Projecting Supply Expense

HCA Healthcare rises to the challenge with a new tool

With elective procedures suspended, outpatient volumes dropping and uncertainty around supply availability, supply chain and financial leaders quickly discovered when COVID hit that traditional methods for projecting supply expense were not accurate during a pandemic.

“We knew we needed a better way to project supply expense, and we couldn’t rely on historical information to do it because the new environment was just so different,” says Steve Vecchione, CFO of HCA Healthcare’s Richmond Supply Chain Consolidated Services.

After labor, supply expense is generally a healthcare system’s highest cost. Hospitals could not afford to have such a significant expense unknown and uncontrolled. “With COVID, there was such a significant impact to our patient mix that we were seeing double-digit supply expense growth, adjusted by volume,” says Dan Cleeton Jr., VP of Financial Operations for HealthTrust Supply Chain. “We needed to get ahead of that growth and address it in real time.”

A new tool of the trade

So when Todd LaCaze, CFO of HCA Healthcare’s South Atlantic Division, challenged his Supply Chain CEO Noel Hodges to find a better way to project supply expense, Hodges’ team rose to the challenge. Vecchione, in collaboration with hospital financial leaders, supply chain operators and data analytic teams across HCA Healthcare, worked to create a tool suitable for the new reality.

Generally, hospitals forecast supply expense based on historical data using supply expense and volume metrics like adjusted admissions or adjusted patient days. “But that approach didn’t take surgical volume into account. If you have sharp increases or decreases in surgical volume, it’s going to drive supply expense a lot more than the overall admissions number,” says Vecchione.

That’s why instead of using historical data, this new supply expense projection tool takes a completely different approach. It analyzes month-to-date purchase order activity—which typically accounts for about 90% of supply expense—as a leading indicator, and then forecasts current month supply expense using a rolling 12-month average of purchase order activity as a percentage of supply expense.

“This tool puts a greater emphasis on understanding what our specific product purchases were in order to project total supply spend for that month,” says Cleeton.

Not only does the projection tool allow supply chain operators to forecast supply expense, but the extensive detail it provides enables them to take action. For example, it can help answer questions like, “Does my department really need the 10 cardiovascular implants it ordered, when we only used two in the last month, or was the purchase order created incorrectly and the wrong number ordered?”

“It allows supply chain operators to review purchase orders daily to identify where they have new or inappropriate spend. They can request purchase order changes or cancellations in an effort to mitigate avoidable supply expense spend throughout the month,” explains Cleeton.

A team effort

A number of teams collaborated over many months to develop the tool. Vecchione indicates that the first step was understanding the best way to pull the data that was needed on a daily basis. He did that by working closely with approximately 15 supply chain operators.

“They would look at the data I was collecting and provide feedback. We took that feedback to figure out how to improve the tool,” Vecchione shares. This collaborative approach continued throughout the tool’s development, expanding to include hospital finance and IT development teams. One advantage of this approach was the opportunity to test and improve the tool. “It gave us some real-time quality assurance. It enabled us to understand when it didn’t work and what caused it, so we could fix it,” says Vecchione.

After about six months of iteration, Vecchione was still manually pulling the data and consolidating it into an Excel spreadsheet for supply chain operators. That’s when the South Atlantic Division pulled in IT resources led by Kendrick Miller, Decision Support Manager for HCA Healthcare’s North Florida/South Atlantic Division, to automate as much of the process as possible. “They stepped up and built it into a tool where it was nearly automated.

I mostly just had to go in and manipulate a couple of things and send it out,” says Vecchione. This was the foundation that the data analytics team, led by Stephen Ronan Sr., Financial Analyst at HCA Healthcare/HealthTrust, used to develop its final iteration as a Microsoft Power BI (business intelligence) dashboard.

“The data analytics team created something bigger than I ever thought it could be, including the addition of features that enabled our operators to see other metrics, such as the percentage of contract purchases versus non-contract purchases,” says Vecchione.

The projection tool went live in December 2020. Although it’s available for anyone within HCA Healthcare to use, Vecchione and the collaborative team are continuing the iterative approach of improving the tool over time.

Beyond the pandemic

Because of its advantages over their previous approach, Vecchione and Cleeton expect that this will be HCA Healthcare’s new way of projecting supply expense for the foreseeable future, beyond the pandemic.

“Our operators see the value in reviewing yesterday’s purchase orders to better understand their projected supply expense and being able to address inappropriate spend before it’s received at the hospital dock,” explains Cleeton.

Vecchione is also interested in applying what they’ve learned from its development and use to monitor other spend. “Is there a leading metric or an indicator that we can use to project purchased service spend more accurately, for example, or to develop algorithms that automate the identification of inappropriate spend?” he asks. “I don’t have the answers to that, but this is the foundation to advance our analytics capabilities and see how we can continue to leverage data to drive our daily behavior.”

For Vecchione, seeing HCA Healthcare’s divisions and facilities use the tool is gratifying. “The last thing you want to do is build something that doesn’t yield value. A number of colleagues have said this has both reduced the time required and simultaneously improved their ability to manage supply ordering. That is especially nice to hear,” he adds.