Implantable devices are medical miracles. But from the supply chain executive’s perspective, they also are the source of many headaches. Due to high manufacturer margins and sloppy logistics, they remain one of the greatest opportunities for hospitals to reduce the cost of care. Jay Istvan, CEO of Suture Express – the leading specialty distributor of suture, endomechanical and other surgical supplies – believes that centralized warehousing and distribution can rationalize the implant supply chain, lower costs, and improve economics for manufacturers, hospitals, and patients.
Journal of Healthcare Contracting: It’s fair to say that most supply chain executives recognize the potential savings in clinical-preference items, such as implants. How big is the opportunity?
Jay Istvan: In the United States, medical implants consume twice the amount of spend as all med/surg products. Yet the supply chain for implants – which are predominantly distributed through manufacturers’ sales forces – is one of the most inefficient in all of U.S. industry, based on quantifiable factors such as product loss, expiration, freight expediting and inventory turns. The fact is, there is tremendous amount of waste in the current spend on surgical implants.
JHC: Can you identify some of that waste?
Istvan: Enormous amounts of inventory are used to support a relatively small amount of product usage. Large manufacturers of orthopedic implants, for example, turn their inventory fewer than three times a year. This compares to 10 to 20 turns per year for other supply categories. Add to that the cost of related supplies that sit on the shelves (and balance sheets) of hospitals, and you see the total U.S. healthcare system turns its inventory fewer than two times per year. This is capital investment, which can be better used on facilities, technology, diagnostics and infection prevention.
JHC: What’s wrong with inventory, especially in a critical category, like implants? And isn’t it true that much of that inventory is actually consigned?
Istvan: Because implant inventory is poorly tracked (a meaningful amount rides around in the trunks of sales reps’ cars), the industry suffers high rates of product loss, expiration and damage. It is not unusual for loss damage and expiration to total 8 to 12 percent of a manufacturer’s sales. That is a cost that everyone in the supply chain bears – manufacturer, hospital system, patients, payers. Despite the excess inventory, ship-ping and emergency expediting costs are rampant in most implant categories. An effective supply chain can drastically reduce the need for high-cost, last-minute transportation.
JHC: Some supply chain executives are implementing a “rep-less” model to reduce costs associated with implants. What do you think of that strategy?
Istvan: Implants are indeed associated with expensive labor. That expense can be justified when it is focused on providing clinical sup-port and improving patient outcomes. How-ever, most direct distribution models call for highly skilled sales reps to spend significant time performing lower-value logistical tasks. It is not unusual for a med-tech rep to earn $200,000 to $400,000 a year, yet spend 15 to 25 percent of his or her time managing product logistics. An effective supply chain can minimize the amount of high-value rep time consumed by logistics, and enable reps to focus where they can add the most value to the healthcare system – providing clinical support and training.
JHC: What’s the bottom line impact of the inefficiencies of today’s implant supply chain?
Istvan: High gross margins cover up a lot of sloppiness. Many manufacturers are still able to price in a way that generates gross margins of 70 to 80 percent – double or triple the margin of med/surg products. When margins are this high, manufacturers focus their efforts on getting the next sale rather than on improving the efficiency of business systems and operating processes. This motivation leads to over-utilization and high cost.
JHC: How can Suture Express – which has specialized in the distribution of suture, endomechanical, mesh and energy products – help an IDN manage surgical implant costs?
Istvan: We were founded in 1998 by a group of hospital supply chain leaders who wanted to address the poor availability of a broad selection of sutures through distributors in the U.S. healthcare system. Since that time, all of our significant business expansion has been driven by addressing unmet needs of our customers. We believe that reducing the cost of implant distribution is one of today’s biggest unmet needs.
JHC: What are some of the components of your solution to help the industry rationalize the supply chain for implants?
Istvan: We have created a program called S|Implant which has seven components:
- Suture Express manages on-site inventory at each participating hospital. (Inventory can be owned by the manufacturer, Suture Express or the hospital/IDN.) We track every SKU with a lot and serial number, to minimize the risk of expiration and to provide instant identification in the event of a recall or an FDA audit.
