Mercy ROi, an operating division of Sisters of Mercy Health System in St. Louis, began as a bold move to transform traditional ways of doing business in the healthcare supply chain. That alone would have been a significant accomplishment, but along the way the ROi team developed a bigger vision. They saw that by extending an optimized supply chain all the way to the patient's bedside, they could help Mercy significantly improve patient care and even save lives.

And that is precisely what ROi has done, along with delivering operational improvements that last year netted the parent corporation $15.7m in benefits-a six-to-one return on investment.

The journey to that winning outcome begins in 2002 when three Mercy managers-Mike McCurry, Lynn Britton and Shannon Sock-proposed forming ROi (Resource, Optimization and Innovation) to improve a fragmented and inefficient supply chain. At that time, each of the 19 hospitals in Mercy's four-state integrated healthcare system operated pretty much independently, says Vance Moore, president of Mercy ROi. They had separate information systems and negotiated separately for all medical and surgical supplies. "In no other industry in the world would a company be run this way," he says. While the Mercy system supported more than 4,000 beds, 3,100 doctors and 26,000 co-workers in Missouri, Oklahoma, Arkansas and Kansas, "we were literally a cottage business. At the very best, the corporate structure was referred to every now and then for risk pooling, but that was it," he says.

The creators of ROi believed they could streamline operations and gain efficiencies by consolidating and leveraging volume across their network, but they needed talent-professionals with a firm understanding of the supply chain from the manufacturer to the hospital dock. This was an area where Mercy previously had relied on third-parties and so had no in-house expertise. "The ROi founders knew they could either spend significant time and effort to develop talent internally or go outside and hire talent," says Moore. "To reduce start-up issues and accelerate results, they decided to go outside and they brought in a robust mix of people with both industrial and provider experience."

Moore had both. He also previously had worked on a project with Mike McCurry, who wasted no time inviting Moore to join the Mercy ROi team as head of consulting and to help consolidate Mercy's transportation and logistics programs. At the time, Moore was the chief U.S. salesperson for the healthcare business of UPS Supply Chain Solutions, a position he had come to when UPS bought Livingston Health Care. He had been vice president of sales for Livingston, a specialty 3PL company based in Delaware. Prior to that, Moore had worked for Cardinal Health, one of the nation's largest distributors of medical and healthcare products.

The experience with Cardinal was important because the ROi team knew they would have to do more than make internal supply chain changes. To get the results they wanted, they would have to take on the traditional industry supply chain model, which was highly dependent on a few huge distributors like Cardinal and on outside group purchasing organizations (GPOs).

The traditional healthcare supply chain basically is a "broken system," says Moore, because it is based on a fundamental misalignment. "Healthcare supply is one of the only industries in which the key decision makers for the majority of supply usage (physicians) have no stake in the cost of the goods they use," he says. Instead, GPOs aggregate the volume of hospitals in an attempt to leverage the economies of scale for their constituents while funding their operations through administration fees paid by the manufacturers. "This illogical alignment brings into question how aggressively a GPO will negotiate," says Moore. Distributors have a slightly better revenue model, with fees based on a percent of sales, but this relationship also is rife with conflicts. One is that many distributors also are manufacturers. As such, they can leverage the margin on self-manufactured products and manipulate inventory by understocking products for which they manufacture an acceptable, but not preferred, substitute.

And these are very large companies, Moore notes. Four distributors control 96 percent of the market and have individual annual revenue of more than $50bn. Similarly, the four largest GPOs represent 75 percent of the market. But intermediaries should not be solely blamed for what is wrong with the healthcare supply chain, says Moore. "Hospitals tolerate and pay for these services everyday."

Time For Change

Mercy ROi decided the time had come for change. "All of the folks working on this understood there was a pretty good chance they would get fired, because what we were doing was completely radical," says Moore. "But there also was a deep, heartfelt belief that it was the right thing to do."

Mercy ROi first conducted a thorough analysis of its current situation. "We basically just sat down and really looked at what was taking place in the industry and the fees we were paying and the services we were getting and kept asking the simple question: Is this worth it?" says Moore.

Service quality was an issue. A number of Mercy's facilities are located in relatively rural areas that are fairly far from major distribution locations, Moore explains. As a result, deliveries were not as frequent as Mercy would have liked and hospitals had problems with out-of-stocks. "We concluded that we were getting neither great service nor great value," he says.

