The magnitude and impact of materials and supplies on a hospital’s finances make them incredibly important to manage and monitor.

As external forces such as looming Medicare reimbursement cuts, increased local competition and a growing uninsured population continue to impact hospital margins, it has become more important for facilities to ensure total internal operational efficiency to maximize profitability. After the salaries and wages of its personnel – the second largest expense in a hospital, accounting for approximately 30 percent of the total budget – is a facility’s supplies and materials.

Therefore, the magnitude and impact of materials and supplies on a hospital’s finances make them incredibly important to manage and monitor. Even so, there is continued opportunity for improvement. One strategy that has been identified as an avenue for improvement is implementing technology throughout the supply chain process.    

Healthcare administrators have turned to other business models, such as those in retail and the automotive industries, to help with supply chain management strategies and have borrowed universal details that have had an immediate positive impact on the hospital sector. Although supply chain initiatives are intended to increase efficiency in materials management and throughput, there are still gaps along the continuum that impact hospitals’ profits and compromise patient quality. Similar to many of the other solutions in healthcare, the answer to this supply chain quandary lies in technology.

However, offering technology as the sole answer to supply chain issues is generic, esoteric and unhelpful. Further, once an area along the supply chain is identified for improvement, administrators must determine the appropriate time for adoption and the appropriate method for return on investment (ROI) calculation.   

Finding a way to quantify a hospital’s investment in technology is about as ambiguous as determining a not-for-profit’s community benefits. With the relentless demands of the numerous stakeholders pressuring hospitals today, it is increasingly difficult for many administrators to justify the purchase of complex information systems that may have little or no observed impact on a facility’s bottom line.

One way hospitals can measure progress is through improvements in quality, which has come under increased scrutiny recently. In the last five years, sufficient data has been collected by hospitals, resulting in affirmative conclusions about technology investments. One study has even established a direct correlation between technology investment and a hospital’s quality. Yet, there is still debate about how administrators and stakeholders can accurately calculate an appropriate ROI.   

Timing can have a significant impact on a project’s success. In the 1960s, Everett Rogers developed the diffusion of innovation theory, which became the Rogers Adoption/Innovation Curve. The curve is intended to depict the various stages a piece of technology goes through in its lifecycle. In healthcare, there can be great financial advantages depending on when a facility or group invests in a piece of technology, techniques and capital.

While investment in new technologies usually comes at a premium price, it can give facilities competitive advantages over other hospitals, differentiating them and allowing them to capture more market share. The idea of a competitive advantage from early adoption is one that works well with very lucrative, profit-generating services such as radiation therapy and imaging, but does not hold true for every department or technology.

A hospital’s financial welfare also contributes to the adoption process. Rural hospitals that do not have the same volume or payer mix as other, larger urban facilities may not have the capital necessary for a new technology investment. However, smaller systems can observe a significant benefit over larger counterparts through the swifter integration of regional clusters, which offer economies of scale and communication advantages. This article is intended to look at the maximization of a hospital’s ROI as it pertains to the relationship between supply chain technology and the Rogers Adoption/Innovation Curve.

ROI and the Supply Chain
Current ROI for adopted supply chain technology can be measured in a multitude of ways. Managers can present returns through improved quality, reduced numbers in full time employees, quantitative savings and increased efficiency. Regardless, usually the return has some impact on at least two of these factors, and is therefore often understated by administrators when reported to chief personnel. 

As is widely recognized, hospitals are traditionally under pressure to maintain healthy margins. As reimbursement continues to decrease and costs rise, budgets will only continue to tighten. Therefore, it has become an even more daunting task for managers and administrators to justify an investment in new technology.    

