STRATEGIC VALUE ANALYSIS IN HEALTHCARE

Advancing Healthcare Organizations to the Next Level of Supply Chain Savings

Value Analysis An Rx in Healthcare

By Julie Murphree, editor for Purchasing Today^®.

March 2000 Purchasing Today^®, page 55.

Value analysis (VA) has become a strategic cost reduction tool for healthcare purchasing and supply professionals in long-term and acute care facilities who use it. But, it's a well-kept secret.

Struggling with dramatically rising costs along with the rest of the healthcare industry, a prestigious 350-bed teaching hospital sought answers to cost improvement issues. Located in a bustling city in the Northeast, the hospital's purchasing and supply professionals looked to the systematic evaluation of the value of goods and services, known as value analysis, for help. In other words, they began to literally pick apart each product or service purchased to understand its inherent worth, searching for possible alterations to specifications that could reduce costs and improve the hospital's bottom line.

Long revered and used in manufacturing, the value analysis tenants of Larry Miles - known as the father of value analysis - make for good management practices in a competitive environment. In a more regulated environment, such as healthcare, the tenants have not quite taken hold. However, changes in government support of healthcare, brought about by the Balanced Budget Amendment and other legislation, have made healthcare facilities tighten cost practices in recent years. As a result, more and more healthcare purchasing and supply professionals are beginning to move toward the tried and true. Against this backdrop, the teaching hospital formed a team to implement value analysis.

The team, headed by a surgeon, was made up of both a horizontal and a vertical cross-section of department heads and managers, including an administrative vice president, a recorder, and a nurse. The hospital's purchasing manager facilitated the team. In the beginning, some team members reacted negatively, mainly due to time commitment requirements.

Beginning with evaluating the traditional 80/20 rule, the team narrowed down and selected only high-dollar purchases as the initial value analysis candidates. First on the analysis agenda: intravenous (IV) administration sets.

The hospital's expense sheet for its IV administration sets averaged more than $1 million each year. This annual expense, when compared to similar-sized hospitals, was seven times higher.

Tackling the analysis step-by-step, the group engrossed itself in "understanding" value analysis by going where the users (nurses) were. They followed nurses as they set up IVs and programmed the administration sets. The team immediately noticed that a majority of IV pumps would alarm - a consequence of old, faulty pumps. Nurses simply reprogrammed them for a temporary fix. An immediate probable cause of cost seemed to be emerging.

The project eventually cut $500,000 out of the IV sets expense item, and improved the IV administration by purchasing new pumps (from the savings proceeds). This area now saves $280,000 per year. From this one experience, the team members became champions of the value analysis process. Some have gone on to director-level positions at other hospitals spearheading their own value analysis projects.

Value analysis success stories continue to emerge in the healthcare industry. They are rare, though. Some industry estimates suggest no more than 5 percent of acute and long-term care facilities are effectively conducting value analysis. Says one value analysis expert, "Many like to claim they're conducting value analysis; however, it's usually just a shadow of the real thing." The encouraging note is that 80 percent of organizations trained in value analysis stick with such programs because of the dramatic benefits realized.

What's driving the return to a tried-and-true method of cutting costs? With an 18 to 20 percent drop in government reimbursements, acute and long-term care facilities can no longer depend on traditional revenue sources to help meet their fiscal goals.

What It Takes

Most purchasing and supply professionals suggest value analysis began with Larry Miles and the purchasing department at General Electric (GE) Corporation, just after the Second World War. Miles, with the help of an electrical engineer named Roy Fountain, developed a value analysis job plan.

Miles and Fountain convinced GE management that this was something to be used throughout the corporation. They started conducting 120-hour workshop seminars with teams from various plants in attendance. Today, the training programs have been refined to 40- to 60-hour sessions.

The key to value analysis is the functional, carefully followed approach, asserts Robert T. Yokl, healthcare consultant in Skippack, Pennsylvania.  With 15 years as a value analysis consultant working mainly in the healthcare industry, Yokl suggests that by starting with the "understanding" phase (see below), and going through the individual value analysis steps in an organized manner, one obtains the necessary information. "This is a process that should be completed on an ongoing basis. It should become a part of the culture of the organization, not a cult within it."

