Healthcare Utilization Management: Solving the Mystery of the Missing Inventory

I recently had a chance to interview a supply chain director from  a mid-sized hospital in New York state, that was very insightful in helping me to think about the challenge around inventory management.  The supply chain officer described the approach that was needed to think about standardization, but also about a concept called “UTILIZATION”, a term I had never encountered before in my 30 years in supply chain management.  What I learned helped me to understand why healthcare supply chains are in such a pickle today.  This gentleman told me the story of how they evolved to begin measuring utilization as a core component of flow in their system.

“The concept of utilization involves measuring whether the items scheduled to be used in a patient procedure were actually used, and whether those items were invoiced correctly to the patient in the revenue cycle.  This is where a lot of errors occur – and the waste in such cases can easily be 30-40% of stuff we buy that we never get paid for and which goes to waste!”

“When we started monitoring our utilization, we adopted a very simple chart for tracking items:  1)  Items bought, 2) Items used, and 3) Items sold to patients.  We were amazed to learn that our “bought to used” ratio was 60/40.  That is, we were only billing patients for 60% of what we were actually using in the procedure!  And it was costing us millions of dollars.”

“To get a handle on this, we settled on the two key pieces of information, as there only two things a hospital knows for sure.  How much they bought, because they got an invoice for something and they paid it.  And the second thing they should know for sure is how much they billed insurance providers for, and whether they got paid the full or partial amount for what they billed.  If there is a difference between these two figures, then you know something is wrong with the “used” part of the equation, and you better figure out where the missing items went!”

“Let’s take an example.  I purchased 100 Band-Aids, that go into the Operating Room.  And my clinical system which documents how many we used with patients shows that we used 90 of those Band-Aids.  But then my clinical Data Master shows that I only invoiced for 80 Band-Aids for reimbursements by patients or insurance.  So if I work backwards, I can see that I used 90, and there is a discrepancy.  Perhaps 20 were wasted along the way.  Or perhaps a physician didn’t follow the procedure standard, and used more then they were supposed to.  So our utilization is 80%.   Either way, I have a mystery that needs to be solved, and it drives the right actions to get to the bottom of it.”

“In many cases, poor utilization is a function of physician practices.  One of the things we do is to capture utilization by comparing the similar practices across physicians, say for a hip or spine replacement.  When we compare the cost of each procedure, it is only meaningful to do so if you are able to do a good job to ensure utilization of materials is similar across all physicians.”

Consider another example.  You buy 10 IV kits, but only 8 show up in your clinical system.  A physician requests a tray that includes four meshes and three rolls of tape.  Some physicians use four meshes, and some only use two.  It is important in this case to set a base-level utilization – which is how much I charge the patient.  If some physicians use four meshes, then the base utilization for that procedure should be at least four.  It is the clinical department’s responsibility to use all of the material they buy.  In a sense, you can “eat all that you want, but be sure to eat all that you take!”  Thus, the buying activity is my responsibility (supply chain), but the second critical responsibility is the clinical department needs to document accurately what they are using, and that they are using what they take out of inventory!  If you bought it, and documented that you used it, then you better not be cheating the system.  Some nurses feel bad for the patient, and will charge the patient for the cheaper item, but actually use the more expensive one!  This can be avoided if the data is trustworthy, and the clinical system is easy to use.  The prior example of not being able to find the item from the clinical master is a big problem that has to be eliminated, to make it as easy as possible for nurses to “do the right thing.”  The problem, of course, is that most hospitals have no visibility into their clinical systems, and so never know if they used an item or not.  And without proper controls, the 40% unused items that you purchased but never used goes into a black hole, and is ultimately eating into hospital margins that could be used to invest in new technology and greater nursing staff and hospital services.”

The critical element here is to ensure that a hospital puts in a rigorous, documents process for billing patients and tracking materials in the system.  When there is a high level of data accuracy in billing, then the inventory management part of the equation is automatically solved for free!  Accuracy in tracking products going through the system from inventory through to use and billing is critical to solving the mystery of low utilization!