There are a number of ways hospitals can implement new technologies. The most often utilized are through bandaging, upgrading and/or system reconstruction. Whether for a materials management department or the adoption of an electronic health record system, these three strategies describe the options that hospitals face when choosing to execute and implement new technologies:

• Bandaging – Purchasing new technologies in different areas when faced with obsolescence challenges or a potential lack of system integration. Bandaging is the worst byproduct of a facility’s technological fragmentation since it is the most expensive and confusing to adopt. Although this seems less expensive, it can increase overall costs, decrease efficiency and inhibit quality over the long term.
• Upgrading – Make upgrades with the systems as they become available. These upgrades should integrate more systems. Installing upgrades can be easy if the appropriate systems were initially invested in and established; otherwise, upgrading incompatible systems can be essentially a different form of bandaging.
• Renovating – This option is very expensive and requires a lot of personnel buy-in. This change will often impact the overall culture of the organization and will hinge on the existing culture for success.
  

Rather than depict numerous financial models that demonstrate varying levels of ROI, an exploration of the Rogers Curve will provide a means to understand the elusive relationship between supply-chain technology implementation and financial success. Developed in the 1960s, the curve is intended to depict the various stages a piece of technology goes through in its lifecycle.   

When looking at the Rogers Adopt­ion/Innovation Curve, a logical question for managers and administrators is “at what point along this curve will I observe the greatest ROI?” The answer to this complex question is not universal across all facilities, but by looking at the current offerings of supply chain technologies and historical events in supply chain technology, the appropriate time for adoption to produce the largest ROI is in the early adopters phase.   

It is a difficult task to practically determine when a hospital should invest and adopt new supply chain technology. For the purposes of this article, and its current popularity in materials management departments, we will look at radio frequency identification. Established and successfully implemented in other industries including computers with Dell and retail with Wal-Mart, RFID is in its fifth year of operation or at the beginning of the early majority stage.    

Due to the financial volatility that hospitals often experience in today’s market, it is difficult to strongly urge that facilities simply make such a large capital investment, especially when it is often higher priced than it would be if they would wait to the late majority or laggard phases. However, there are hidden long-term costs that are often not included in the end-cost when it is invested in the later phases.

These costs include the increased efficiency that the hospital can gain through investing. Further, the actual return associated with more effective supply chain technology such as the benefit of more accurately ordered supplies should go into the cost-of-implementation calculation, as well as the costs associated with bandaging, updating and renovating.    

When waiting for technology to develop, businesses lose out on the potential benefits of investing in that activity. With supply chain technology, hospitals lose out on actual savings and potential efficiencies that may be gained through the earlier adoption of materials management technology. Often, these measurements go into the ROI calculation, but are meaningless to CFOs and other chief administration due to their lack of enthusiasm for investments in expensive technologies that are not directly revenue-generating.

After analyzing the relationship between the Rogers Adoption/Innovation Curve and a supply chain technology’s ROI, we conclude that investment at the end of the early adopters phase or at the beginning of the early majority phase (initial 10 to 20 percent of a product’s life) would produce the strongest return on investment.

Avoiding Hesitation
At this point, the cost may be larger, but the efficiencies could be higher. RFID is currently in the early adoption phase, but due to facility skepticism and hesitation to invest in the appropriate labor and time necessary to implement the technology, hospitals should not be as hesitant as they currently are. Like many other practices in the hospital sector, RFID technology was not developed specifically for or used exclusively in healthcare. Following in the footsteps of other industries gives hospitals a template to work from when implementing it on their own.    

As a selling point to CFOs, the measurable savings from the technology updates and the improvement in overall hospital efficiency need to be added to the capital investment made later in the product’s cycle to get the full cost of foregoing the investment of a new piece of technology in the early stages.

Matthew Kaufman is an analyst at Nexera Inc. He is a second year master of healthcare admin­istration student at Virginia Common­wealth University in Richmond, Va. He completed the 2008 summer internship at Nexera and currently works as a market analyst in Richmond.

Salil Joshi, M.S., is senior consultant of technology at Nexera. He has several years experience in various industries managing technology projects. He has worked with several systems and applications in health care arena. He has successfully managed several technology assessments, systems implementation projects and projects involving analysis, design, and development of business processes.

Eileen O’Donnell, R.N., is vice president of operations and technology at Nexera. She is responsible for managing supply chain consulting engagements, from system-wide assessments to implementation of specific cost-reduction and clinical process improvement strategies within the healthcare industry.

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