Health Care Supply Chain Immature and Expensive Due to Lack of Data Standardization, Study Shows

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University of Arkansas researchers conducted a comprehensive survey of the American health care supply chain and reported their findings in The State of Healthcare Logistics – Cost and Quality Improvement Opportunities.

FAYETTEVILLE, Ark. – A comprehensive survey conducted by researchers at the University of Arkansas reveals that the American health care supply chain is an immature and expensive system with significant barriers to efficiency. Specifically, stakeholders – manufacturers, distributors, group purchasing organizations and providers such as hospitals, surgical centers and long-term care facilities – lack good and accurate information because they have not implemented universal standards for data, despite a recent movement in this direction.

“Right now, all manufacturers, distributors and providers do not use the same system to identify items, whether they be surgical scissors, heart monitors or cafeteria trays,” said Heather Nachtmann, associate professor of industrial engineering. “In short, the health care supply chain is starved for accurate and accessible data, which are the primary barriers to efficiency, collaboration and standardization. Perhaps, needless to say, this is an extremely expensive problem. In our survey, the average health care provider spends more than $72 million a year on supply-chain functions, nearly one-third of their annual operating budget.”

Nachtmann and Edward Pohl, also an associate professor in the department of industrial engineering, conducted the industrywide study for the university’s Center for Innovation in Healthcare Logistics and for the Association for Healthcare Resource and Materials Management, a national association for health care supply chain and materials-management professionals. The goal of the survey was to assess and describe the current state of the health care supply chain, identify inefficiencies and investigate opportunities for improvement. Their findings are important and timely as Congress considers potentially historic legislation on health care reform.

“Everyone knows health care costs are rising at an alarming rate,” Nachtmann said. “A significant cost driver is the universal complexity of the health care supply chain. We believe that health care logistics is an area in which costs can be significantly reduced and efficiencies gained to provide better and safer health care delivery at a reasonable cost.”

The health care supply chain is a network of information and logistics within the broad spectrum of U.S. health care. In addition to direct health care providers such as acute-care hospitals and long-term facilities, surgical and diagnostic centers, physicians’ clinics, pharmacies and other facilities, the health care supply chain includes laboratories, equipment manufacturers, suppliers and distributors. Group-purchasing organizations, which are businesses within the health care supply chain formed to increase purchasing or bargaining power for bulk supplies, also play an integral role in the health care supply chain.

The researchers surveyed 1,381 professionals from all major sectors of the health care supply chain. Most – more than three out of four – of the respondents worked for a health care provider. The remaining participants worked for manufacturers, distributors, group-purchasing organizations and other health care supply-chain organizations. The respondents generally had significant experience in the industry; two out of three had worked in the health care supply chain for more than 10 years, and almost half of the respondents had more than 20 years of experience in the field.

Nearly half of the respondents indicated that their organization’s supply chain was immature – with unstructured and loosely defined supply-chain management practices and no process measures in place – or “defined,” where basic supply-chain-management processes were defined and documented, and procurement and other processes went through a formal procedure. Fewer than one in 20 respondents reported that their organization operated at the “extended” level, the highest of five levels on the maturity spectrum. “Extended” means that supply-chain management and processes are routine and so well established that the transfer of responsibility among all entities within an organization is smooth and seamless. At the extended level, there is a high level of trust, collaboration and mutual dependency among all entities.

As mentioned above, lack of data standardization was the main obstacle to a mature or extended supply chain. Data standards refer to universally agreed upon and accepted representations, formats and definitions for common data ascribed to equipment, supplies and records. Data standards increase compatibility, reduce redundancy and improve exchange and efficiency. Nearly three out of four survey participants indicated that a lack of data standards is a barrier for their organization reaching an acceptable level of collaboration among health care supply-chain organizations.

Thirty-five percent of the respondents stated that their organization was moving toward the adoption of a data standards system. Importantly, the overwhelming majority of these organizations will use the same tool, the GS1 system, which includes location- and product-identification standards and a registry. The respondents reported that most of the organizations are at least marginally ready to adopt data standards. Of those manufacturers, distributors, health care providers and group-purchasing organizations moving toward adopting product identification standards, most will do so within three years.

There were other encouraging findings. The researchers found that despite the lack of standards for data, there was a high level of collaboration among the various health care supply-chain players. The respondents also reported significant existence of and active participation in strategic supply-chain improvement initiatives within their organizations.

Two out of five survey participants indicated that their organizations had attempted at least half of the initiatives suggested by the Efficient Healthcare Consumer Response report, the 1996-benchmark study that assessed the role of the supply chain in health care expenditures. Initiatives most frequently attempted improved supply-chain performance, Nachtmann said. These initiatives included inventory-management and reduction programs, an increase in electronic-commerce transactions and automation for common supply chain practices.

“It is our hope that 10 years from now people will look back at this study and attribute many of the new and innovative changes made in the health care supply chain to the opportunities identified in this report,” Nachtmann said.

The Center for Innovation in Healthcare Logistics is an industry-university partnership that leads a nationwide effort to identify and foster systemwide adoption of ground-breaking innovations in health care supply chain and logistics. The center facilitates collaboration among researchers at the University of Arkansas, health care provider organizations and industrial sponsors, including Walmart Stores, regional Blue Cross Blue Shield companies, Veterans Health Administration, the Association for Healthcare Resource & Materials Management, Procter and Gamble and IBM. The center, which began operations in May 2007, is housed at the University of Arkansas and has sustaining funding of more than $3 million for five years.

A copy of the report, titled The State of Healthcare Logistics – Cost and Quality Improvement Opportunities, may be found at the Center for Innovation in Healthcare Logistics’ Web site or at the Association for Healthcare Resource and Materials Management’s Web site. Copies of the report will be provided upon request.