ROi did not try to completely alter the system overnight, however. "We believed that too much change too quickly would be rejected by the industry and by our customers," Moore says. "So we took the game that everybody was playing and internalized it." Essentially, ROi became Mercy's own GPO. To operate as a GPO, state law required that ROi be set up as a separate for-profit subsidiary of the hospital system, which is a non-profit organization. "In terms of how we operate, we look like the supply chain division of Mercy," Moore says. But ROi's separate legal structure enables it to collect the same administrative fees from manufacturers that had previously been paid to outside intermediaries, making ROi entirely self-financing. "That part is really sweet," says Moore.

Once it replicated the GPO model internally and achieved market acceptance, ROi "then began tweaking it to optimize the supply chain," Moore says. At the same time, ROi was working on internal issues. One of the first things it did was to address Mercy's disparate technology systems and fragmented purchasing. It implemented a common materials management software solution with a common item file, using Pathways Materials Management from McKesson Provider Technologies, San Francisco. "This meant that a blue widget was a blue widget in all our facilities," says Moore. "Before, we had a lot of variation-light blue widgets, dark blue widgets and so on." This process had an important byproduct. "We learned a tremendous amount about our ordering and usage patterns, which allowed us to be much more specific about where we needed to reduce variation in the supply chain," he says. "We became very successful at saving money and better leveraging our ability to negotiate. We actually were one of the few hospitals or health systems in the nation that had this kind of command of its data."

The company set up a new, internally-owned, 100,000-square-foot Consolidated Service Center in Springfield, Mo., to provide warehousing and order fulfillment for all hospitals in the system. The CSC also is the base for consolidated purchasing and customer service.

As demands on the CSC increased, ROi implemented the EliteSeries warehouse management system from Tecsys, Montreal. Moore says he first heard of Tecsys when he was in charge of sales for Livingston. "Several times I lost business to one competitor that used Tecsys and highlighted its capabilities as a differentiator," he says. "So that stuck in my head." Later he encountered Tecsys again when one of Livingston's customers was acquired by McKesson and that business was transferred into McKesson's distribution center in Memphis, which also ran Tecsys. "When we began looking for a WMS system at Mercy ROi, I contacted the person at McKesson who had made that decision, and he convinced me that Tecsys was a good product for specialty distribution, particularly for the lot and serial tracking that we are concerned with in the pharmaceutical and medical/surgical world," says Moore. Additionally, Tecsys recently had been installed at the University of Toronto Medical Center, "so it also had hospital experience." With that validation and after seeing the software demonstrated, "I felt comfortable going with it," says Moore. "It had a very low risk point."

Mercy ROi also decided to develop its own private fleet of tractor-trailers. It already had a fleet of delivery vehicles-box trucks and vans-used by hospitals to make deliveries to outlying clinics in their region. The tractor-trailers would be used to make regular runs from the CSC to hospitals. "The interesting thing is that we have been able to sell our backhauls in the five lanes where we operate, so this service also basically pays for itself," he says. Having control of transportation from the CSC enabled ROi to increase delivery frequency and improve service to hospitals. With the new system, says Moore, ROi shortened order cycle to 12 hours or less, reduced hospital inventory by 38 percent and eliminated 3,000 material service failures or stockouts per week.

The reduction in stockouts turned out to be a big "aha" moment in this whole process. "It is amazing how the lights went off when we determined that by eliminating stock-outs, we actually reduced the burdens and distractions nurses have in taking care of patients," says Moore. "That is what Mercy is all about. We are not in the supply chain business; we are in the healthcare business. We just happen to support medical activities through our supply chain." This revelation led the company to first start thinking about the relationship between the supply chain and clinical outcomes-a seed that was to fully blossom a little later in the process.

It also made an impression on executives of the parent company, which launched an initiative called the Genesis Project to apply some of ROi's tactics to other areas. "Basically, our CEO said, 'you guys have proved that single-system, enterprise-wide management using common nomenclature is beneficial. So let's apply this same approach to financial settings and clinical settings and other parts of the business.' Now we are moving to the point where we will have one system across the corporation, from Lawson Software, which will allow us to have data that we can analyze in a consistent fashion," says Moore. "Decisions then can be based on evidence rather than guesswork."

Guiding Principles

As it began to tweak the GPO model, ROi next addressed the purchasing and contracting process. A key element here was getting input up front from physicians. "One of the big problems with the way traditional GPOs work is that they get very little input from users of the products as to which products should be purchased," says Moore. The result is poor compliance with vendor contracts. Early on, ROi was replicating some of those same problems, he says, "so we decided to start going to our customers six months out and saying, 'the contract for this product is coming up for renewal. We want you to tell us the very best product in this category. Now, we are only going to buy one product, but we are willing to buy the best product even if it is more expensive, because we can use our volume to negotiate price. But you have to tell us what that best product is.'

