Final Paper Health Care Reform 2012

Health care reform: Restructuring the Health Care Industry, and Reshaping Health
Care Supply Management

An Independent Learning Project Presented by
Michelle Christina McDonald

to
Dr. John Chittick

Faculty Advisor

in partial fulfillment of the
requirements for the degree of
Master of Management

Cambridge College
Chesapeake, Virginia Campus
Cambridge, Massachusetts
April 2012
ii

This is an unpublished Independent Learning Project
in which copyright subsists
Copyright by Michelle Christina McDonald
April 2012
All rights reserved.

Since this manuscript is not intended for publication, some of the charts, graphs, photos,
pictures, and drawings were used without permission of the authors. This copy is not for
distribution to the public.
iii
Acknowledgments
I feel truly blessed to have such a wonderful group of supporters, family, friends, and
co-workers. They all have been instrumental in the completion of this project.
To my husband, he has to pick up the slack, without complaint, and support and
understand my plight from the beginning. He stood by me when my life turned upside
down a couple years ago, thank you honey for being my rock.
To my kids, I hope that you follow in my footsteps and realize that the only thing
holding you back is, YOU! I hope that all of you find your calling in life, and follow
your dreams and aspirations (but of course with a back-up plan (wink).
To my friends, all of you have been very supportive, and I am glad that you chose
me to be in your lives.
To my co-workers and manager, during the last year I have learned so much from
each and every one of you. In particular, thank you to my director/manager. She has
been an excellent teacher and mentor, and has been an instrumental in sharing with me
her knowledge of Health Care Industry, and Health care supply chain management. To
her, I am greatly indebted.
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Abstract

In this Independent learning Project (ILP), the author discovered how the
implementations of the Health care reform Initiatives have affected the health care
industry that is continuously evolving with the newly spurred mergers, acquisitions, and
partnerships. In an effort to decrease medical costs, and conform to the new Patient
Protection and Affordable Care Act, hospital management and industry corporations are
re-evaluating current supply chain operations, and reacting to the challenges of the Health
care reform that was implemented on March 23, 2010.

Keywords: Healthcare Supply Chain Management, mergers, and acquisitions,
partnerships, healthcare reform, physician preference items, benchmarking, due diligence,
Medicare, Medicaid, consolidations, GPOs, contracting, private contracts, VHA, cost
saving strategies in healthcare, Federal Trade Commissions healthcare concerns,
transformational, healthcare cost reductions, and non-profit healthcare

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Table of Contents

Abstract ............................................................................................................................. iv
Introduction ....................................................................................................................... 1
History of Health care reform ......................................................................................... 2
Modern Health care reform ............................................................................................. 4
Literature Review ............................................................................................................. 6
Health care reform after 2010 ......................................................................................... 6
Mergers, Acquisitions, and Partnerships ...................................................................... 11
Benefits and Risks of Consolidation ............................................................................. 16
Supply Chain Management ........................................................................................... 20
Information Technology ............................................................................................... 21
Successful Consolidation .............................................................................................. 23
Health care GPOs and Benchmarking .......................................................................... 27
Summary ....................................................................................................................... 30
Methodology .................................................................................................................... 32
Data Review .................................................................................................................. 36
Survey Results: ............................................................................................................. 37
Data Analysis: ............................................................................................................... 38
Conclusion ....................................................................................................................... 42
Statement of Learning .................................................................................................... 44
Bibliography .................................................................................................................... 47
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Appendix .......................................................................................................................... 51
A. Healthcare Reform Time-Line ................................................................................ 51
B. Statistics .................................................................................................................. 53
C. LinkedIn Comments ................................................................................................ 57
D. Glossary of Abbreviations ...................................................................................... 59

Health Care Reform Restructuring the Health Care Industry
1

Introduction
With the implementation of Health care reform (which news reports now commonly
refer to as Obamacare), many small community hospitals and private practice clinics are
considering merging with larger Health Care Networks (HCNs) and Integrated Delivery
Networks (IDNs). The situation has created a need for the larger networks to thoroughly
research not only their current supply chain, but also the implications that mergers will
have on personnel, resources and vendors. Mergers, acquisitions and partnerships can
take countless months or years to completely research and ultimately implement. Many
questions go unanswered until due diligence begins, and the communication lines are
allowed to open.
Mergers and Acquisitions, Health Care, and Supply Chain management are often
very popular literary subjects, and usually are not discussed simultaneously in the
literature. Yet the supply chain is a crucial part of the Health care industry , and the
effects of consolidation not only distresses the hospitals or networks involved, but also
impacts vendors that regularly supply products and services to them.
For purposes of the discussion in this ILP, health care as two words refers to
actions by people who work in the healthcare system and by patients who receive it;
healthcare as one word refers to a system to offer, provide, and deliver health care.
Healthcare is the system used by the healthcare industry; when referring to the corporate
entity, the Healthcare Industry is the preferred spelling.

2

History of Health care reform
Throughout history, healthcare reform has been a hot issue for political candidates
and the public due to the ever-increasing cost of health care, the fear of not having access,
and the political gain that can be accomplished by saving healthcare dollars. In 1912,
President Theodore Roosevelts campaign endorsed his Progressive Partys platform that
included a national health insurance program, which began the initiative of Health care
reform in the United States. In 1932, President Franklin Roosevelt (fifth cousin to
President Theodore Roosevelt) created an advisory committee that introduced The Social
Security Act that initially proposed a national health insurance provision. Social Security
was adopted in 1935 but the law did not include the health care insurance provisions. Yet
President Roosevelt proposed during his 1944 State of the Union address that Americans
should, have the right to adequate medical care, and the opportunity to achieve, and
enjoy good health (The long, long road to national health reform (a short history), 2010).
When President Roosevelt passed away in 1945 his successor, President Harry S Truman,
continued to lobby for the healthcare insurance provisions; efforts which resulted in
grants to provide public health. Congress passed the Hospital Survey and Construction
Act (also known as the Hill-Burton Act) in 1946. The Act subsidized new hospital
construction, and required hospitals to provide charity care for those that could not afford
health care (The long, long road to national health reform (a short history), 2010). In
1948, the United Kingdoms Healthcare Service launched a similar plan for all citizens of
the U.K., the worlds first major socialized health care system (the National Health
Service) to cover all its citizens equally. It is important to note that the present
3

Obamacare debate is not about such an expansive system because many Americans
would not be covered by one government healthcare system (private choices are
allowed).
In 1962 President John F. Kennedy addressed the issue of health care for seniors, the
prototype for todays Medicare program, which was robustly opposed by commercial
insurance companies and medical professionals. In the wake of his assassination in 1963,
his successor, Lyndon B. Johnson took over the fight (The long, long road to national
health reform (a short history), 2010). In 1965, President Johnson signed the Medicare
bill into law with former President Truman by his side. Soon after the Medicare bill was
approved, Canada created its own Medicare system that is similar in key parts to both its
American counterpart and the U.K.s plan.
In 1973, President Nixon signed into law a new program to generate health
maintenance organizations or as it is commonly known today, HMOs. Later Congress
approved the Emergency Medical Treatment Act in 1986 that obligated hospitals to
screen and stabilize all emergency patients regardless of their ability to pay. The
rationale was that if federal funds were helping to finance the countrys hospital system
then wider public service was fair. In 1993, President Bill Clinton, along with his wife
Hillary Rodham Clinton, created the Managed Competition plan that would have
allowed private insurers to compete in a regulated market. This proposal (a.k.a.
Hillarycare) was heavily criticized for being too ambitious and was not passed by
Congress. However, it laid the seed that sparked the State Childrens Health Insurance
4

