Health Care Resource Management 2000 – Key Issues

Editor’s note: This article was originally published in 2000. It is reprinted with the author’s permission. Portions of this article were adopted from BD Healthcare Consulting & Services.

Much has been written about issues that face us all at the dawn of the new millennium. The fact is, any issues we face are merely the extension of a long continuum. For healthcare resource management, the issues that began in the 1970s have continued to become more and more diverse and complicated. The basic function and responsibility of the discipline has not changed. We are still concerned with providing the correct resources at the correct location in the correct amounts and at the correct costs. Now, however, there are fewer of us and we are doing it for more sophisticated organizations. As a new decade dawns, we should pause for a moment and take a look at the issues that we will face in the coming years.

First, we will be required to know our costs at the detail level. Healthcare has been an industry that has traditionally known its costs only at the macro level. Most organizations can quickly tell you their gross operating margin or their cost per adjusted patient day or their cost per discharge, but few can tell you the detailed cost components of procedures or departmental operations.

Second, we will be required to partner with key clinical users to develop measurement indicators. Once again, knowing costs at the gross level leads to management by generalization. While that served well enough in the past, it is no longer acceptable. The sad truth, however, is that few meaningful benchmarks exist for materials management. Bearing this in mind, here are some recommended performance indicators:

Financial Indicators

1. Supply and Purchased Services Cost per CMI Adjusted Discharge: This is a global indicator. It indicates that portion of each discharge that is related to supplies and purchased services. The Case Mix Index adjustment makes the benchmark valid for comparison with other organizations. The calculation is made by dividing the total supply and purchased services (including drugs) costs by the number of Case Mix Index (CMI) Adjusted Discharges.
2. Supply Cost per CMI Adjusted Discharge: This calculation is the same as No. 1, except it factors out purchased services, becoming a pure supply cost relationship.
3. Supply Cost as a Percentage of Operating Revenue: This calculation will show the manner in which revenue is compromised by supply costs. For an organization operating at a 5% margin, $19 of every $20 is spent on operating expense. This calculation is made by dividing the total supply costs by operating revenue.
4. Supply Cost as a Percentage of Operating Expense: This calculation is similar to No. 3, except it relates to operating expense. Whenever supply costs are reduced, the effect is immediate and one for one on expenses. Therefore, expense reduction is more important than revenue enhancement.
5. Supply Cost per Adjusted Patient Day: To calculate this, total supply costs (including pharmaceuticals) is divided by total adjusted patient days.
6. Materials Management HCFA (Now CMS) Wage Adjusted Labor Cost per CMI Adjusted Discharge: This calculates materials management labor’s cost per CMI Adjusted Discharge. To calculate, materials management labor costs are divided by the total CMI Adjusted Discharges.
7. Materials Management Supply and HCFA Wage Adjusted Labor Cost per Adjusted Discharge. This is the same as No. 6, except that supply costs are also included.

Labor Indicators

8. Materials Management Labor Hours per CMI Adjusted Discharge: This measure It can display the different application of labor across members of an IDN. It is calculated by dividing materials management salary and benefits expenses by the total CMI Adjusted Discharge.
9. Materials Management HCFA Wage Adjusted Labor and Supply Cost per CMI Adjusted Discharge: This calculation shows the cost of the supply chain function. It is obtained by adding the materials management labor costs to the supply costs and dividing by the CMI Adjusted Discharge.

While there are many other benchmarks that can be developed for specific functional areas with resource management, the nine mentioned above provide good overall measurement tools – tools that can be utilized to monitor progress against supply cost containment goals. Many organizations subscribe to comparative performance services that provide information monitoring one healthcare organization’s performance against “peers” with similar operational indicators such as the number of beds, services provided, adjusted discharges, etc. The problem with these comparative services, if utilized incorrectly, is that they become punitive or defensive management tools where departments are encouraged to jump in line with best performers.

Often the best defense a manager can produce for perceived poor performance is the hackneyed phrase, “but we’re different.” The truth is that each resource management operation is different. The comparative practice services should be used as comparative numbers. Managers should learn who their “peers” are and establish communication with those healthcare organizations in their peer group to share information and operating practices.

The real key to successful benchmarking, however, is to develop an internal methodology that is agreed upon as being valid by the participants. Then benchmark(s) can then become a management tool for charting and improving performance. Once an organization begins to compare and manage against itself it has a real chance of being successful in its efforts.

Historically, most healthcare organizations have managed and reported success against the operating budget. Successful performance against budget equates to a successful year. But budgets are affected by many variables. Activity can seldom be successfully forecasted with a high degree of accuracy from year to year. Therefore, a new type of activity-based budgeting, or flex budgeting, has come into vogue in recent years. Simply stated, flex budgeting takes the ratios of costs to revenues expressed in a fixed budget and “flexes” them up or down based on key activity indicators.

The marriage of flex budgeting and internal benchmarking is the management methodology necessary to help healthcare organizations survive and prosper in these times.

Benchmarks can and will become extremely focused at minute levels of activity. They will all have on upward effect on the nine indicators mentioned above, but to develop detailed, focused benchmarks on small areas of activity will be necessary to control overall costs. Indicators should be developed by teams. In that manner they will be more viable and buy-in will be obtained at the front end. Management of costs versus the indicators can then become collaborative as opposed to defensive. Indicators can be added, subtracted or changed by the team(s) as time goes by.