- We get an automated feed from either the surgical monitoring system or the facility’s inventory system, which provides a real-time usage signal (by lot and serial number). Technically, this is easy to do. Sometimes the provider’s IT firewall policies require special integration.
- We replenish the hospital with overnight delivery of new product (usually in the same shipment as its surgical supplies).
- The manufacturer replenishes the Suture Express distribution center once per week – usually by ground. (Inventory at the Suture Express distribution center may be owned by the manufacturer, Suture Express or hospital/IDN.)
- If product fails to move in one hospital but does move in other hospitals within the IDN, we can redistribute SKUs to increase inventory turns and reduce expiration.
- We provide reliable, real-time reporting by manufacturer, product, hospital, cath lab, and even clinician, if so desired. Some IDNs make this reporting available to their manufacturing suppliers as well.
- We apply rigorous analytics to forecast demand at each facility, optimizing inventory levels.
JHC: How would you respond to those who might perceive Suture Express as one more player injecting itself into the implant supply chain, driving up costs?
Istvan: I would respond by pointing out the major sources of proven savings:
- Logistical efficiency. Shipping expense drops, because Suture Express adds the implant replenishment to our regular daily shipments of surgical supplies to each hospital. And the manufacturer replaces daily overnight shipments to each hospital with one weekly ground shipment to our distribution center.
- Inventory reduction. It is true that we add one additional stocking location (the Suture Express national distribution center) to the system. However, in every pilot we have conducted, we have reduced total system inventory by 5 to 25 percent, depending on the number of hospitals in the IDN.
- Less waste, loss and expiration. Manufacturers report that by using this distribution process, product loss and expiration have been cut in half. (These typically run 5 to 10 percent in a manufacturer-direct system.)
- Accurate reporting. Both hospitals and manufacturers track and contract on share of usage data. Suture Express provides total visibility to manufacturer share for each hospital. IDNs can monitor share differences across their network. Furthermore, we provide daily data on premium product usage at each facility (and individual cath lab), allowing hospitals to identify potential “upselling” by sales reps.
- Improved productivity for manufacturers’ reps. This system almost eliminates the logistical burden on the manufacturer’s rep, allowing him or her to invest more time in high-value case support or clinical training.
JHC: Have you actually implemented your program, or are you still in the planning stages?
Istvan: Yes, we have implemented. We have pilot programs in place with the following manufacturers of cardiovascular implants (e.g., stents and catheters) and cardiac rhythm management implants (pacemakers and implantable cardioverter defibrillators): Medtronic, Boston Scientific, Abbott Vascular and St. Jude Medical. And we are designing a pilot program in orthopedics.
JHC: Early results from the pilots?
Istvan: The savings mentioned above are real and quantifiable. There is typically a 10-15 percent reduction in total system cost, which creates enough value to be shared between the hospital and the manufacturer. While a good portion of the cost reduction benefits manufacturers, hospitals have successfully negotiated additional ‘Bulk Buy’ discounts which average about 10% of the contract price. We have decreased stock-out rates in all participating hospitals. Surgeons appreciate that, as it creates less disruption and enables them to use the product they believe is most clinically important. Some hospitals are using more transparent information to encourage groups of surgeons to standardize on one or two manufacturers. This could unlock additional savings, but is not a requirement to capture the cost savings mentioned above.
Jay Istvan, CEO of Suture Express – the leading specialty distributor of suture, endomechanical and other surgical supplies – believes that centralized warehousing and distribution can rationalize the implant supply chain, lower costs, and improve economics for manufacturers, hospitals, and patients.
Istvan joined Suture Express in 2014. He brings 23 years of healthcare consulting experience and eight years of executive operating experience with The Boston Consulting Group, Bain and eLoyalty. He began his career in 1982 as a project engineer at Abbott Laboratories in the Diagnostic division.