Program that expanded health care to poor children in low socioeconomic neighborhoods
of hard-pressed cities. The Health care reform of the 1990s focused primarily on urban
areas, including consolidating hospitals and healthcare plans to expand the referral base,
in contrast to the healthcare reform today, which is based on specialty care and rural
providers (Kiser, 2011). Health care reform legislation has created transformational
opportunities and difficulties for hospitals.
Modern Health care reform
The reform initiative is designed to not only overhaul the care delivery system, but to
address hospital tax-exempt statuses and pricing transparencies. The current U.S.
healthcare system is set up as a volume reward payment system with little or no concern
for medical outcome or re-admission. U.S. Health care cost is high while the quality of
health care is low in comparison to most other developed countries. The legislation is
designed to change the incentives from volume-based to quality-based medical care
(Mulvany, 2010).
The Center for Medicare & Medicaid Services (CMS) has already implemented a
value-based system that reduces Medicare payments to hospitals with extremely high
volumes of re-admissions that are avoidable, by reducing Hospital-Acquired Conditions
(HACs). In addition to the CMS efforts, the Secretary of the Department of Health and
Human Services (HHS) is responsible for developing a procedure for reviewing all
5

hospital performances, rewarding those hospitals that meet or exceed the guidelines that
the CMS initiates (Mulvany, 2010).
The Patient Protection and Affordable Care Acts were approved on March 30th, 2010,
and were signed into law by President Barack Obama (Patient Protection and Affordable
Care Act, 2010). This act is effective in conjunction with The Health Care and Education
Reconciliation Act or 2010. The acts not only establish the legislation that is set forth in
regards to Health care reform, but also institute the provisions, time-line and penalties
established for the Healthcare Industry as a whole (Patient Protection and Affordable
Care Act, 2010). Currently, the Health Care Reform Act is under fire (spring, 2012).
The Supreme Court is considering whether or not the federal Act is constitutional in
whole or in part. The possibility of starting over due to its possible repeal would result
in astronomical repercussions in the healthcare industry since wheels have already been
put in place and billions of dollars have been invested since the law passed in 2010
(Thomas & Abelson, 2012).

6

Literature Review
Health care reform after 2010
Health care reform is considered to be a catalyst that has spurred an increase of
consolidations in the Healthcare industry. In a recent survey of hospital leadership,
eighty-six percent of those surveyed predicted that due to Health care reform, mergers
and acquisition will increase considerably during Health care reform implementation
(Munich-Pourshadi, 2010).
Healthcare Reform is still in its infancy, and will continue to evolve as the healthcare
industry is affected and reacts to the changes.
Starting in 2013, hospitals with higher-than-projected 30-day re-admission
rates for heart attack, heart failure, and pneumonia will have all of their
inpatient Perspective Payment System (PPS) payment reduced, which will
result in an estimated payment reduction of $7.1 billion over 10 years
(Mulvany, 2010).
In 2015 the list of conditions will increase and will include many cardiac surgical
procedures, as well as vascular surgeries. Calculations will also be tabulated and posted
by the CMS, which will include all re-admission rates for chosen conditions. Health care
value-based purchasing will begin in 2013; value-based care is directed towards acute,
inpatient care at PPS hospitals. The information is now collected for conditions of this
nature by Medicare. The value-based program is funded by money saved from Medicare
adjustments (Mulvany, 2010). By 2015, the Healthcare laws will impose a pecuniary
penalty on hospitals exceeding the expected, risk-supported rates. Hospitals and/or
7

networks that make up the top 25% will see a 1% reduction in their inpatient PPS
payments, which will save Medicare nearly $1.4B within 10 years. The program will
utilize conditions that are currently part of the CMSs Hospital Corporation of America
(HCA) inpatient PPS payment policy (Patient Protection and Affordable Care Act, 2010).
In the future, the laws have the real possibility to drastically overhaul hospital care.
Pilot organizations that test combined costs and Accountable Care Organizations
(ACOs) may be able to help hospitals assume and realize financial gains. If hospitals
can work with physicians as well as post-acute providers, the partnership should not
only improve quality, but lower costs as well (Mulvany, 2010).
In 2013, a voluntary Medicare consolidated payment pilot program will begin. The
five-year program will start three days prior to hospital admission and end 30 days
after discharge, including post-acute care, physician services, inpatient care, outpatient
care, and additional services deemed necessary by the HHS secretary. Hospitals,
physicians groups, nursing facilities, and home healthcare facilities are allowed to
apply to participate (Mulvany, 2010). The initial pilot program will focus on 10 health
conditions. The conditions will consist of a blend of acute and chronic issues, surgery
cases, and medical cases where there seems to be momentous prospects to not only
vastly develop the quality of health care, but reduce cost and lessen re-admission rates
and post acute care.
In 2016, if the pilot is successful, there could be a possibility of expansion to
include more areas of health care, cost and improving quality. In addition to the HHS
8

Secretarys pilot program, there are two other pilot programs that hope to achieve
similar results, the Medicare program, and the ACO program. The Medicare pilot that
began in January of 2012 included eight states (Patient Protection and Affordable Care
Act, 2010). The ACOs pilot program is a long-term program that tests the capability
of ACOs by attempting to tie reimbursements to quality health care improvement and
cost reduction by bundling payments. Physician groups, Physician joint venture
organizations, and hospitals that employ physicians are permitted to participate in this
pilot program (Patient Protection and Affordable Care Act, 2010).
Mulvany stated that to be eligible to participate, providers must agree to the
following:
1. Become accountable for the overall care of their Medicare
beneficiaries
2. Participate for a minimum of three years
3. Have a legal structure enabling receipt and distribution of bonuses
4. Provide information on physicians practicing in the ACO
5. Have a management and leadership infrastructure in place
6. Define processes to promote evidenced-based medicine and patient
engagement
7. Meet patient-centeredness criteria determined by the HHS secretary
(Mulvany, 2010)
9

The HHS Secretary is required to set the minimum savings required by the ACO,
and establish the requirements to come eligible to earn the incentives payments.
ACOs must meet the minimum savings required for the clinical outcomes, cost of
care, patient care, caregiver perspectives/opinions of care, and deployment of care
(Mulvany, 2010).
Many hospitals have non-profit status, which is a particularly sensitive subject for
lawmakers. In March of 2010, tax-exempt hospitals came under more scrutiny, and the
government watched closely. Hospitals are now required to conduct a community
health needs assessment (once every three years), and are accountable to the IRS to
certify that they are meeting community needs. Tax-exempt hospitals are also required
to generate a fiscal assistance plan and policy that must use, reasonable efforts to
establish if a patient qualifies for charity care (Mulvany, 2010). The first assessment
was due by March 23, 2012, and if not completed on time, will result in a fine of
$50,000 to the non-compliant hospital. In addition to the assessment, the hospital is to
report to the IRS how they meet the acknowledged needs of the public. This will be a
financial statement that includes a description of the needs that must be addressed and
the reason why the needs were not addressed during the three-year period (as well a
financial audit statement of the hospitals community benefit conduct). The Department
of the Treasury will compile the results of the submissions from the hospitals to report
to Congress in regards to the charity care that is provided, and the costs associated with
the community benefits provided by the tax-exempt hospitals (Mulvany, 2010).
10

The hospitals are required to implement and advertise their fiscal assistance policy
which must: address eligibility, establish amounts charged to perspective patients for
care, provide instructions on how to apply for charity care, and institute actions that
could be taken for non-payment. Also, hospitals cannot inflate charges, and will be
required to charge the same amount regardless of insurance charges, unlike todays
billing practices that allow hospitals to over-inflate prices for those that do not have
insurance. Hospitals are also required to publicize the list of charges for all hospital
services and items provided, which will also include charges to Medicare MS-DRG.
The HHS Secretary is creating a plan that will establish reporting standards and verify
compliance (Patient Protection and Affordable Care Act, 2010). MS-DRG is the cost
allocation method that is used by Medicare to determine, the ratio of costs to charges
that are calculated for each patient (Tyson, 2010).
Hospitals that are prepared, and acknowledge the new guidelines quickly will
benefit most from the reform. Those that do not, will not only lose funding and
government support, but will be fined heavily for non-compliance. First and foremost,
hospitals must understand and study the laws and guidelines set forth in the Health
Care Reform Act. Hospitals will need to make comparisons utilizing revenue versus
cost impact to establish how it will impact the bottom line. Senior executives must
recognize exposure and opportunity and create a strategic plan to identify possible
negative impact, and acknowledge areas of opportunity (Mulvany, 2010). For many
organizations, this strategic plan may include mergers, acquisitions, and partnership
opportunities (Kiser, 2011).
11

