Burns, who despite his deep baritone voice bears more than a passing resemblance to comedian Billy Crystal, swerved into the healthcare supply chain’s fast lane last year by releasing the results of a four-year research project he conducted of the industry, analyzing and examining what worked and what didn’t and mincing no words on why.

His book, The Health Care Value Chain, critiqued modern-day supply chain management and trading relationships among hospitals, group purchasing organizations, manufacturers and distributors. Publication of the 444-page tome catapulted him onto the speaking circuit where he headlined and keynoted dozens of conferences since the book’s release.

“I wrote the book primarily for senior hospital executives because they don’t know anything about supply chain management,” Burns candidly told a crowd of materials managers at last year’s annual conference of the Association for Healthcare Resource and Materials Management (AHRMM). “They get absolutely no formal training in their health administration curriculum, regardless of their being in the business school or the school of public health or the school of health administration. Whatever they’ve learned, they’ve picked up over time informally.

“In fact, I went through a program at a top-tier school in the early-to-mid 1980s and I was never taught a thing about [the supply chain],” Burns added.

As director of the Wharton Center for Health Management and Economics and professor of healthcare systems and management at the Wharton School at the University of Pennsylvania in Philadelphia, Burns may be more of a career academician with a Ph.D. in hospital management and an MBA from the University of Chicago, but he does retain some limited experience as a hospital administrator. He spent 18 months as a junior hospital administrator in the for-profit segment with the former Hospital Corporation of America (now HCA) in Fort Worth, Texas. He also spent a year at an inner city black hospital in Chicago’s South side. All told, he’s been studying hospital management for 22 years.

Misdirected Fortune-Seeking

So where have hospital executives focused their attention? On the payers and insurance companies. Trying to leverage managed care. “That’s why we’ve had these huge multi-hospital systems develop over the last 10 years,” says Burns. “Those were all put together with one basic reason in mind: To have enough market power to extract money out of HMOs, maybe to do some direct contracting with employers or try to leverage the federal and state government in some way.”

But there’s not that much money left to squeeze out of managed care anymore, Burns notes. That’s why hospitals should look to adding value to supply chain management, effectively creating a value chain, which involves a collaborative partnership between providers and suppliers.

Unfortunately, the healthcare industry is nowhere near ready for value chain management, according to Burns. His assessment is blunt: The industry lacks coordination and strategic alliance among the players. It lacks knowledge sharing and a willingness to do it. And it lacks information about costs. “One reason there’s no knowledge sharing is that sometimes there’s no knowledge,” he notes. “There’s no data being collected about the value or costs added at each stage of the chain.” There’s too much duplication of effort across various links in the chain. Manufacturers maintain a “very definite product push mentality.” There’s no data at the point of consumption to foster a product pull mentality at the provider end. Hospitals keep “just-in-case” inventory on hand. And there’s a total lack of trust among all participants.

In short, “the word ‘partner’ really doesn’t exist in the vocabulary of supply chain players,” Burns adds. Hospitals and IDNs really haven’t reduced costs, improved care and customer service, rationalized their systems and stemmed the inflationary growth of insurance premiums, according to Burns. Most never really merged at all because medical staffs still operate independently of each other, purchasing remains fragmented and similar services are delivered in multiple facilities.

Fundamentally, many hospitals struggle with the “make vs. buy” decision, Burns says. Does the hospital or integrated delivery network serve as its own group purchasing organization or distributor or outsource those functions? “It’s the classic issue in corporate strategy that hospital systems should not be taking lightly,” he says. “Why do I say that? First off, Fortune 500 firms aren’t doing a very good job doing the ‘make vs. buy’ decision. In fact, many of the choices they’ve made are based on consultants and fads more than serious critical thinking. The same thing is true in healthcare.

“Over the last 10 years we’ve watched hospitals botch this decision,” Burns continues. “And I don’t have to look very far to see where hospitals have made the wrong choice.”

