My long absence from the pages of Connected World was due to an intensive round of business trips across Canada and the U.S. and a good deal of that effort was focused on understanding the challenge facing hospital group operators stemming from changes in health care insurance law and patient demographics.

The essence of this challenge has been highlighted in the recent news about Humana putting itself up for sale. Medicare reimbursement “caps” are shrinking annual revenues, which means that profits are dropping. A “cap” is the maximum amount that the government will reimburse the service provider regardless of the original billing amount. With changes in healthcare insurance law, there has been a general decrease in the amount the government will reimburse the provider. A hedge against this will be mergers and acquisitions, as increases in patient volume will, at least in the near term, compensate for the effect of this shrinkage. But remember that old business chestnut: We lose money on every deal but make it up in volume!”

Whether the hospital operators are for profit or non-profit, they are businesses, and as such have operating budgets based on some relationship between expected revenue (including what they get from Medicare) and the costs of doing business. While they are being hit hard by the reduction in reimbursement caps, they are experiencing price increases in goods and services used in patient care, and a more costly but increasingly transient workforce. These factors are driving operating costs up at the same time revenue is shrinking, forcing painful changes to be made in how the business is run.

One patient-facing strategy to optimize Medicare revenue that has been recently investigated by The Wall Street Journal and confirmed in a new study published by Health Affairs is to time-patient discharges to a “window” of opportunity after the “short stay” period has been passed, allowing the hospital to receive a larger lump sum payment intended to cover the stay of longer term patients. About 400 longer term treatment hospitals take advantage of this strategy.

If you have ever been a patient in a hospital, you no doubt are aware of the conservative nature of the doctors and patient care workers. There is more of an openness to patient dialog and a more consultative approach to treatment options, but this developed because the Internet made medical knowledge available to everyone, and the new crop of doctors and nurses who came of age along with WebMD.com are fostering an openness to change that baby boomers like me never experienced in our earlier years.

We are seeing significant change in patient engagement strategies, driven in part by competition among the healthcare providers. Patients increasingly have provider options, easily identified by resources on the Internet. We can “shop” for doctors, get ratings on their performances (as well as their groups and affiliated hospitals), and provide feedback based on our experiences that either enhance or damage their competitiveness. Back to the point why Humana is selling itself: Volume matters, and if your rating as a doctor is poor, your group will drop you; if your group rating is poor, healthcare consumers will migrate en mass; if your hospital has a poor rating you will find a group with an acceptable doctor that uses a better-rated hospital. We are getting to a point where “brand loyalty” is diminishing and social media will make a poor rating go viral. Call me crazy, but I can see a time when healthcare providers will be in a competitive mode similar to the wireless carriers.

We will also see the deployment of Augmented Reality for patient orientation applications, but that is the subject for its own report.

So let us now look at the supply chains of major hospital operators (generically) and see what changes they are facing. As it happens, what I have personally seen on my road trips has been more than adequately summed up by one of the largest logistics providers on the planet, UPS.

For the seventh consecutive year, UPS has recently released its annual “Pain in the (Supply) Chain survey results. For a good overview with a link to the UPS report, click this link to the May 21 review on RecCycleIntelligence.com.

Essentially, and not surprisingly, healthcare supply chains, specifically the one operated by the major hospital groups, are so far behind in supply chain operational efficiency, that you would need the equivalent of Dr. Who’s TARDIS time machine to find the starting point of current practices. Where retail brands in their DC (distribution centers) are scrambling to adopt bleeding edge technology, including robotics, hospital group DCs still predominantly fulfill orders with paper-based processes. It is no wonder then that with the new pressures on operating margins that payment caps have wrought, attention to improving efficiencies in the supply chain have gotten attention—and money.

If UPS is to be believed, and I do because of firsthand experience, hospital group DCs are on the back end of the supply chain technology adoption curve. Having said that, they are committed to catch up quickly and in the process, leapfrogging over older, less efficient technologies that are being eclipsed in the supply chain operations of retailers, food service and other mainstream companies.

This rapid move to technology adoption also has implications for the “smart” device makers and application developers, the most salient of which is the increase in the number of devices purchased. There are thousands of hospital group DC employees that are presently using paper and pencil for the range of DC processes starting with Receiving and ending with Shipping. Smart devices, configured as proprietary formats from major manufacturers such as Honeywell and Zebra (Motorola) or, increasingly in the years ahead, as Android platforms, are going to be introduced in large numbers to replace pen and paper, and even some of the workers. Technology introduces efficiencies and one efficiency is the reduction of the number of workers you need.

Major hospital operators are looking to find ways of moving to “Just in Time” inventory management, and major suppliers to the hospital groups such as Cardinal (http://www.cardinal.com/) and Owens & Minor are gearing up to support these initiatives.

I think the most interesting trend is the adoption the retail-store inventory management model by hospitals. Retailers that operate “brick and mortar” stores are under continuous and significant competitive pressure from Amazon to capture and keep customers that increasingly want same day delivery. A store can only do that if inventory is on the shelf when the customer walks in. Stores have limited space in the back room to hold additional inventory, and what is stored there may not be the “hot” items sold on any given day. Holding inventory has a cost as well—money is tied up in products that may take a while to be sold.

Hospitals, from an inventory management perspective, are like retailers. A “store” is typically a floor or ward, such as maternity or intensive care. Each floor has an inventory holding area, with a buffer stock. You can imagine that the inventory held in a hospital can be much more expensive than what you would find at a Gap or Old Navy store.

What retainers are now implementing are systems using smart devices like hand held scanners that can also function as a POS (point-of-sale) device (like the register in the checkout lane). Every item on sale in the store has a defined shelf location. A customer can check out with the floor clerk, or at the traditional register at the front of the store, but in either case, the inventory system has captured the fact that the item was sold and there is now one less of it on the shelf.

Hospitals are looking at doing the same thing with floor inventory. The “shelf” is typically in the storage room on the floor, the item has a bar code which can be scanned, and the floor clerk could be a nurse in the operating room, at the beside of the patient in intensive care or in the common care room of the maternity ward. Once the item is scanned, the inventory system knows that there is one less “on the shelf” on that floor. Replenishment of the store or floor inventory is therefore very specifically matched to its consumption, ensuring that just in time delivery can be planned more effectively.

In my discussions with supply chain leaders in both retail and healthcare, I repeatedly heard inventory reduction targets of 30-40% that were expected from the shift to this inventory management model. Larger hospital groups spend hundreds of millions of dollars annually for the products they inventory and use in patient care. You can do the math.

Bottomline: Wirelessly connected-smart devices, networked throughout entire supply chains, will be moving into healthcare in significant quantities in the next few years, driven by the need to reduce operating costs while not sacrificing patient care standards. Like the tip of the iceberg, all that you may see of this massive change will be the scanner that the nurse uses before handing an item to the doctor for use in your procedure. That act of scanning the item at your bedside drives productivity improvements back through the supply chain to the point where it was made. The aggregation of all of these individual scans through the course of the year, across hundreds of hospitals and thousands of clinics, makes a significant difference to the health of the enterprise.

Significant changes, indeed.

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