Mergers, Acquisitions, and Partnerships
Mergers more often than not occur when organizations of the same size merge
together to become a larger organization. Acquisitions usually occur when bigger
organizations acquire smaller organizations, and partnerships involve two or more
organizations that combine their efforts to work together for a common goal (Saraan,
2008).
Many small physician groups and hospitals have joined with larger hospital networks
and IDNs. This shift has triggered a trend of mergers similar to those of the mid-1990s
during the Clinton Administrations attempt to overhaul healthcare. During the last 24
months, several hospitals have merged or signed letters of intent to merge with larger
health systems. Allan Baumgarten, a Minneapolis health care consultant stated, I would
say theres definitely a trend I see it here and in markets across the country (Kiser,
2011). Baumgarten publishes annual reviews of the health care markets in 12 states. He
also stated that, entire health systems are being absorbed, which is creating some
interesting situations; the traditional geographic boundaries in health care are eroding
(Kiser, 2011). Price Waterhouse began a series of discussions in 2010 in conjunction
with Health Leaders Media to determine the effect that Health care reform has had on the
healthcare industry, and the repercussions that have occurred (Elek, 2010). The
following advice was given to healthcare organizations:
Healthcare organizations need to begin by weighing their options for how
they will continue to fulfill their mission of care five or ten years from
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now. Assess up front whether a particular merger, acquisition, or
partnership is financially, operationally, and culturally advantageous to the
organization and the community. If the deal makes sense, recognize that
mutually advantageous deal making in todays environment requires
increased due diligence by both the buyer and the seller, and simultaneous
attention to the integrate operations. (Elek, 2010)
In the 2010 survey by Price Waterhouse, 83% of healthcare investors believed that
healthcare reform would trigger consolidation in both the healthcare and insurance
industry (Elek, 2010). Mergers are obviously not new to the healthcare industry as they
begin and change dependent on the current legislation, political gain, and government
reform. From 2002 to 2009, mergers had leveled off, but with the passage of the Health
Care Reform Act in 2010 consolidation are inevitable for smaller hospitals to stay afloat.
Eighty-six percent of hospital leaders predicted in a recent survey that they expected an
increase in acute care mergers and acquisitions (Zuckerman, 2011). There are many
trends and conditions that have began to re-structure the healthcare industry. Alan
Zuckerman, a healthcare executive and editor of Leading Your Healthcare Organization
through a Merger or Acquisition stated,
Executives will face the most challenging experiences in their healthcare
careers due to the huge number of complex issues and considerations, all
of which strain organizational leadership and involve highly sensitive
decisions given that continued economic uncertainty and other potential
13

challenges lying ahead in the wake of healthcare reform, every healthcare
organization in the country is likely to step back and reflect about whether
they might benefit by seeking new opportunity to integrate with other
healthcare organization, many will have no choice but to move from
reflection to action. (Squazzo, 2010)
In addition to mergers and acquisitions, partnerships have also scattered the health
care landscape. Late in 2011, three major healthcare networks formed a strategic
partnership called the MNS Supply Chain Network. The partnership included MedStar
Health (Columbia, MD), Novant Health (Winston, SC), and Sentara Healthcare (Norfolk,
VA). The three systems spend an aggregated $3 billion yearly on supplies and services.
The executives of the networks involved believe that with the partnership, their buying
power will result in a 2% over all savings and calculated savings of over $60 million
annually. Ed Robinson, MedStars vice president of performance improvement and
operational sustainability stated, We will be able to take the leverage between three
large systems, which generally speaking will get a lot more attention from the supplier
community. The stakes will be higher, and they will respond with more competitive
proposals (Fischer, 2011).
Last year alone, the three organizations collectively booked $12.5 billion in
revenue. The organizations combined own 32 hospitals throughout the mid-Atlantic
region. The consolidated venture was handled by VHA Inc., a Group Purchasing
14

Organization (GPO) that will act as a data intermediary between the three organizations
(Fischer, 2011).
In 2011, over 86 hospitals and healthcare systems mergers and acquisitions have
taken place. This is an increase of 12% from 2010. This increase has not gone unnoticed
by the federal government; the FTC (Federal Trade Commission) is watching very
closely to merger and acquisition transactions. The FTCs main concern is with non-
competitive mergers that resemble hostile competitors take-overs, without additional
bidders or interest given to other parties (Dunn, 2012). The FTC announced intentions to
revamping pre-merger filling requirements to try to cut down on non-competitive
transactions (Dunn, 2012).
Health care reform has completely changed the healthcare industry, as well as
industries that are dependent on it. The insurance industry has become more
consolidated; healthcare capital markets have changed; there has been a drastic increase
in expenses and decrease of reimbursements; there are more workforce shortages due to
an aging workforce; and financially strapped providers have increased.
The Insurance Industry has begun to shrink. Colossal restructuring and consolidation
have resulted in two of the largest insurance companies now having a combined market
share of over 70% in 24 of 43 states reviewed by the American Medical Association
(Zuckerman, 2011). This is creating a great imbalance and an oligopolistic insurance
landscape due to the insurance companies controlling great national and regional
15

provisions. In effect, this transformation has given the larger insurance providers
increased bargaining power in regards to contracting with providers, and gross leverage
to decrease rate increases (Zuckerman, 2011).
New technology, the need for higher quality, increased safety, and patient demands
have fueled the change in capital market needs. Only the larger hospitals and IDNs can
afford to keep up with the times and provide patients with the next best thing. Smaller
hospitals are forced to either merge with a larger hospital or network, or refer patients
outside of their network (Zuckerman, 2011).
Cost inflation has outpaced rate increases throughout the last decade. Unemployment,
non-compensation, and under compensation have increased while reimbursements have
decreased and are now capped. Patricia Tyson, Vice President of VHA LLC has
commented, The need to confront reimbursement changes providers have made
efforts to reduce cost, but this has caused a domino effect resulting in their decreasing
financial performance and ultimately financial leverage (Zuckerman, 2011). The shift to
value-based health care from volume-based healthcare is inevitable (Tyson, 2010).
An aging work force and shortages cannot keep pace with the rising volumes and
staff needed to provide care to patients. Recruitment has changed from a local
employment search to going after national and sometimes international applicants. This
shift has resulted in widening the gap even further for smaller hospitals that do not have
the financial ability to increase recruit funding (Zuckerman, 2011). New physicians tend
16

to prefer employment in larger groups that include regular work hours, staff coverage,
and leisure time availability. In addition to the fore-mentioned recruiting issues, smaller
hospitals are not being considered by new physicians because they lack the security that
they desire (Zuckerman, 2011). Wages at larger hospitals and IDNs are also much more
appealing to new physicians, and translate to a financially secure hospital.
The financial ability of a hospital is extremely important in many aspects. First and
foremost is the hospital or IDNs credit worthiness with increased strains on finances,
demand for new technology, workforce shortages, increased expenses, and healthcare
reform. Smaller hospitals are struggling to keep up. The gap is expected to widen even
more; as a result, smaller hospitals will either fail, or be forced to consolidate with a
larger more financially stable organization (Zuckerman, 2011). Smaller hospitals often
do not have the buying power of the larger hospitals and IDNs that leads to the larger
organization receiving more attractive pricing and increase revenue, versus smaller
organizations that will ultimately lose revenue (Tyson, 2010).
Benefits and Risks of Consolidation
The decision to consolidate or integrate with another organization cannot be taken
lightly. There are many factors that need to be considered, and the most successful
integrations involve not only due diligence in regards to the new partnership, but aligning
both organizations visions in regards to the integration. Quality improvement,
improved care, capital cost avoidance/access, cost reduction, access to staff/personnel
17