He and other Larry Miles converts outline the fail-safe steps of value analysis:

• Understanding Phase - Look at the product or service in a critical and careful manner.
• Investigative Phase - Follow the product or service uses, and survey and shadow customers.
• Speculation Phase - Come up with material or service alternatives to meet users' function requirements at the lowest possible cost while still seeking the greatest quality benefit.
• Analytical Phase - Develop two to three alternatives; prioritize and rank them, along with the cost of those alternatives; and then select the best one.
• Planning Phase - Pilot the project in a controlled environment to make sure the selected alternative works. In value analysis, usually several alternatives are developed, and the best one is selected by the team.
• Execution Phase - Roll out organization-wide execution.
• Follow-Up Phase - Check to see that the alternative is in use and continues to be the "best" choice.

The work on a project - done by a team with representatives from different departments - should not last more than two weeks for simple projects, to two months for more extensive value analysis projects. Information should be gathered first - this includes costs, operation sheets, specifications, and customer requirements. Then, the functions of the parts and assemblies need to be identified for a product. For a service, a detailed outline of the process flow to provide the service should be mapped. Next, come up with different, creative, and innovative ways of accomplishing the required service in a more economical way. This entire process normally can be completed in less than two weeks and, at the end, recommendations for change are made. However, it does take longer to analyze the recommendations, test them, and implement them depending on the complexity of the project.

While estimates vary, Yokl and others suggest that audited savings as a result of the value analysis process can produce great returns. Simple projects will produce small savings; more complex projects' savings can easily go from $10,000 on up.

"The struggle for successful value analysis," says Yokl, "has been in developing a strategic value analysis plan upfront. In addition to the few that do value analysis, most struggle with doing it successfully. The majority are home-grown programs that don't follow the classic model Larry Miles put together several years ago." Yokl further explains that purchasing and supply professionals must first train cross-functional stakeholders in value analysis and cost management. "Most value analysis team participants have a good understanding of cost-cutting concepts but lack 'hands-on' experience. Until purchasing and supply professionals show participants the 'how,' you're still talking in platitudes."

Healthcare purchasing and supply professionals who have effectively used value analysis swear by the strategy and believe that the industry has barely chipped away at the tiniest tip of the iceberg. "When you apply value analysis to the supply chain, you expand and broaden the cost management/containment concept for healthcare," says Scott Ferguson, vice president of corporate materials management for Covenant Health in Knoxville, Tennessee. He and others point out that initial cost concepts, such as standardization of clinical supplies and use of committed volume contracts, can help cut material and service costs by at least 10 percent. But when cost management and the use of value analysis are incorporated into the complete purchase/supply chain process, additional savings can reach as high as 50 percent.

Adds Yokl, "Driving out cost in the supply chain is a mind-set that broadens the scope of a team's efforts. [I]t involves the total life cycle of the product or service. Don't limit savings opportunity by just looking at the product or service 'for the moment,' but at its entire life cycle." An example of this would be how the hospital in the IV administration sets profile followed the life cycle of the product from manufacture to final use in order to hunt for costs to cut out.

Two Organizations' Success Stories

In the following examples, value analysis is explored in two completely different healthcare environments. In each, size, location, or management style did not prevent either from successfully pursuing value analysis. In addition, one profile instituted value analysis in its materials management process more than a year ago, while the other profile is just beginning.

An Integrated Delivery Healthcare Network: They Live by It

Covenant Health is known in the industry as an integrated delivery network. Essentially, Covenant provides all facets of care to a 16-county service area in eastern Tennessee. This includes seven acute care hospitals, a home health company, a physicians organization, long-term care facilities, and multiple ambulatory care facilities. In addition, Covenant owns a managed care company. The bulk of Covenant's business is in the acute care hospitals, although some of that is moving to non-acute care organizations.

Annually, Covenant spends $90 million for consumable supplies, and another $40 million in capital purchases. The materials management organization has a corporate staff, responsible for the purchasing function, and a materials management staff at each acute care hospital, responsible for the management and distribution of the supplies to the facility departments. Each facility materials director has a dual direct report: to his or her facility administrator and to Ferguson. To ensure synergy with corporate and all involved facilities, the directors meet with Ferguson once a month to coordinate planning, operational, and benchmarking activities.

Having achieved success in standardizing low-cost, low-tech (commodity) supplies and establishing the related committed volume contracts through its group purchasing, Covenant turned its focus to how those supplies were being used and to other more expensive supplies. Ferguson's reason for pursuing value analysis was not simply to decrease costs. He was looking for a better approach to achieve clinician and physician buy-in to purchasing decisions.