"The big fear of caregivers is that they will be made to use a cheap product," says Moore. "We reversed that." While it often was difficult for ROi's customers to agree on a single product, giving them ownership of the decision was crucial, he says. "We told them from the beginning that they may not always get their way, but they would always get input. And when we made a decision, they would know why."

The result was fewer contracts and far higher contract compliance. The number of contracts dropped by 40 percent, while the annual spend under each contract rose 136 percent. "The term 'vendor partner' really started to mean something," says Moore.

ROi now is second in the nation in contract dollars spent per hospital, according to an annual survey by Modern Healthcare magazine. In 2003, it was in 6th position. "When we started getting the input, everything just flipped. Our compliance tripled," says Moore.

Sustainability metrics help ROi keep track of contract compliance on a continuing basis. This allows for flexibility on several fronts. "If we promised a vendor $1m in business and it turns out we are spending $1.5m, we can go back and ask for a concession because we are out-performing," he says. Also, if a purchasing commitment is not being met, ROi can investigate to see why. "If we find there is a new, better product out there, then we will re-open the contract to address that," he says. "We can do that because our contracts all include technology escalation clauses and new product clauses, which allows us to keep our word to doctors and clinicians that we want to do the right thing in terms of healthcare."

Keeping their word is one of three guiding principals at ROi. The other two are: involve all stakeholders and create value. "When we are successful, all three of these principles are always evident," says Moore. "If we struggle-as we did with contract compliance before we started getting physician input-at least one of them is missing."

Call to Action

The call to action that motivated Mercy ROi to push to the next level was the well publicized report, To Err is Human, from the Institute of Medicine. This landmark report revealed that medical errors were the eighth-leading cause of death in the U.S., with 7,000 deaths per year being attributed to medication errors alone. These adverse events cost money as well as lives-an estimated $37.6bn each year. Approximately $17bn of those costs, the report said, is associated with preventable errors.

"When we analyzed this report, we realized it is not bad medicines or bad people that are killing patients. It is bad processes," says Moore.

Mercy ROi began to study this problem in depth. "We concluded that the last safety net is at the patient's bedside and that is where you have the largest potential for preventing mistakes," says Moore. As ROi evaluated ways to address bedside safety, it discovered that appropriate barcoding and scanning technology was available but little used in clinical settings. Moreover, a bedside scanning program requires medication that is dispensed and bar-coded in single dose form-an option available on less than 40 percent of medications. The market offers few incentives for companies to provide unit packaging because the automated equipment is expensive and FDA regulations make commercial repackaging a cumbersome process, with lengthy licensure and reporting requirements.

Despite these hurdles, ROi decided that it should act and act quickly because patients were being impacted every day. It aggressively sought input and cooperation from all stakeholders, including caretakers, manufacturer and distributor partners and state boards of pharmacy. Once all stakeholder concerns were assimilated and addressed, ROi developed a business plan to support the entire effort from manufacturer-to-patient bedside. This plan, called Mercy Meds, included establishment of a medication repackaging operation at the Consolidated Service Center, automated medication dispensing machines on each hospital floor and bedside scanning and verification equipment. ROi secured $35m in funding from the parent corporation for the necessary infrastructure. It purchased all the equipment and gifted the hospital-based machines back to Mercy.

For this initiative, Mercy again recruited professional staff well versed in pharmaceutical distribution, repackaging, quality assurance and regulatory issues to minimize false starts and assure that things were done right the first time. These decisions paid off and within 12 months from the start date, the repackaging operation was up and running. Implementation of dispensing machines and bedside scanning technology at hospitals was sequentially performed over two years. ROi also coordinated the training of hundreds of nursing and pharmacy workers in the application and use of the technology. Finally, it constructed a results monitoring program to track progress and ensure sustainability of the program.