and expensive technology, expanding services, and revenue enhancement are all
advantages or benefits that result from integration.
Quality and safety improvements can occur when sharing best practices, clinic
protocols, implementing new technology, upgrading software, and standardizing systems
and process to improve care. Clinical feedback in regard to the needs of vulnerable
patients care can increase the collaborative effort by introducing ground breaking
delivery models and /or alternatives to current delivery methods (Zuckerman, 2011).
One of the largest expenses for any hospital is capital equipment. There is an
enormous opportunity to consolidate capital purchases for the integrated activities to
produce not only cost savings but also improves access and borrowing terms, in
particular, for the smaller hospital. In addition to the capitol opportunity, there is also
opportunity in overall cost reduction due to supply chain integration and product volume
increases (Zuckerman, 2011). That means with volume increase, it will normally result
in product cost decrease. Supply chain integration in an integral key to merger success.
The newly consolidated organization will have more access to personnel (as discussed
earlier) as well as access to more specialized technology and expensive assets. In
addition there becomes in increased opportunity to amplify savings by combining vendor
services. With an expanded network, hospitals have the possibility of meshing current
contracts, and lowering overall service contract spend for not only the smaller hospital
18

but the larger hospital or IDN. Revenue enhancement can also be realized by expanding
services, coordinating bill collection, and contracting (Zuckerman, 2011).
Some of the risk associated with mergers include loss of local control, reduction or
elimination of services, reduction or elimination of personnel, unrealistic expectation and
goals and potential loss of local/community support, Both the benefits and risk must be
taken into account when deciding whether or not to participate in any type of integration.
Smaller hospitals usually are integral parts of their communities; one of the biggest
fears for these hospitals is losing local control and ground in their community. It is
thought that larger organizations tend to be insensitive and not in tune with their
customers needs and desires. This concern can be problematic, especially in hospitals
that are heavily rooted in the community and do not want to lose their footing. In
addition, loss of philanthropic support that is connected with the pride and emotional link
associated with the community feel of hospital must also be considered (Zuckerman,
2011).
Reduction and elimination of services and personnel could also be a possibility in a
merger or integration. Services may be consolidated with the larger organizations
service plans, resulting in a negative effect on the local economy and local vendors by
either eliminating the need for service, or forcing them to take on a much smaller role in
the hospital. Unavoidably, doctors and hospital staff positions may be reduced or
eliminated due to the needs to the new organization (Zuckerman, 2011).
19

Some hospitals may look at the larger combined organization as being a savior or
hero that is going to heal all the organizations ills, and may have unrealistic
expectations of the outcome of the integration. Leaders may expect unattainable results,
and may become disappointed when aspirations are not achieved. Leaders in both
organizations may also become overwhelmed leaving the organization as a whole
unmanageable and disorganized. The result will be decreased performance and customer
service satisfaction (Zuckerman, 2011).
One of the most important factors to merging health care supply chains is successfully
consolidating and reducing cost on physician preference items. Admittance and care are
controlled by physicians; they directly impact utilization of equipment, supplies, service,
and staff (Tyson, 2010). If consolidated hospitals cannot agree on a plan of action to
control wastefulness, inconsistent or redundant behavior, cost will increase due to lack of
standardization. For example, for each surgical case admitted, tools and supplies are
required. Physicians are similar to artists who choose their preferred tools carefully
before beginning their masterpiece (Goodroe, 2010). This wide disparity ultimately will
drive up cost, even in the most efficient hospitals, and is increasingly made more difficult
when combining two or more organizations that have specific physician preference items
already established for their particular organization (Goodroe, 2010).
Many organizations may delay merging or be acquired at the last minute, essentially
treading water to stay afloat, while others will choose to be more proactive and conduct
the research necessary to forge a strong partnership. Either way, the most important part
20

of the whole transaction should be the shared vision of the combining organizations as
well as discovering what the partnership will accomplish.
Supply Chain Management
There are many key areas to consider when analyzing consolidation of the supply
chain. Inventory management, order management, procurement, logistics, supply chain
planning, and return/recall management must be considered. Inventory management
keeps the optimum stock levels needed for the hospitals products needed to be available
and in stock at all times (Unknown, Top 15 Supply Chain Management Software
Vendors REVEALED, 2011). While many large hospitals and IDNs distribute to their
network hospitals, some smaller hospitals set up JIT (Just in Time) contracts with
vendors to deliver Par level items (Items split by departmental orders) to the hospital at
particular intervals throughout the day or week. This will cut down on inventory required
on hand, but can increase overhead cost to the hospital as a percentage on overall
spending on products delivered. Purchase orders are placed continuously throughout all
hospital systems, small or large by departments. The orders are then placed by
purchasing staff, and authorized by the established approval matrix. Order management
usually includes automated order entry, supplier scheduling, pricing, and product
information (Unknown, Top 15 Supply Chain Management Software Vendors
REVEALED, 2011). Not all orders placed are purchased under a contract or purchasing
agreement. Those items that are purchased outside of contracted agreements should be
reviewed and considered during possible contract implementation or review to add to
21

existing contracts with vendors. It is important that purchasing and accounts payable
software is integrated in the order placement software, to ensure invoices are paid
correctly and on time.
Logistics includes warehouse management, transportation and distribution channel
coordination (Unknown, Top 15 Supply Chain Management Software Vendors
REVEALED, 2011). Transportation and distribution channels may be completely
different dependent on geographic placement and whether or not there is a JIT system in
place.
Returns and recall management encompasses items that are defective or recalled.
There are several different programs that offer assistance in detecting defective products
and recalled products that effect supply chain operation. It is extremely important that
records are kept on all products to ensure that when products are deemed defective, or
recalled by the vendor or the government, there is an accurate tracking system to remove
items from the shelves, and replace them with a comparable, non-defective or recalled
substitute item.

Information Technology
Todays Supply Chain Managers rely heavily on Supply Chain Management Software
to streamline operations, and maintain efficiency.
An efficient and agile supply chain is critical to success. Companies must
be able to quickly respond to the rapidly changing needs of customers,
while keeping the cost of goods produced down to increase profit margins
22

and ensure maximum profitability. Supply Chain management (SCM)
software can help business achieve this by enabling them to better predict
demand trends, negotiate the best possible deals with suppliers, optimize
inventory levels, and better coordinate distribution channels (Unknown,
Top 15 Supply Chain Management Software Vendors REVEALED,
2011).

Thorough research of the supply chain needs and capabilities must be completed before
choosing a software application for Supply Chain Management. Healthcares rapid and
changing intricate supply chain demands may require a large investment in Information
Technology (IT) in order to keep up the pace (Barlow, 2011). Smaller hospitals usually
have thousands of line items to administer, while larger hospitals and IDNs have tens of
thousands of line items to manage. During mergers and acquisitions, information
technology is paramount. Coordinating information sharing, setting up integration
crosswalks, and developing solutions for IT problems will be instrumental to the success
of the new partnership. Solutions may be needed to fully integrate supply chain software
functions that may include a cloud or central database for a fully integrated supply
chain approach. Full integration of the supply chains software will be used to measure
and achieve the goals of the combined organization, which should improve quality and
operating efficiencies, and allow for full view of contracts, pricing, and all logistics
(Unknown, Top 15 Supply Chain Management Software Vendors REVEALED, 2011).
23

Successful Consolidation
There are two key elements associated with successful consolidation in todays health
care environment. The first key element is accumulating data to uncover where waste
exists, and the second is allowing physicians to increase clinical quality while using the
data compiled to decrease costs while aligning the hospitals and physicians priorities
(Goodroe, 2010). This can be a daunting task, especially if the success of the merger is
based on the savings of the supply chain. Benchmarking is a very important tool in the
supply chain managers toolbox. By accessing national data benchmarking, hospitals can
analyze the diverse physician preference patterns, identify waste, and opportunities for
cost savings (Goodroe, 2010). In addition to benchmarking, a detailed analysis including
cost each day per patient, supply costs per adjusted patient discharge cost per case
(Tyson, 2010) means if the patient stayed longer, there is a cost increase; shorter supply,
a cost decrease.

