheduling and billing, delivering, tracking staff education, and providing patient access to their information. These are also used for purchasing, receiving, storing, and distributing supplies and equipment throughout a facility. Clinical systems ideally include patient information from the physician offices, outpatient departments, and inpatient units. The information from all these systems can be fed into a central data warehouse to be analyzed for studies supporting medical research and operations. Security of the equipment itself, as well as all of the data in these systems, is part of the IT department’s role.

Purchasing department

The purchasing department interfaces with originating departments and the suppliers (group purchasing organization, individual manufacturer, or third-party supplier.) For large contracts, there is usually a Request for Proposal sent to potential suppliers, and the evaluation committee uses this information plus meetings with the “finalists” to determine who wins the contract. The goal is to achieve the best total cost for the products or services. This includes the procurement cost, product cost, and management cost.

Supplier

Group purchasing organizations, manufacturers, and third-party logistics providers for medical supplies and pharmaceuticals may all provide supplies to a large health system. Contracts may also exist with suppliers of linens, food services, environmental services, and waste management.

There are different arrangements with suppliers. The goal is that the health-care organization needs to ensure it has all supplies, medical devices, pharmaceuticals, etc., needed at all times. Depending on the size of the system, the requirements will vary.

Receiving

The receiving department receives the items, checks the orders, and enters that the items have been received into the computer system. The items are then sent to the inventory/distribution department. If receiving is located in a central warehouse, items might need to be delivered to each facility’s inventory/distribution department and then distributed to the end users.

Certain supplies and drugs must be kept at a certain temperature. Are parts of the delivery cart temperature controlled? If not, how do you ensure they are kept at the correct temperature throughout the facilities’ supply chain?

Sometimes the order is delivered directly to the originating department by the supplier. This may be especially true for a nonclinical department since their needs do not overlap with the materials received in the clinical system. They also need to record the delivery in the appropriate system.

Inventory/distribution system

Inventory management within the organization is an important part of reducing total costs. To manage inventory, a typical approach is to determine what is there and how fast inventory is used. Slow-moving inventory can be returned for credit, used by another department, donated, or sold. Then, determine the reorder points and economic order quantity, do an inventory count, and determine the progress. This may also be automated in an inventory system. For example, if the electronic medical record (EMR) is connected to the inventory in the pharmacy, the physician order for the medication can “deduct” it from the total count in the pharmacy, and it will be sent to the unit. The nurse then gives the medication to the patient and scans that it has been used into the EMR. The central system will then have a new inventory count.

A number of approaches might be used to distribute supplies from a facilities central storeroom. Requisitions from the originating departments may be used to place orders on an ad hoc basis. Since the orders may be placed randomly, too much or too little stock may be kept in the central location or on the originating department. There also may be last-minute orders. Rather than relying on a system that predicts usage based on past experience, so the area is properly stocked, an ad hoc approach is used in many medical facilities.

Exchange carts may be used to take the basic supplies needed to and from the storeroom to the point of use. If a duplicate cart is prepared, then the loading process is centralized and the carts are exchanged on a regular basis. This, however, results in duplication of supplies and the need to store the “backup” cart in the facility.

Surgical carts are also prepared for each surgery, containing the instruments and supplies that will be used. They can be stored outside of the operating room itself in a nearby location. Once the surgery is over, the cart and all of the instruments can be returned to the sterile reprocessing area. This ensures that the instruments are all taken for reprocessing.

Preauthorized replenishment-level (PAR-level) systems are maintained by individuals from the central storeroom. They visit each area regularly and determine what supplies need to be replenished. This may be done with a scanner or be part of an automated inventory system. These orders are then filled and the material replenished in the department. Computer systems might supplement the counting function by predicting future use based on past utilization. The predicted order is then delivered.

The point-of-use system is similar to that used by retailers. The caregiver enters or scans the code of the item used into the EMR, the inventory is reduced, and the information needed for charge capture is recorded. The system can then trigger an order for the items to be replenished. Unique identifiers on medical devices are also entered into the system. If it is necessary to recall the device at a later date, the patient who received it can be identified.

The items could be delivered by self-driving robots or by the central receiving staff. There are also potential efficiencies if the receiving staff also puts them away rather than the clinical staff in the unit. Pharmacy techs may deliver the medications to the drug dispensing cabinet in the unit (Vecchione, 2017, pp. 19–20) and put them into the patient’s drawers. The dispensing units should be connected to the EMR system and delivery recorded in the system.

Accounts payable

Accounts payable is part of the finance department in most organizations. The staff work with the departments that receive the orders to make sure invoices are paid on time, and there are no late fees. The process is automated so that everyone can determine what has been received and make sure the invoices are paid according to the contract. Originating department budgets may be charged if the items are not part of the clinical process. This is especially true for administrative departments and other nonclinical support areas.

Maturing technologies

These technologies are appropriate for large group purchasing organizations, suppliers, and 3PLs, as well as in health-care facilities themselves.