Moore describes how Mercy Meds works today: It begins with a doctor prescribing a medication for a patient. Eventually that will be electronically captured and sent to the hospital pharmacy but today this still is mostly done via a written prescription that is faxed. A pharmacist reviews the order and if it seems appropriate he sends an electronic approval to the dispensing cabinet on the patient's floor. The cabinet acknowledges electronically that it has received the order. Unless it is an emergency situation, this medication will be dispensed during regular medical runs. A nurse goes to the cabinet and scans her badge. At that point, all of her patients' names appear on the screen with their medication order. As each patient is selected, the appropriate drawer of the cabinet opens and a light flashes to indicate which medicine is to be picked. The nurse scans the pills to verify that she has the right medication. Using a rolling cart with a scanner attached, the nurse then proceeds to the patient's bedside, where she scans her badge, the patient's identification bracelet and the medication. If there are any conflicts or errors, an alert is sounded. Otherwise, the nurse gets an OK and the whole transaction is captured in an electronic record.

During the day, the dispensing cabinet keeps a tally of what medications have been used and builds a replenishment order that is transmitted each evening to the CSC and repackaging operation in Springfield. Orders typically are filled and delivered direct to the dispensing machines the next day.

Moore says several of Mercy ROi's partners were instrumental in bringing Mercy Meds into reality. He particularly cites AmerisourceBergen, a major pharmaceutical wholesaler and distributor as well as its subsidiary AutoMed, Vernon Hills, Ill., which provided the pharma repackaging equipment. Omnicell, Mountain View, Calif., made the dispensing cabinets with automated replenishment; and Cerner Bridge Medical, Solana Beach, provided the bedside scanning equipment and alerting system.

Huge Dividends

Mercy Meds has paid dividends far beyond ROi's original expectations, says Moore. In terms of patient care, medication errors have been virtually eliminated, which translates into an annual avoidance of more than 178,000 potential medication events and more than 17,800 annual adverse drug events that actually harm patients, he says. Moreover, all potential events now are documented through automatic electronic alerts and medication administration is completed in one-third less time.

Another benefit is that pharmacists now spend much less time dispensing pills and much more time on clinical activities, such as reviewing medication orders. This has resulted in more than 15,000 pharmacy interventions per month, which represents documented hard-cost savings of more than $2.7m per year.

ROi has quantified additional cost avoidance of more than $13.6m annually from elimination of testing and procedures, transfers to ICU and litigation.

Additionally, providing tools to ensure a safe medication environment for nursing has become a key job satisfaction issue and a recruiting differentiator in a competitive labor market.

Mercy ROi's achievements have caught the interest of many hospitals. "At this point, representatives of 23 percent of the hospital beds in America have been through our doors to look at what we are doing," says Moore. While he still has not seen much in the way of adoption of similar models, Moore believes these will begin to emerge. "I think there will basically be two different models-one like ours, which is an owned model and another that I would call an affiliation model," he says. The latter would be where two or more hospital systems in a geographic area, which may be small by themselves, get together in a co-op type of structure and hire someone to set up a distribution operation for them, he says. "They would outsource the service, but retain control and ownership," he says.

"But don't think for a second that these major corporations are just going to sit back and let it happen," says Moore. "There will be a lot of defensive maneuvers. I know for a fact that several GPOs are investigating offering distribution solutions to differentiate their services. So I expect GPOs will get into the distribution business in the future and that will force distributors to get into the GPO business, and providers will probably get into both."

Might Mercy ROi provide its services to other hospital systems? "Conversations along those lines have taken place around here and are continuing," says Moore. "We have been asked, and in the early days we were just too busy. We still are busy, but we also believe that some of the things that are going on in the industry are too important for us not to look at it. Yes, it is a commercial opportunity and we are all wired up in the free enterprise mode, but the bottom line is that Mercy Meds is all about patient safety. When you have a better mousetrap, you have some responsibility to lead."

Mercy Roi Thanks Its Partners

In light of Mercy ROi's recent recognition as Supply Chain Innovator of the Year, it is appropriate that Mercy ROi highlight the contribution of other essential parties involved in our success. We would like to highlight Johnson & Johnson, Medline, Ecolab, and Hospira as key trading partners that demonstrated great faith and commitment to accepting a new and innovative model between trading partners. Their leadership and acceptance has significantly assisted in rapid and broad market adoption of our direct strategy. The second group of distinction is related to the essential parties involved in our Mercy Meds program. AmerisourceBergen should be highlighted with special distinction for their role as chief collaboration partner.  They demonstrated an open commitment to deploy the best solution even when their internal interest may not have been served. AmerisourceBergen introduced an integrated solution comprised of technology and service offerings of AutoMed, Omnicell, and Bridge Technologies. Finally we would like to highlight the contribution of Tecsys as the supply chain management systems solution that has allowed us to support a very complex continuous replenishment model in a responsive and affordable fashion.