24

The following is a chart of the top 4 MS-DRGS and the annual case cost, and loss per
year: on pgs. 29-30

Table 1
Source: Preparing for the new landscape of payment reform Patricia Tyson

In the above table, it is clear that the average cost is less than the payment received
from Medicare to cover procedures. It is important for hospitals to undertake
partnerships with physicians and personnel to assess all steps needed clinically and
appropriateness dependent on procedure (Tyson, 2010). By engaging physicians and
involving them in the education on the clinical implications, and the expenditure
legislation involved with the implementation of The Health Care Reform Act, they will
become aware of their role, and the hospitals role in ensuring that their hospital is not
penalized for not complying with the guidelines of the act (Tyson, 2010). Eventually,
Procedure
Average
Cost
Average Paid by
Medicare
Loss per
Procedure Annual Loss
Major Joint Replacement $19978 $16152 $-3826 $-1637528
Hip and Femur Procedures $18074 $14232 $-3842 $-456300
Simple Pneumonia and
Pleurisy $9889 $8271 $-1618 $-614840
Nutritional and Metabolic
disorders $10455 $7095 $-3360 $-483840
25

hospitals, and ultimately physicians will be held accountable for excess spending, and
penalized for using products for procedures that are not standardized or contain non-value
added waste. As annotated in Table 1 above, if cost exceeds payment from insurance
agencies, then the hospitals will not only lose revenue, but they will pay a penalty for not
performing to the standards set forth by the Health Care Reform Act. Some of the key
ways to realize the savings during a merger, consolidation, or partnership is to make the
most of the newly combined purchasing power that results from the unification. This
can be achieved by re-negotiating more aggressive contracts with vendors, using
increased spend and industry benchmarking tools as leverage for decreased pricing,
making an increased effort to standardize physician preferences items, and re-negotiating
current service contracts (Tyson, 2010).
Many vendors are reluctant to reduce pricing, while some will automatically
acknowledge the consolidation. In both cases, there are ramifications and difficulties that
can arise. If vendors are slow to implement reduced pricing, savings will take longer to
accomplish. On the flip side, if vendors move too fast, jumping the gun can cause
extreme invoice discrepancies, mass confusion, and possibly increased pricing. In order
to synchronize a smooth transition, the supply chain must have a plan of implementation
and strategy that not only involves the supply chain professionals, but the vendors as
well.
Vendors are aware that the consolidations merging supply chains have an effect on
their sales strategy. In an article published in January of 2012, author Janet Spirer, co-
founder of Sales Horizon Sales, remarked that the landscape of sales is changing with the
26

increase of mergers and acquisitions (Spirer, 2012). She urges medical sales
professionals to take steps reduce duplication, capture larger market shares, improve
negotiation positions, and obtain a better bond rating (meaning that increasing sales to a
more secure hospital will increase credit worthiness of the company) (Spirer, 2012).
Hospitals are often located in different sales territories, states, or jurisdictions; this
becomes a problem for local vendor representatives due to sales tracings and credit for
sales. Spirer suggests that companies should be open to exploring the use of the national
account sales model. This model will allow vendors to develop a relationship with the
organization, and secure sales across the companys portfolio (Spirer, 2012).
Translating clinical value into economic value with doctors is also important. Doctors
need to not only know the clinical aspects of the products, but the business or financial
impact of the products on their organizations (Spirer, 2012). Cost reduction will require
strategic planning and re-thinking entire processes (Goldstein, 2010). Dale Locklair, vice
president of procurement and construction for McLeod Health stated the following:
In the battle to reduce costs, many healthcare organizations have
mistakenly focused on lowering the price of goods as the primary means
of creating value, but consider, for example, that products used in giving
an IV infusion may be the cheapest products available, but also may
contribute to elevated occurrences of costly and potentially deadly blood
stream infections. Its evident that we need to shift our thoughts from
price to value. We are working to measure cost in correlation with
27

outcome for both the physical health of our patients, and the financial
health of our organization. (Smith, 2011)

If physicians are involved in the evolution, and are fully educated in the implications of
the Health Care Reform Act, they will be more willing to standardize or re-evaluate
current practices and champion cutting costs themselves (Goldstein, 2010).
Standardization combined with industry benchmarking should result in increased profit
and less supply cost. There are two standard types of product contracts: they are GPO
(Group Purchase Organizations) contracts, and private or local contracts. Approximately
96% of acute care hospitals utilize Healthcare GPOs, and nearly 72% of the purchases
made are contracted through a GPO (Unknown, Wikepedia, 2012).

Health care GPOs and Benchmarking
A GPO aggregates the purchasing volume of its members for various goods and
services and develops contracts with suppliers through which members may buy at
group price and terms if they choose to. GPOs typically provide contracted
discounts on medical supplies, nutrition, pharmacy and laboratory. There several
different types of Healthcare GPOs, and help can be packed many different ways,
and provide contracted discounts on medical supplies, nutrition, pharmacy, and
laboratory (Unknown, Wikepedia, 2012).

28

One of the services often offered by larger GPOs is benchmarking. Benchmarking allows
member of the GPO to view what other GPO member hospitals of their size are paying
for products. The view is blind meaning that they have view of the products and
pricing dependent on purchase aggregation or tiers, but not a view of the organization
that is receiving the pricing. Hospitals and IDNs can use this information as a
negotiating tool for analysis and contract negotiation with vendors. The more aggregated
spend of a product or category of products, the more purchase power the hospital has, and
the higher tier they can achieve. By adding new hospitals to their organization, their
overall spending can increase on a product, or line of products and can ultimately mean in
increase in their tier, reducing pricing. There are many companies that offer Health care
GPO services. The top Health care GPOs, based on Adjusted Present Value (APV), are
MedAssets, Premier Inc., and Novation LLC. MedAssets APV is worth over 45B
dollars, Premier Inc. APV is valued at 43B dollars, and Novation is not far behind with
40.1B APV (Unknown, GPO Facts and Figures, 2012). Healthcare supply chains rely on
GPO contracts for many products, but they also may have the option to pursue private or
local contracts with vendors if both parties can come to agreement on contractual terms
and conditions, and both parties find benefit in a private agreement. This agreement
usually cannot be disclosed to GPOs, therefore it is not available for others to use as a
benchmarking tool. Vendors often attempt to include contractual stipulations of non-
disclosure pricing in agreements or contracts, as well as cancel their GPO relationship to
avoid GPO price benchmarking possibilities.
29

In February of 2011, one the nations top device suppliers severed their GPO
relationship with two of the top Health care GPO services, Novation LLC and Premier
Inc. This caused quite a disruption in the Healthcare Material Management community.
In a letter to Medtronic, Novation LLC expressed their extreme disappointment in
Medtronic, and the actions they took bear (Unknown, Does Medtronic action signal a
shift?, 2011), and 16 major health systems supply chain executives signed the letter in
agreement. Premier Inc. referred comments to the Health Industry Group Purchasing
Association (HIGPA) that stated, Medtronics decision puts greed ahead of patients, and
is nothing short of an attack on Americans hospitals. Without the ability to benchmark,
hospitals would be left to negotiate with device makers that will now be able to charge
whatever local markets will bear (Unknown, Does Medtronic action signal a shift?,
2011). Due to this action by Medtronic, many healthcare industry professionals worried
that more suppliers would follow suit, and opt out of GPO contracts. Some vendors, and
larger IDNs and hospital networks question the fees charged by GPOs and if their
organizations will benefit from belonging to a GPO. Vendors pay fees to the GPO when
customers purchase through GPO contracts with the implementation of the Healthcare
Reform Act, they will be required to also pay a 2.3% federal device tax. A sensible
solution to vendors like Medtronic, is to eliminate GPO fees in order to help absorb the
additional taxes that will be required by the government in 2013 (Unknown, Does
Medtronic action signal a shift?, 2011). Larger IDNs and hospital networks have
enormous purchasing power and leverage due to spend. Many IDNs and hospital
networks have outgrown their GPO tier structures, and may believe that private contracts
30

may be more beneficial to the organization as a whole. Others may decide to form a
partnership, as did the three hospital networks in the mid-Atlantic region discussed
earlier. One of the differences between this partnership, and a private contract is that the
pricing may still be available for benchmarking, while a private or local contract would
not. In addition to the fore-mentioned ways to reduce pricing, if hospital systems can
compromise and agree on standardization of products, even greater savings can be
accomplished (Unknown, Does Medtronic action signal a shift?, 2011). Adoption of
organization-wide standardization, based on a unified information technology platform,
will both add to the bottom line and make future mergers and acquisitions easier to
implement (Goldstein, 2010).

