Flexing Market Power Trims Costs
Editor's note: This is the third in a series of articles about the Duke Procurement Initiative.
Most of us don't think much about what it takes to keep things running in the Duke system. As long as the lights glow, X-ray machines hum and elevators rise, we're content. But the bill for clinical engineering and facilities maintenance at Duke University, Duke Hospital, Durham Regional Hospital and Raleigh Community Hospital tipped $70 million last year, making it one of the three prime target areas for cost reduction in a system-wide Procurement Initiative.
"The charge of our team is look at the total expenses in facilities maintenance and clinical engineering across the university and the health system, and to develop a strategy for reducing those expenses," said Bill Martin, senior administrative director at Durham Regional Hospital. Martin has been leading his team under the direction of William J. Donelan, executive vice president of the health system. "We think we can identify savings that can help keep our expenses down as we continue to provide world class patient care."
While much of the work was done in separate groups, clinical engineering and facilities maintenance worked together as a team on issues similar to both areas, such as determining total expenses for both areas and then deciding what portion of total expenses were to be considered for reduction.
"When we talk about total expenses, these are ones we think we can affect by approaching them differently, contractually and by presenting ourselves as the university and health system, not as individual facilities or individual departments," Martin explained. "We can leverage our market power and consolidate suppliers."
The team decided that about 53 percent of last year's bill ‚ or $37 million ‚ was ripe for possible retooling. If the team's right, it may be able to trim 15 percent, or a hefty $5.5 million-6 million, from the expenses across the university and health system.
In the discovery stage of the process, which began in December, the team members tallied items used and maintained in all four institutions, tracking not only the hardware but also the service costs. As with other teams in the procurement initiative, some cost reduction opportunities waved like red flags. There were instances of one facility paying less than the others, and service contract prices varying from one facility to the next.
"Although it was not the same company (providing service), we found that Durham Regional was paying more to service 12 elevators than Duke University was paying to service 80 elevators," Martin said. "While we can now reconcile that some of those differences exist, the end point is that we can do better by consolidating our business.
"The initiative is designed to help us change how we do business."
A key to doing business differently is contracting for service and purchasing as one entity rather than as separate hospitals or departments, team members say.
"We're negotiating with vendors and say, 'Hey guys, we're one, and if you want to do business with one of us, you do business with all of us,'" explained Robert Guerry, director of medical center engineering and operations at Duke. "And that's good. Now we're a force to be reckoned with. We're always going to have multiple vendors (for the system), but we're trying to get the best service and price.
"We're not looking just for price; we're looking at total cost of ownership - things like how is the product delivered. For instance, it may be cheaper to pay more for air filters and pay a distributor to take care of all the delivery and receiving mechanisms, storage and the like. We're asking these vendors to tell us what we could do differently in the way we do business to help them lower our price. It may be that we order in larger quantities, by the case instead of individual items."
The facilities maintenance group created a "hot list" for all the general maintenance areas of items used repetitively and representing a big chunk of parts and supplies costs over the year.
"When you think about it, Duke buys 100,000 items a year, and can't buy everything in large quantities, so you target ones that make sense: 20-foot sticks of (electrical) conduit, light bulbs, filters would be on the hot list, for example," Guerry said.
Besides bulking up and buying to supply the system rather than single facilities or departments in facilities, the team says savings will come from consolidating suppliers. More than 200 different vendors had a piece of the business last year when each institution purchased its own parts and supplies.
The clinical engineering group found similar challenges. Its discovery phase tracked everything from MRI scanners to operating room equipment to heart defibrillators - anything that's of a biomedical or clinical nature, including clinical research equipment at the university, according to team member Dottie Hughes, director of radiology services at Durham Regional. "It's an astronomical amount of equipment. It became obvious to all of us, once we saw the magnitude of the equipment, that we could effect significant savings if we consolidated vendors for service," Hughes said.
As with facilities maintenance, evaluating real costs for clinical engineering is more tricky than reading a price tag, she added.
"Obviously we're interested in the price, the cost of repairing a piece of equipment, but we also have to be sure that we're not compromising quality. Down time (of medical or lab equipment) would have a real significant impact on patient care where it might not in another area," she said. "Quality of parts being used to bring equipment back on line needs to be comparable to what we've had provided in the past. We're looking at choices of in-source or comprehensive out-source agreements, or a blend of the two. To ensure the best quality and reliability and to reduce price, we may end up using a blend of the two."
Once the team had inventoried and targeted savings areas, it began working with vendors on the consolidation process. To help the system's buyers hone their skills, administrators set up a negotiating workshop for all the teams.
"It was a presentation of how you conduct negotiations and how you measure the results," Martin explained. "It's a value analysis. How do you determine that you've achieved what you want in negotiations, to help you measure your work once you leave the table and before you make a final decision?
"And the primary measurement we're looking for is in dollars," he added. Team members said that as they near their deadline for presenting recommendations, they know more work lies ahead. They view the process not as the end of the procurement initiative, but as a good start.
"The first step was trying to figure out where we are. Pulling together information from different methods of record keeping was a challenge. Do we have all the people we need to be involved, are we contacting all the vendors we should (for requests for proposals)? With everything from carpeting to bolts to air filters, should we have segregated things, made the RFP more clear?" reflected Pat McDonald, director of facilities maintenance at Raleigh Community Hospital. "I think working collectively as a team has been very, very good. When we start on future work, we have a relationship already established with team members. We're all working for the same goal."
The work of the three teams - clinical engineering and facilities maintenance, pharmacy and office supplies/equipment - to change business methods and find savings admittedly has been intense, administrators say.
"It is requiring an enormous effort up front by this team, and the other teams involved in the initiative, but ultimately it will also require the efforts of every person at Duke," said Donelan. "With the fiscal pressures we face, we cannot continue to do 'business as usual.' We must rethink our standard operating procedures and foster a new, system-wise mind-set and working relationship across the university and the health system. This is our opportunity to work together to make a difference for our future."
Requests for proposals (RFPs) went out to vendors a few weeks ago, and the team has begun sifting through responses, evaluating proposals and clarifying potential working relationships. A final report will be presented to the executive group and the operations steering committee by mid-April.
Written by Karen Hines.