Says Ferguson, "We're now starting to tackle the high-cost, high-technology items, such as orthopedic implants. We used the 80/20 rule in understanding that these high-cost supplies account for a significant amount of our supply budget. It's common knowledge in healthcare that many of these items are controlled by physicians' preference."

If you want a total cost concept that doesn't focus just on price, then look to value analysis - so the experts say. "Value analysis is a very systematic approach to looking at what you buy and how you use it," says Ferguson. "Value analysis helps to take the emotion out of the purchasing decision."

He turned the challenge of establishing and implementing a value analysis program over to Beverly Graham, director of clinical standardization for Covenant. Given her previous experience as director of surgical services for a major urban hospital, Graham was a natural to be the value analysis champion. With assistance from a consultant, Covenant formed three teams consisting of 10 project managers per team and trained all in the appropriate use of the value analysis methodology. They reviewed a diversity of items such as pulse oximeters, orthopedic implants, patient belongings bags, incontinence products, cardiac markers, surgical scrub apparel, and forms. The annual savings for the first year of the value analysis program totaled $700,000.

Consistent with Covenant Health's focus on continuous quality improvement, the value analysis program is currently being reviewed after the first year for what went well and what can be improved upon. Important issues include the length of a project manager's term (typically the project managers are from mid-level management from across the system), member selection, proper feedback, time commitment, and adherence to value analysis steps. Says Ferguson, "Our participants are generally supportive and believe in the process once they become involved."

Of course, time management continues to be key. Project managers have significant job responsibilities, so finding time to do value analysis and run a team can be challenging. Ferguson says most participants put in five to eight hours a week on the value analysis teams.

Yokl, who helps train organizations to do value analysis effectively, says that organizations are trying to find new techniques to save time, including virtual meetings. When setting up a value analysis system that incorporates technology, organizations are also including standard questionnaires in electronic modules.

"We're ramping up for the next level," says Ferguson. "We've just scratched the surface of value analysis and we have a long way to go. Physicians and patients are our customers, so we must be sensitive to what they want and need."

For Ferguson and Covenant, the next step is further developing the information systems already in place that will support their ongoing efforts to standardize and conduct value analysis. Ferguson believes that the more integrated and aggregated their information systems are with collected data, the more streamlined the supply chain will be and the more his team can drive out cost to improve the bottom line.

When he shares advice on the value analysis process, Ferguson is earnest, but frank. "Value analysis is not easy. It's time-consuming; it's disciplined. If you have a million things to do, value analysis will be harder to commit to. Plus, just trying to integrate clinicians and physicians can consume your efforts."

He doesn't stop there. "You must see value analysis as a long-term commitment. This must be ongoing. In fact, operationalizing value analysis in your culture is key to the success of the program. If you and your organization are dedicated and committed, you can do it. But don't short-cut the value analysis steps. Follow the value analysis process. If you don't, you won't get results."

Covenant Health is first focusing on consumable supplies for value analysis projects and then considering moving to capital items and services. Ferguson seems to share his insights openly and freely, as if hoping to create a revival of an old practice. When he reviews the challenges in healthcare, you understand why. "We need to share information due to what's going on in the industry. If we're going to change things and improve the financial situation, we must prove a compelling reason for the change. Providing value-added information is the only way to do this. We can make it collaborative. Most of all, we mustn't get discouraged from all the hurdles."

Acute Care Facility: Hanging Their Hope on Value Analysis

For the new kid on the block, value analysis can look overwhelming, but Susan Millhon, director of materials management for Medical Center of Southern Indiana in Charlestown, Indiana, was eager to jump in. The biggest challenge right now is putting the finishing touches on her plan.

Millhon works for a 92-bed, rural hospital serving the Clark County, Indiana area. This acute care facility has a medical surgery floor, a skilled nursing division, and a geriatric behavior unit. Though operating at a profit today, 10 years ago the hospital was about ready to close. New management turned things around, and today the philosophy of the hospital focuses on serving the community while always improving the bottomline.

Millhon's strategy for cost management is three-pronged. She started with the traditional group purchasing opportunities including maximizing all national contract opportunities through the group purchasing organization she uses. Next, she's maximizing certain supplier relationships with a number of options including the use of consignment. But her third objective is to be fully integrated with a value analysis program for the hospital.