Summary
With the enactment of the Health Care Reform Act many changes occurred
throughout the Health care industry , and those industries that support it. If The Health
Care Reform Act is kept as it is today, there will be many changes yet to come.
Throughout history, Health care reform has played a major part in political campaigns,
and considering that 2012 is an election year, it will no doubt play a large part in the
presidential election.
Many authors cited believe that Health care reform is needed, and have warned those
in the industry that preparation is the key to a successful transition (Mulvany, 2010).
Whether or not the Health Care Reform Act is repealed, many also believe that the
31

wheels are already in place to create a more efficient, cost conscious Health care industry
(Thomas & Abelson, 2012).

32

Methodology
In an effort to gain more insight and knowledge into Healthcare industry and healthcare
materials management, the author uncovered that the Healthcare Reform Act had
significantly changed the landscape of the Healthcare industry. Before initiating this
project, the author knew absolutely nothing about healthcare materials management, and
was extremely thirsty for information.
The author collected data from many different sources, including websites, books,
publications, magazines, and journals. In the beginning of the research, the key words
used were: Healthcare Supply Chain Management, mergers, and acquisitions. Through
further research and discovery, the author realized there was much more involved, and
expanded the key words list to also include: partnerships, healthcare reform, physician
preference items, benchmarking, due diligence, Medicare, Medicaid, consolidations,
GPOs, contracting, private contracts, VHA, cost saving strategies in healthcare, Federal
Trade Commissions healthcare concerns, transformational, healthcare cost reductions,
and non-profit healthcare.
The sources chosen are greatly diversified and include industry professionals, case
studies completed by reputable healthcare organization leaders, federal government
official court documents, and healthcare industry professional insight.
The author chose to organize a survey to accomplish a blind analysis of actual
perceptions of survey participants due to the sensitive political nature of the subject. The
author also felt that healthcare professionals and industry experts would most relate to the
33

questions compiled as a result of the research gathered on the subject. Having insider
knowledge in regards to the healthcare industry and firsthand knowledge of healthcare
supply chains would also benefit survey participants in accurately expressing their
opinions in regards to the survey questions. The author chose to use Facebook, and
Linked-In networks to publish the survey links for participant. The author is a member of
various Healthcare Executive Networks and Healthcare Supply Networks sponsored by
Linked-In: www.linkedin.com.
The tool used to create the survey is Survey Gizmo at www.surveygizmo.com. The
author opened a free student account that enables survey creation, various posting tools,
data analysis, and data consolidation tools. The questions were developed in order to
capture the strong opinions of the survey samples, and did not allow for additional
statements or comments. The author did collect statements that resulted from the survey
that were posted as comments to the posting of the survey, but were not included in the
body of the survey form (comments can be found in Appendix C).
The questions were developed in conjunction with the subjects found to be important in
the research, to get a better understanding on the true opinions of the professionals that
participated in the survey.

34

The survey questions and available answers are as follows (Available Selection: Yes,
No, Maybe, I dont know).
Health care reforms Impact on Materials Management
1) Do you feel that that Health care reform has changed the health care industry already?
2) Has your organization been greatly affected by mergers, acquisitions or new
partnerships in the last year?
3) Do you feel Healthcare reform is necessary?
4) Are you familiar with the Healthcare reform initiatives?
5) Do you feel that your organization is prepared for the Healthcare initiatives set forth
the Healthcare act?
6) Does your organization have an organized time line regards to the Healthcare
initiatives?
7) Are you employed in Materials Management/Logistics, or work closely with Materials
Management at your organization
Available Selection: Yes, No, Work Closely
8) Do you feel that Physician Preference Item (PPI) have driven the need for Healthcare
Reform?
35

9) Given that supply chain is where most initial savings is found during mergers,
acquisitions and/or partnerships, do you believe that it should be looked at with more
scrutiny and thoroughly researched before finishing due diligence?
10) Do you believe Healthcare reform should be rescinded?

36

Data Review
The author received a healthy 113 responses from the survey posted on two sites:
www.facebook.com and www.linkedin.com. Two responses were generated from
www.facebook.com, and 111 were generated from www.linkedin.com. At first the
responses were sporadic, but the author believes that due to renewed interest in this
subject in the media and political campaigns, and good timing in reposting the survey,
these factors helped in generating more interest. The survey was posted three times on
each site. The survey was posted for the first time on December 15
th
, 2011, the second
time on January 11
th
, 2012, and the third time on March 30
th
, 2011. The first post
generated 12 responses. The second post generated 17 responses, and the third post
generated 84 responses (at the height of the Supreme Court news).
The author believes that the third posts extraordinary amount of responses was a
direct result of the current newsworthiness of the subject of Health care reform. On
March 30
th
, 2012 Congress held a special session to discuss the Health Care Reform Act,
and determine the constitutionality of the Act.

37

Survey Results:
1 Answer

6 Answer

Yes 77.90% 88

Yes 44.20% 50

No 8% 9

No 33.60% 38

Maybe 9.70% 11

Maybe 7.10% 8

I don't know 4.40% 5

I don't
know 15% 17
2 Answer

7 Answer

Yes 44.20% 50

Yes 73.50% 83

No 50.40% 57

No 20.40% 23

Maybe 1.80% 2

Work
Closely 6.20% 7


3 Answer

8 Answer

Yes 79.60% 90

Yes 31.90% 36

No 4.40% 5

No 34.50% 39

Maybe 15.90% 18

Maybe 21.20% 24

I don't know 0% 0

I don't
know 12.40% 14
4 Answer

9 Answer

Yes 80.50% 91

Yes 83.20% 94

No 6.20% 7

No 4.40% 5

Maybe 13.30% 15

Maybe 10.60% 12

Not
applicable 0% 0

I don't
know 1.80% 2
5 Answer

10 Answer

Yes 30.10% 34

Yes 32.70% 37

No 34.50% 39

No 49.60% 56

Maybe 30.10% 34

Maybe 13.30% 15


I don't
know 4.40% 5

38

Data Analysis:
Change: Question 1 asked if survey subjects felt that Health care reform had changed
the health care industry already. The results revealed that 88 out of the 113 participants
believed that the healthcare industry had already changed due to healthcare care reform.
Almost in parallel with this finding, Question 3 asked if the survey participants felt that
Health care reform was necessary, 90 of 113 respondents agreed that it is necessary.
Comparing the survey questions, the author concludes that the respondents believe that
the Health Care Reform Act has already begun to affect the Healthcare Industry, and a
significant amount of the responders believe that Healthcare Reform is necessary.

Mergers, acquisitions and partnerships: Question 2 asked respondents if they had
been greatly affected by mergers, acquisitions, and partnerships. The results from this
question were nearly split in half. Of the respondents 50 believed that they had been
affected by some type of consolidation or partnership, while 57 said they had not. If the
author was to use this as a representation of the healthcare industry as a whole, this would
translate to nearly 50% of the industry being affected by mergers, acquisitions, and
partnerships.