One area involves insurance. “Some hospitals thought that they could make an insurance product in-house by having an in-house HMO,” says Burns. “They lost their shirts – almost all of them.”

Another area involved the ambulatory care business and physician practices where hospitals met similar fates. In fact, Burns calls the hospitals’ delusion that they could run physician offices better than the doctors themselves “the height of hubris.” Burns channels his inner comedian and says this hospital activity spawned at least one joke making the circuit: “How do you make a small fortune on physician practice acquisition? The answer is you start with a large fortune.”

Bleak Report Card

While many have been intrigued by his frank assessment of the industry’s inefficiencies, his suggestions about the underlying causes and his recommendations for improvement, a miniscule but ever-so-slowly growing minority is starting to tire of his message. Some legitimately believe their operations are either operating at near-peak efficiency or delude themselves into thinking they’re the exception to the rule; others simply want to move forward with solutions rather than be consistently reminded of the bleak report card he offers.

Still, Burns acknowledges the lack of respect supply chain managers receive from senior management, as well as from suppliers. Materials managers are victims of a Pygmalion effect by CEOs, he says. Basically, how they treat people affects how they end up. He quoted one GPO executive, for example, as saying, “the weakest link in the supply chain is the one that does not know its own cost of doing business.”

But Burns encourages supply chain managers to communicate their impact on the bottom line and on the revenue stream to the executive suite. “Let’s be honest. Supply chain management isn’t very exciting work. It’s hard, detailed work involving a lot of dialogue and communication,” he says. “They’d much rather be doing more strategic things, you know, like mergers and acquisitions, vertical integration, diversification, hammering managed care. They’d rather trumpet the success of [supply chain management] but leave the implementation and execution to other people.”

Burns outlines a simple five-step strategy for healthcare facilities to get on track with supply chain management: 1. Identify key areas of savings; 2. Assume accountability; 3. Manage information; 4. Reduce process variability; 5. Achieve end-to-end integration.

What’s needed is fundamental top-down and bottom-up change, notes Burns. Hospitals should stop trying to change how they deal with the federal government and payers and focus on making themselves more efficient and better supply chain partners with manufacturers and distributors, he says. “Hospital CEOs have been too enamored with strategic initiatives over the years, involving HMOs and physician practices, that they’ve neglected operations. Operations may be considered a dirty term among them. But they need to forget about leveraging managed care for higher revenue margins and focus on operations.”

‘New Cadre’ Needed

Leaders need to emerge from the industry to make a commitment to operations improvement, to push for the adoption of standards like the Universal Product Number (UPN), to make an investment in materials management professionals as well as the right information technology and to explore better relationships with suppliers, says Burns.

Meanwhile, supply chain managers have to demonstrate an ability to collect clinical data and tie them to costs, products and utilization, which will help them move to a product pull mentality. Unfortunately, “hospitals have developed a ‘junk food’ diet of pricing concessions with a greater appetite for more,” adds Burns.

What the industry needs right now is a “reigning paradigm,” he says. “There’s no reigning paradigm in healthcare that really captures executives interest.” Ten years ago it was building vertically integrated delivery systems. In the mid-1990s came the merger and acquisition boom in reaction to healthcare reform, dominant managed care companies and Columbia/HCA Healthcare Corp. threatening to take over the world – all representative of a classic herd mentality.

“These have all run their course and now there’s really no grand strategy out there,” says Burns. “Some have jumped on the supply chain management bandwagon as the solution to healthcare costs and IDN profitability.”

Burns calls for a “new cadre” of materials managers who are re-trained and equipped with new skills – especially communication skills – to lead the charge and develop success stories that are well publicized for senior-level executives to notice. “You can’t predict innovative behavior and entrepreneurship. You have to allow for it,” he says. “That’s a major issue with hospital CEOs. Executives are embarassed by how little they have done about the supply costs per day. They’ve actually told me this. Executives may not want to know their costs because then they will be held accountable for them. But really, executives want to know and control them.” FM