RFIDs, bar codes and health care costs
A nonprofit hospital system is digitalizing its supply chain to lower cost and improve operational efficiency
Half of all health care spending is inside hospitals and they are facing increasing pressure from insurers and regulators to curb costs. A major source of this historically high cost has been a failure of care providers to properly measure and manage the true costs of health care. This is where digitalization of supply chain can help. A fully connected supply chain could allow organizations to run with lower inventory levels, reduce billing and shipping errors, and improve overall process efficiency. A recent report from McKinsey & Company estimates that such modernization of procurement can result in about 30% lower operating expenses and up to 75% decrease in inventory levels. So, not surprisingly, one of US’s largest nonprofit health care organizations, BJC Healthcare, is leveraging digitalization to reform its supply chain. Through a digitally connected supply chain, BJC expects to lower its average inventory by 23%.
As a starting point, BJC conducted a one-year pilot program across 3 of its 12 hospital locations. The pilot was called SupplyPlus End-to-End Supply Chain Visibility (E2ESCV) and was rolled out in partnership with Cardinal Health (a large distributor of pharmaceutical and medical products) and Cook Medical (a medical device manufacturer). A key aspect of this pilot was implementing radio frequency identifier (RFID) capability, that has been ubiquitous in the retail industry for a few decades. These RFID tags, installed on medical goods, transmit data via radio frequencies to a central database for the hospital chain. This allows the real time tracking of items being used or nearing expiry dates, and automates placing of new orders with suppliers.
The pilot program had some notable successes: (i) average 23% reduction in inventory levels; (ii) cost savings by avoiding inventory expiry; (iii) decreasing hospital staff time spent on inventory management; and (iv) more efficient flow of goods from warehouse to the patient. Since the completion of the pilot, BJC has rolled out the supply chain initiative across all its hospital sites. BJC estimates expected total inventory management cost savings of up to $68 million over 10 years. With additional benefits in patient safety due to enhanced capability of avoiding expired products, stock-outs, back logs and managing crisis / pandemics.
Additional measures that BJC should consider include expanding RFID connectivity to a broader set of its medical and non-medical supplies; analyzing historical RFID tracking data to adapt best practices across sites; and using medical items usage data to push for reimbursement reform. Firstly, digitally tracking movement of inventory items has proven to lower costs. Therefore, similar measures should be rolled out across as many hospitals supplies as possible, including office supplies, patient beds, etc. For low cost items (where the cost of a RFID tag cannot be justified), basic bar-codes and bar-code scanning capability can achieve similar results in terms of centralized tracking and automated ordering. Secondly, the historical RFID data provides an opportunity to compare medical supply usage across wards and hospitals. This creates opportunity to share learnings from one hospital with low medical supply cost to another, thereby ensuring faster diffusion of best practices across the BJC system. Lastly, visibility into movement of supplies from distributor to the patient allows for a better estimation of costs associated with each type of treatment. Armed with this level of granular data, hospitals can partner with payors to better align reimbursements with actual cost of care and find efficiencies that are beneficial for both sides.
The prospects of digitalization in hospital supply chains seem promising. However, the question about data security remains open. The first concern is around the security of information flow between the hospital and its vendors. Any breach of such data could compromise private medical information of thousands of individuals. The other issue is related to potential attacks by hackers. The WannaCry attack on UK’s NHS earlier this year led to the cancellation of 6,900 medical appointments. A similar attack on the supply chain could be disastrous for a health care system.
 McKinsey&Company report “How sourcing excellence can lower hospital costs”, p.19
 Kaplan, Robert S., Michael E. Porter, and Mark L. Frigo. “Managing Healthcare Costs and Value.” Strategic Finance 98, no. 7 (January 2017): 24–33.