Necessity: Question 3 asked if respondents felt if Health care reform was necessary.
The respondents overwhelmingly agreed that reform was necessary. Nearly 90 of the 113
respondents felt it was necessary; five did not feel it was necessary, and 18 believed it
might be necessary. This question is in direct competition with Question 10, which asks
39

the respondents if they believe Health care reform should be rescinded. The author was
surprised in regards to the answer to Question 10, due to the answers posted for question
3. Question 10 resulted in 37 out of the 113 respondents answering No; 37 responded
Yes; 15 responded Maybe; and five responded I dont know. Due to the positive
response in regards to the support of the Health Care Reform Act and the split response to
rescind Health care reform, the author made the deduction that Health care reform is
wanted by many, but not in the form it is today by some respondents.

Familiar with Initiatives: Question 4 asked if respondents are familiar with Healthcare
Reform Initiatives. A strong majority of 91 of the 113 participants were familiar with the
initiative, 15 thought that they may know the initiative, while only seven stated that they
did not know or were not familiar with the initiatives. In comparison with Question 7, 90
of the participants are employed in Materials Management/Logistics or work closely with
Materials Management. The author believes that there is a direct correlation between
those that work in Materials Management and those that do not in regard to the
Healthcare Reform Initiatives and their knowledge of them. Materials Management
personnel seem to be more directly involved with the implications.

Preparation: Question 5 asks respondents if they believe that their organization is
prepared for the Healthcare Initiatives set forth in the Health Care Reform Act. Of the
respondents, 39 out of 113 answered No, 34 answered Yes, 34 answered maybe, and six
answered I dont know. This translates to only 34 out of 113 that are confident that
40

their organization is ready for Health care reform, even though it has already begun.
Question 6 asked if they believed that their organizations had a timeline in regard to the
health care initiatives. Slightly less than half or 50 out of 113 stated Yes, 38 stated No,
eight stated Maybe, and 17 stated they did not know. If it is understood that Health care
reform has begun, and only 35 out of 113 organizations are ready for it; and only 50 out
of 113 are aware of the full implications and timeline of health reform, then there are
many organizations that are definitely not ready for Health care reform.

Physician Preference Items: Question 8 focused on Physician Preference Items (PPI)
and whether or not they have driven the need for healthcare reform. The author was
surprised that the responses were so split: 39 out of 113 stated No, 36 out of 113 stated
Yes, 24 stated Maybe, and 14 stated I dont know. Even though the results were
divided, there does seem to be some question to whether or not these items influence
increased costs in the Supply Chain. The Maybe and I dont know categories make a
combined total of 38 respondents that are really not sure if these items influenced the
need for healthcare reform.

Supply Chain Importance: In Question 9, the respondents are asked if the supply chain
is where most initial savings are found during mergers, acquisitions, and partnerships, do
they believe that it should be looked at with more scrutiny and thoroughly researched
before finishing due diligence? This question generated the most responses for a single
response than any other in the survey: 94 of the 113 respondents answered Yes to this
41

question, only five responded No, 12 answered Maybe, and two answered I dont
know. To the author, this near unanimous opinion makes a statement to those that are
initiating the deals. The Supply Chain is often an after-thought, after the merger or
after consolidation begins, and then the real work begins, even though most of the money
sought after is money that can be generated from Supply Chain saving initiatives.

Rescind or not?: Question 10 asked participants if they believed that Healthcare reform
should be rescinded. This question is one of the most contentious questions in the whole
survey at this very moment in time (spring 2012) due to the Congressional debate to
possible rescind the Health Care Reform Act and the intense passion on both sides of the
Obamacare debate: 56 out of 113 answered No, 37 answered Yes, 15 said Maybe, and
five answered I dont know. While slightly more than half want to keep it, those that
wanted to definitely repeal it (with the Maybes), the author believes that many do believe
that there is still a need for Health care reform, just not the Health care reform that
currently exists.

42

Conclusion
Historically, Health care reformation has been a very political issue (as it is today) but
it has evolved significantly since its inception into the national debate in 1912 by former
President Teddy Roosevelt. Todays Health reform has completely transformed the
Health care industry since its controversial implementation in 2010. Throughout this
paper, health care executives and experts, medical retail executives, insurance executives
and GPO leaders have all expressed the changes that have occurred since the Health Care
Reform Act was signed into law by President Barack Obama.
Mergers, acquisitions, and partnerships have drastically increased since the
implementation of the Act, and the research and documentation have shown that the
changes are not coincidental. Many industry experts not only predicted the rise in
mergers and acquisitions but they have extensively researched and reported on the
possible repercussions that Health Care Reform Act would have on the Health Care
Industries, and all other peripheral industries that support it.
Prior to healthcare reform, the U.S. Health Care system was set up as a volume-based
system with little concern for outcome or readmission rates. Now, with the health care
initiatives partially in place, quality over quantity is making sense. The health care
industry is taking action, insurance providers are preparing policies, and vendors are
taking notes. Even as the Supreme Court Justices scrutinize and review the Health Care
Reform Act, many are convinced that healthcare reform is not only needed but long
overdue, Many hospital executives and insurers say big changes in how care is being
delivered will continue regardless of the law (Thomas & Abelson, 2012)
43

It is human nature for individuals, and organizations to initially refute change of any
form. Change is difficult and requires evaluating current procedures, discovering areas
that need improvement, training personnel on new processes, and implementing new
policies and procedures. The author revealed that many survey responders acknowledge
that change and health care reform is needed, but the question still remains, to what
extent?

44

Statement of Learning
February 2011 was a very busy month for me. I retired from the U.S. Navy after 22 years
as a Logistics Management Specialist. I accepted a position as a Materials Consultant at a
local hospital network, and began my quest for an Independent Learning Project in
Management (MMG).
My years in the Navy provided me the skills needed for procurement and logistics as well
as the leadership and flexibility needed in any position, but the Navy did not teach me
everything I needed to know about health care, and real world logistics. I quickly
discovered this my first week on the job.
After 22 years of knowing how to do everything, it was hard starting over and accepting
that I did not have all the answers and I had so much to learn. I started researching, taking
notes, and observing my management and co-workers--soaking everything up like a sponge,
wanting to learn more. Then, just two short weeks later, I was asked by my professor,
What would you like to do your ILP on?
I decided that the title of my ILP would be Health Care Mergers and Acquisitions, and
their effects on Healthcare Supply Chain Management. I began researching and compiling
data from everywhere, relating articles to my job, and discovering the intricate details of
Health care supply chain Management. After about four months of research and study, I
discovered that I was missing a big part of the picture, The Health Care Reform Act. I did
not truly realize, until that moment, the implications that the Act not only had on Health
Care, but also how important it was to include it as a main focus of my paper.
45

In addition to discovering the importance of the act, I also discovered I knew absolutely
nothing about the Health care industry . I never had to pay a hospital bill, so the cost of a
doctor visit was never a concern for me, but there are millions that do not have that luxury.
Doing research for this project opened my eyes to the dilemma that many health care
organizations face. Without Health care reform, supply prices would continue to rise and
eventually, will be unaffordable for everyone except those that provide the supplies, and/or
are already wealthy. It also surprised me that physicians often receive incentives or perks for
championing vendor products. I found this situation particularly disturbing; in the
purchasing community we are strictly forbidden to take anything from a vendor because it is
considered to be a conflict of interest or un-ethical. I found this site very interesting:
http://projects.propublica.org/docdollars/.
Throughout my research, cost savings seems to boil down to standardization and volume
purchasing possibilities that occur during mergers, acquisitions, and partnerships. I could
see where this would be a problem if physicians have a particular interest or affiliation with a
particular company or vendor.
It is hard to express in words how much I have learned from this project, and how much I
learned about my job--each and every time I read a new article in regard to the health care
industry. I believe this paper has not only helped me to grown scholastically, but in my
current positions as well. The best decision I have ever made was basing my paper on my
job. I have so much more insight into the everyday workings of the health care supply chain,
and its intricacies.
46

I personally do believe that Health care reform is needed. The initiatives and positive
changes that have been made in the Health care industry have been amazing. While
completing this paper, just one day prior to submission, the Supreme Court is deciding
whether or not to repeal the Act. I feel this decision would be devastating to the Health Care
and Insurance industry.