Optimization software is used by Benco Dental (see Chapter 5: Technologies for dealing with error in supply-chain planning) to reduce inventory, increase market share and sales, and eliminate expedited shipments.

Sensors/telematics, such as RFID, are available for expensive, mobile equipment throughout the facility. Many pharmaceuticals must be kept below a certain temperature so sensors throughout the supply chain may be used. Telematics can also be used for vehicle fleets delivering supplies to and from a central warehouse. In addition, medical devices have unique identifiers that are scanned into the patient’s EMR so he/she can be contacted if an upgrade or recall is needed (Endicott, 2017).

Cloud computing allows all appropriate parties access to the data and provides storage for the large amounts of data housed in EMRs and administrative systems. Security of the data is paramount as health-care facilities have been targeted by hackers and have paid ransoms to “release” their patient data. The Health Insurance Portability and Accountability Act is a US law that protects patients’ medical records and other health information provided to health plans, doctors, hospitals, and other health-care providers. The US Department of Health and Human Services outlines specific regulations related to the security of cloud storage for Personal Health Information (PHI) (Guidance on HIPPA and Cloud Computing).

Data warehouse and integration systems are set up at large health systems and academic medical centers. They may have established a data warehouse to store information from their EMRs, administrative systems, and employee and patient surveys. This information may be used for medical research, analysis for operational improvements, or evaluation of human resource or training programs [e.g., Northwestern Medicine Enterprise Data Warehouse (NMEDW), http://www.feinberg.northwestern.edu/research/cores/units/edw.html; Research at Trinity Health, http://www.trinity-health.org/body.cfm?id=695&fr=true].

Automated storage and retrieval may be used in large warehouses run by suppliers and large health systems, such as Intermountain Health. Some smaller versions of these systems might be found in facility storerooms or pharmacies. In hospital units, dispensing cabinets may be considered a form of automated storage and retrieval for pharmaceuticals. Each patient has a separate drawer that is opened by the caregiver through the EMR and contains the medications that have been delivered from the pharmacy. There are also components that are refrigerated for medications that must be kept below a certain temperature (Vecchione, 2017).

Growth technologies

Growth technologies may be used by very large suppliers and health systems for their supply-chain functions. However, many of these are being developed for use by patients directly. This changes the situation from a centralized location for face-to-face interaction between the provider and the patient to one that can take place anywhere. Any supplies or medications must now be available to the patient close to where he/she lives rather than being delivered to the health-care facility.

Mobility capabilities, such as barcode scanning, are used to manage pharmaceuticals, supplies, and lab specimens. The patient wristband also has a barcode so both the patient and medication or supply barcodes can be entered into the EMR when used. Likewise, the lab specimen can be matched with the proper patient when reporting results.

Wearability in the health-care setting refers to watches or other devices that the patient wears to track heart rate and other vital signs related to the individual’s health. For example, the Apple Watch has the potential to monitor symptoms of patients and medication responses (Spitzer, June 5, 2018). Apple also has received a patent for a blood-pressure monitor worn by the patient and able to communicate wirelessly with another device (Spitzer, June 8, 2018). These devices can be connected to a central location via the Internet of Things (IoT), and if something is not normal, the provider can be notified. This, along with video conference calls, allows the individuals to “visit” their provider from anywhere and their vital signs can be monitored. This form of telemedicine is becoming much more common. Initial issues with licensing across states and payment for the service are being resolved. It is especially appropriate for individuals who live in rural areas, after a natural disaster, or to follow those with a chronic disease.

Data analytics is made possible by EMRs, administrative systems, and other sources of data that are centralized in the data warehouse mentioned above. If patterns of usage of supplies and medications can be predicted for certain patient populations, then inventories held centrally and in units can be anticipated. Also, the results of patients seen via telemedicine may result in better planning for deliveries to the patients’ residences. As in other organizations, predictive analytics can be used to determine when maintenance of equipment may be needed to avoid unplanned events. This is especially important in diagnostic, therapeutic, and surgical areas where a machine breakdown can have fatal results.

Social media is used by health systems to communicate with their patients and as part of their public relations efforts. The supply-chain professionals in the system can also benefit from networking with their counterparts from other organizations.

Emerging technologies

Technologies that have been used in other industries are now being used in some health-care organizations and have the potential to improve the quality of care available to patients, regardless of their location.

Potential applications of 3D printing in health care are similar to those in manufacturing. There has been much research in the medical areas using 3D Printing. Medical devices and hip and knee joint replacements might be fabricated specifically for a patient when needed and researchers are trying to make organs ultimately for use in patients. Manufacturers are also fabricating spare parts for machines using 3D printers, as needed, rather than having to keep inventory. Who does the fabricating and the impact on the traditional supply chain remains to be seen?

3D Printing in Health Care https://www.youtube.com/watch?v=P2peq82e8is

3D Printed Knee Joint https://www.youtube.com/watch?v=mbyT0sQIM18

Drones for delivery of pharmaceuticals and medical supplies provide service to rural areas and after natural disasters. Amazon has been developing drones for delivery to individual customers. On May 29, 2018 the company earned a patent for various methods of communicating with the customer at the delivery point (Bean, May 30, 2018). A drone was also used to deliver medications to a community clinic in Wise County, Virginia. This is a very rural area where there is no local pharmacy.