"In the healthcare industry, group purchasing's national contracts setup has been a lifesaver for most of us," says Millhon. "When I first started with Southern Indiana, a quick fix was to make sure we'd taken advantage of every national contract our group purchasing organization had available. With that done, the next phase was to evaluate other savings opportunities with suppliers such as consignment." She goes on to explain, however, that these efforts can only go so far. And, the impact of the Balanced Budget Amendment has made most healthcare purchasing and supply professionals realize that group purchasing can't go the next step and help support facilities' individual cost-cutting requirements. So Millhon, like Ferguson, looked to value analysis.

In healthcare for 18 years, Millhon didn't start out in materials management but in software development for two software organizations that wrote materials management software for acute care facilities. This gave her a hands-on perspective of a hospital's materials flow and just how easy it is to lose track of total costs as supplies move through the system.

"Now it's more critically important to know the exact cost of any procedure we do since once the DRG [diagnostic-related group] is set for a medical procedure and the reimbursement comes in below the actual cost, there's no going back to recapture the difference. From my evaluation of it, value analysis seems to be the best way to know exact costs," she says.

If healthcare purchasing and supply professionals can position themselves as the strategic players to get medical procedure costs to fall below DRGs, then their role becomes crucial. This is Millhon's aim.

To date, her group has figured out their step-by-step strategy for value analysis. They will be following the seven-step Miles process. By August, she hopes to have teams fully formed and chipping away at various supply costs.

"I'm excited about what value analysis can do for us," says Millhon. "Our industry has been behind the eight ball in this area." Her first target is the operating room (OR). "The OR has the most inventory and from there we can get more of a handle on our supply costs. I want our value analysis groups to be able to answer, 'Yes, we're making money on this procedure because here are the previous costs, here are the new costs after value analysis, and here are the continued savings.'"

As a result of her initial efforts, the OR is excited about participating. Her hardest sell will be the physicians. However, she believes if some physicians are assigned to the teams, they will buy into the process.

And the greatest support for her efforts in value analysis? The management team. The hospital has a healthy team environment and believes forming the value analysis teams will not be difficult.

For the Future

Bradford Kirkman-Liff, Dr.P.H., professor of healthcare management and policy in the College of Business at Arizona State University in Tempe, Arizona, provides a broad perspective on cost containment in healthcare and the key players that will make the greatest impact. "Acute and long-term care facilities need to look very carefully at how they use process guidelines and protocols," he says. "Look at the manufacturing world. If you went to Detroit and visited an automotive plant, you would not find a random group of people walking through the factory, randomly picking up parts and attaching them to a car frame. Successful auto makers have a systematic pathway for manufacturing your car."

Kirkman-Liff, who began his healthcare career working in material management and purchasing at a university teaching hospital, advocates that the same rigorous process development must take place in healthcare. But in the case of hospitals and long-term care facilities, a "clinical" pathway needs to be developed. "It should be the healthcare traffic plan, a map. Using such tools can get the patient well and out the door more quickly, better, and at reduced costs. Plus, an effective clinical pathway should allow purchasing and supply professionals in healthcare to know in advance what supply usage, material and service, and sourcing data are required."

Kirkman-Liff and others also suggest that better information systems will help the process, including the use of data warehousing.

Great opportunity exists in the healthcare profession today. And purchasing and supply professionals are at a critical juncture to become the strategic players in moving the industry from financial survival to financial success.

Value Analysis Defined

"Box page 57"

A systematic and objective evaluation of the value of a good or service, focusing on an analysis of function relative to the cost of manufacturing or providing the item or service. Value analysis provides insight into the inherent worth of the final good or service, possibly altering specification and quality requirements that could reduce costs without impairing functional suitability.

Source: Glossary of Key Purchasing Terms (2nd Edition), NAPM.

Your Value Analysis Checklist

"Box page 58"

• Through use of the 80/20 rule, determine those products and services you'll analyze first. This culls out the "big hit" potentials first.
• Form a cross-functional team composed of people who have the greatest impact on the product or service you're reviewing. Involve the affected to broaden the participation, the ideas, and the buy-in.
• Train the team in value analysis. Focus upon end goals during training such as costs, service, asset reduction, speed, use, and more.
• Closely and carefully follow the value analysis steps.
• (See main article for more notes on these steps.)
• Integrate value analysis into your ongoing processes.
• Report savings and cost reductions to senior management.