47

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Unknown. (2011, May ). Does Medtronic action signal a shift? OR Manager, 27(5), 5-6.
Unknown. (2011). Top 15 Supply Chain Management Software Vendors REVEALED.
Retrieved from Business-Software : http://www.business-
software.com/supplychainmanagement

Unknown. (2012, March 7). GPO Facts and Figures. Retrieved from Healthcare
Purchasing News: http://hpnonline.com

Unknown. (2012, March 6). Wikepedia. Retrieved from www.wikepedia.com.
50

Zuckerman, A. M. (2011). Healthcare Mergers and Acquisitions:Strategies for
Consolidation. Frontiers of Health Services Management , 4-12.

51

Appendix
A. Healthcare Reform Time-Line
June 2010
-Adults with pre-existing conditions became eligible to join the high-risk pool.
July 2010
-President Obama established (within the Department of Health and Human Services) a
council known as the National Prevention, Health Promotion and Public Health Council
to develop a strategy, with the Surgeon General being appointed as the councils
Chairperson.
September 2010
-Lifetime dollar limits prohibited; no longer permitted to be imposed on insurers.
-Dependent children under the age of 26 are permitted on parents insurance policies.
-Preventative care co-pays or deductibles are no longer required.
-Insurance companies no longer allowed dropping policyholders for getting sick.
-Fraud detection methods implemented.
-New website established by Secretary of Health and Human Services to provide
consumer insurance information.
January 2011
-The Centers of Medicare and Medicaid Services develops the Center for Medicare and
Medicaid Innovation to manage testing of payment and delivery methods.

52

January 2012
-Employers must disclose value of insurance benefits.
-New tax reporting initiatives to prevent tax evasion by corporations and individuals.
-January 1
st
, 2014
-Insurers not allowed to discriminate against individuals based on pre-existing medical
conditions.
-Imposition of a $95.00, or up to 1% penalty (whichever is greater) for those individuals
that do not secure insurance.
-No annual spending caps for insurance companies.
-Expand Medicaid eligibility.
-Tax credit for Two years for small businesses that implement insurance coverage for
Full Time Employees.
-Imposition of a $2000.00 per employee tax penalty if the company does not offer health
insurance.
-An increase of tax-free Flexible Spending accounts (FSAs) to $2500.00.
-Chain restaurant required to display caloric content of food on all menus.

53

B. Statistics
Health Care Reform Acts Impact on Materials Management
1) Do you feel that that Health care reform has changed the health care industry
already?

2) Has your organization been greatly affected by mergers, acquisitions or new
partnerships in the last year?

3) Do you feel Healthcare reform is necessary?

54

4) Are you familiar with the Healthcare reform initiatives?

5) Do you feel that your organization is prepared for the Healthcare initiatives set forth
the Healthcare act?

6) Does your organization have an organized time line regards to the Healthcare
initiatives?

55

7) Are you employed in Materials Management/Logistics, or work closely with
Materials Management at your organization?

8) Do you feel that Physician Preference I tem (PPI ) have driven the need for
Healthcare Reform?

9) Given that supply chain is where most initial savings is found during mergers,
acquisitions and/or partnerships, do you believe that it should be looked at with more
scrutiny and thoroughly researched before finishing due diligence?

56

10) Do you believe Healthcare reform should be rescinded?

57

C. LinkedIn Comments
1. Michael Goodson, CMRP: The decline in hospital revenues, the increase in
uncompensated care and the rise in the cost of medical supplies are creating new
challenges to either find opportunities to increase revenue or decrease cost. Supplies and
labor are the two significant contributors to cost and materials costs are fast
approaching labor costs while operating margins shrink to almost unsustainable levels.

Healthcare reform is forcing facilities to find the information for making fact based
decisions as to whether they are delivering the best outcomes in the most cost effective
manner.

For the sake of simplicity, if margins were, for instance, 5%, it would require $2M in
increased revenue to provide the same financial benefit as a $100K reduction in supply
chain costs (which goes directly to the bottom line). Certainly, one of the greatest
opportunities to lower the cost of healthcare can come directly from the optimization of
the healthcare supply chain.

While many hospital materials management departments are managing a few hundred
thousand dollars in supplies in perpetual inventories and PAR areas, supplies valued in
the millions of dollars may be found in operating rooms being managed by clinicians
instead of supply chain professionals employing industry standard and leading practices.
Excess inventory in the operating room and interventional radiology lab buys a lot of
customer satisfaction for an unnecessarily high price.

Hospitals that develop proficiencies in identifying opportunities for optimizing their
supply chain and monitoring the efficacy of these improved processes with quantifiable
goals and ongoing monitoring of appropriate metrics are succeeding in removing
unnecessary costs.

Although many facilities have a value analysis team and process for vetting supplies,
these various processes dont always examine an appropriate fit of the supplies to the
required functionality. Efforts to monitor cost and clinical outcomes can be an effective
tool to begin discussions that present further opportunities. An effective value analysis
team should also retroactively examine supplies currently in use, beginning with the most
expensive DRG s and working down the list.

Physician preference items those items that are requested by physicians to be
purchased from specific suppliers - are recognized as one of the primary drivers of
increased supply cost. Only with executive sponsorship can an environment can be
created to examine the rationale for more efficient management of physician preference
items and for making cost effective choices that maintain quality clinical outcomes.

58

Hospitals cannot remain in business if they lose money when they perform procedures.
Im confident that physicians who insist on specific products from specific vendors
genuinely believe that they are creating value for both the patient in terms of the clinical
outcome and for the facility in terms of the reimbursement exceeding the cost. An
examination of cost and required functionality in relation to clinical outcomes provides
the information and the visibility to confirm that these choices are cost efficient and
appropriate for patient outcomes.

Healthcare reform should motivate facilities to acquire individuals with skills such as
facilitating teams of stakeholders to analyze business processes, recognize opportunities,
craft, implement and continuously monitor their solutions to keep them moving toward
attainment of their defined cost reduction goals. Retrieved from www.linkedin.com in
response to survey posted.

Yolie Turner: The Healthcare Reform I believe will adversely impact more so those
hospitals in the underserved areas. Especially those who have fallen under the spell of
supply/equipment ala carte of a physician's needs when in actuality couldn't afford it
then. Those days are practically over or reduced drastically. Only physicians who
participate in being part of the solution especially in hospitals that are disproportionate
should partner with materials management in making clinical supply/equipment
evaluations that will bring continuity, quality, and the best return outcomes as possible.
As well as GPOs seeking, accepting, and mentoring more local and minority suppliers to
help build socially responsible purchasing. This I believe will not only keep jobs here but
will also promote manufacturing here as well. Thus, I believe that all hospitals will not
survive but those that do will be because they have been forced to step up their
performance outcomes and will be chosen by their patients and those patients from those
hospitals that have fallen. Retrieved from www.linkedin.com in response to posted
survey.

59

D. Glossary of Abbreviations
ACO-Accountable Care Organization
CMS-Center for Medicare and Medicaid
FTC-Federal Trade Commission
GPO-Group Purchase Organization
HACS-Hospital Acquired Conditions
HCN-Health Care Network
HHS-Department of Health and Human Services
HIGPA-Health Industry Group Purchase Association
HMO-Health Maintenance Organization
IDN-Integrated Delivery/Distribution Network
MS-DRG-Cost allocation method used by Medicare to determine payment amount
PPS-Perspective Payment System

60

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Health care reform: Restructuring the Health Care Industry, and Reshaping Health

Care Supply Management

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