Drone Delivery of Pharmaceuticals to Wise County, Virgini https://www.youtube.com/watch?v=iHH4eB__LCMa

Autonomous vehicles have been used in manufacturing, warehouses, and are being developed as passenger vehicles by Tesla, Uber, GM, and others. They are also being used by some health-care systems to deliver supplies throughout a large medical campus. For example, Cleveland Clinic uses them throughout its campus to deliver supplies to various facilities and units.

Cleveland Clinic Automated Delivery Vehicles https://www.youtube.com/watch?v=1uGTUtqOVnE

Exponential technologies

Future of health care and impact on supply chain

There are many external factors impacting health care in general and traditional health-care organizations. The aging population results in an ever-increasing number of people who are qualified under Medicare for health-care services. The payment structures, amounts paid, and quality data requirements must be met by providers. Mergers among hospitals, outpatient facilities, and physician offices have increased dramatically, reducing the benefits of traditional supply-chain arrangements. Amazon, JP Morgan, and Berkshire Hathaway are also combining forces to form a health-care company led by Atul Gawande, MD, MPH, for their employees to reduce costs and which may have a direct and an indirect impact on the entire industry (Ross, July 9, 2018).

Amazon is moving to disrupt health care by using its existing distribution systems to enter the medical device and supply market in the United States. It has been talking to hospital executives and has tested the Amazon Business services in a large hospital system in the Midwest. Amazon Business is a separate business-to-business marketplace (www.amazonbusiness.com), currently available to support the supply-chain needs of the health-care industry (Paavola, Feb 13, 2018).

Amazon has acquired more than 10 wholesale pharmacy licenses from state pharmaceutical boards that are needed to sell medical equipment to licensed professionals and announced its acquisition of Pillpack in June 2018 (Bresnick, July 5, 2018). A recent survey by Reaction Data found that 62% of the hospital leaders support Amazon as a medical supplier (Paavola, May 15, 2018). With the continued decentralization of health-care services to outpatient facilities and the patient’s home, Amazon’s infrastructure will potentially meet future needs.

In an article on “The Future of Hospitals,” Laura Landro summarizes the basic shift from large, central acute care facilities to many specialized smaller facilities located in multiple locations. Innovative programs, such as the Hospital at Home program run by Mount Sinai Hospital in New York, bring supplies, equipment, and providers to a patient’s home rather than having them stay in the hospital. Follow-up services are available for 30 days (Landro, 2018 and mountsanai.org).

Other health-care systems, as well as payers, are focusing on keeping patients healthier, thus avoiding hospitalization. These programs target individuals with chronic diseases, such as diabetes, asthma, and heart failure, as well as working to avoid the onset of chronic conditions. Geisinger Health System serves a number of counties in Pennsylvania where there is a high incidence of Type 2 diabetes. It began working with patients in Shamokin, PA, to provide diabetes education as well as healthy food, cooking equipment, and recipes. There has been a decrease in blood-sugar levels for participating patients (Landro, 2018 and Geisinger.org).

Future potential of technology in the health-care supply chain

The impact of technology in the health-care supply chain is both direct and indirect. Access to providers will no longer be just face to face but utilize telemedicine, mobile devices connected to the Internet, remote tracking of patient conditions, and decentralization of health-care facilities. In order to serve the needs of these patients the supply chain must be able to accommodate delivery of supplies and medications to the patient’s location through the use of e-commerce as it exists today as well as drones and automated vehicles in the future.

Increased access may result in more complete data regarding patient conditions in the health-care systems EMRs. When these are combined and analyzed, the resulting clinical, operational, and administrative data may lead to better management of chronic conditions as well as care of acute illnesses. Predictive analytics, machine learning, and AI are all being used in this effort (Bresnick, July 9, 2018). This may lead to better quality outcomes and potential cost savings. It also should result in better inventory management and distribution to health-care facilities and patients.

Traditionally, the percent invested in health-care supply-chain management is lower than that in other industries. As reimbursement levels are reduced by both government and private payers, and a greater number of patients have high deductible insurance and pay for services themselves, there will be an incentive to reduce costs. Applying maturing technologies, such as inventory optimization, sensors, and automated storage and retrieval, may be utilized as well as the recognition of supply chain as a strategic asset.

The high cost of pharmaceuticals and medical devices also provides an incentive to use technology to ensure that items are kept at the appropriate temperature, can be tracked from the point of origin to use in a patient, and can be identified if recalled. Blockchain, sensors, and the IoT all may be used for transporting these items and then scanning their unique identifiers into the patient’s record.

3D printing has great potential for manufacturing medical devices for cardiology and surgery. Transportation needs would change to accommodate this new technology. There is also ongoing research to produce organs for transplant using 3D printing which would eliminate the need for human donors and the related transportation to the recipient.