Continuing with No. 10, here are some possible indicators for resource management:

Activity Indicators

10. Total Number of Contracts.
11. Percentage of Contracts Negotiated by Contracting: This is calculated by dividing the total number of contracts by the number negotiated by contracting department.
12. Contracting $ per Contracting FTE: This is calculated by dividing the total dollars negotiated by contracting by the number of FTEs associated with the function.
13. PO Lines per Purchasing FTE: This calculates the output per purchasing FTE. Total PO lines are divided by total purchasing FTEs.
14. POs per Purchasing FTE: This is the same as No. 13, except the indicator is the number of POs divided by the number of purchasing FTEs.
15. Receiving Lines per Receiving FTE: This calculates incoming receiving lines per receiving FTE. If receiving lines are recorded, this calculation will be valuable in gauging departmental productivity. Receiving lines are divided by receiving FTEs.
16. Moves per Receiving FTE: This may be difficult to calculate, but the number of moves per receiving FTE is a key activity indicator. Perhaps the only way this can be approached is by conducting a time and motion study. Moves per month would be calculated, and divided by the number of receiving FTEs.
17. Percentage Fill Rate from Key Distributors: Fill rates for key distributors will be measured, which should include the med/surg, lab, forms, office supplies, pharmaceutical and food distributors.
18. Number of Returns per Key Distributor per month. Same as above.
19. $ Returned vs. $ Purchased. Used very little, but calculates the dollars returned to key distributors vs. the total dollars purchased.
20. PAR Deliveries per Distribution FTE: Similar to #16. This can be calculated by using the PAR replenishment schedules to obtain the number of PAR replenishments per month, and dividing that number by the number of distribution FTEs.
21. Supply $ Delivered per Distribution FTE: Total supply dollars divided by distribution FTEs.
22. Inventory Turns per Materials Intensive Departments: Measurement of inventory turns in surgery, cardiac cath lab, diagnostic imaging and pharmacy. These areas comprise 80% of supply costs.
23. Inventory $ per CMI Adjusted Discharge: This will calculate the organization’s inventory investment per CMI Adjusted Discharge. It is calculated by dividing total inventory dollars by total CMI Adjusted Discharges.
24. Number of Sterilizer Loads per Central Processing FTEs: Total sterilizer loads (steam, gas, other) are divided by total processing FTEs. It is important that processing FTEs be singled out. Only those people who are involved in processing should make up the denominator.
25. Percentage of Sterilizer Utilization: This indicator shows demand on sterilizers. This is calculated by multiplying the number of sterilizers x 24 x 365 to calculate departmental capacity. Total hours that machines are in use is divided by total capacity to obtain this measurement.
26. Cost per Sterilizer Load: This is calculated by dividing departmental processing expenses (supplies and labor) by the number of sterilizer loads.
27. Case Carts pulled per FTE: This is calculated by dividing the total number of case carts pulled by the processing FTEs.
28. Cost per Case Cart pull: This is calculated by dividing the total case carts by the processing labor costs.
29. Mail Processing Cost per FTE: This is calculated by dividing departmental operating costs by the departmental FTEs.
30. Postage Cost per CMI Adjusted Discharge: Total postage cost is divided by CMI Adjusted discharges.
31. Printing and Duplicating Images per FTE: This is calculated by dividing total print shop images by print shop FTEs.
32. Total Printing, Duplicating and Forms Cost per CMI Adjusted Discharge: Total forms and printing and duplicating Costs are divided by the CMI Adjusted Discharges.
33. Number of Pounds of Linen Processed per CMI Adjusted Discharge: Total pounds processed are divided by CMI Adjusted Discharges.
34. Linen Replacement Cost per pound processed: This calculation demonstrates the linen replacement costs as a ration to pounds processed. Total linen replacement costs are divided by total pounds processed to get this ratio.
35. Total Linen Costs per CMI Adjusted Discharge: Departmental operating costs are divided by CMI Adjusted Discharges.

Department Indicators

36. Imaging Services Supply Cost per Imaging Services Procedures: This indicator calculates the departmental supply costs as a ratio to total procedures. To calculate, total supply costs are divided by total procedures.
37. Dietary Services Supply Cost per Meal: Total supply costs (food plus other supplies) are divided by total meals served.
38. Laboratory Services Supply Cost per Test: This indicator calculates the supply portion of each test. Total supply costs are divided by total tests.
39. Surgical Services Supply Cost per Surgical Services Case: This important calculation shows the total supply cost per surgical services case. This global indicator will not be as revealing as the same calculation by individual case type (a component of clinical cost management applications such as Supply Usage Evaluation) but it will show a global cost. Total costs are divided by total cases.
40. Pharmaceutical Supply Cost per CMI Adjusted Discharge: Total pharmaceutical costs are divided by CMI Adjusted discharges.
41. Cath Lab Supply Costs per Cath Lab Procedure: Total cath lab costs are divided by cath lab procedures.
42. Invoices Processed per AP FTE: This indicator measures productivity per accounts payable FTE. Total Invoices Processed are divided by the number of accounts payable FTEs.
43. Number of Open POs: This indicator ties to days in payables. Open purchase orders indicate the efficiency of the purchase process. Open purchase orders will be counted at each healthcare organization.
44. Number of Days Invoices in A/P Before Payment: Length of time that invoices wait in AP affects cash flow and discounts. It can cause payment penalties. Most healthcare organizations record this as a matter of common measurement.

Satisfaction Indicator

45. 1 through 4 rating of satisfaction with level of service from Materials via departmental interviews.

Indicators such as these can be used for internal and external comparisons. The key is to make sure that the indicators chosen are measurable and applicable to your organization. Since no two healthcare organizations do things exactly the same way, the best thing to do is select benchmarks that apply to your organization and track your performance accordingly.

Performance indicators are meant to be a management tool. As we become more and more adept at identifying costs in details, performance indicators can become a barometer by which we chart our improvements.

Afshin Fatholahi, MA, MPA, CRME, is Vice President, Support Services, at Cottage Health System, Santa Barbara, Calif.