Deploying Capital Cycle Management in Healthcare

Patricia Hoch

Senior Director of Procurement at Inova Health System

Learning Objectives

The End-to-End cycle of managing capital involves Planning, Procuring, Managing, and Disposing of Capital Assets. Often, these four processes are completed disparately and are without a data-driven approach or business process. Knowing and understanding what exists in your current capital inventory allows you to analyze, evaluate, and plan for what will be needed in the future. Supply Chains that have visibility can take a long term approach to sourcing capital that extracts maximum buying power for an organization. Physical tracking of assets creates real time information to manage inventory changes. A strong disposition strategy is crucial to ensure that the health system is getting the full value available on their assets externally, or properly disposing of those assets as needed.

Key Takeaways:

  • How to move from subjective to objective budgeting process for healthcare capital

  • How to maximize value by deploying a long term sourcing strategy

  • How to achieve long term visibility into the overall health of the asset fleet

"There are 1 million hospital beds, 34 million pieces of equipment that healthcare organizations need to keep track of and make sure they're in working order at all times..."

Patricia Hoch

Senior Director of Procurement at Inova Health System


budget, minimal effort, pricing, procurement, lists, buy, healthcare, wish list, overall hGood afternoon. My name is Patti Hoch. I am the Senior Director of Procurement here at Inova Health System. Today, I want to talk about developing a capital cycle management program, specifically in healthcare. Parts of this presentation today will include an overview of what capital cycle management means, and definitions of those parts. The objectives, what are we trying to achieve while we’re deploying capital cycle management. Then, the first two phases of capital cycle management, which is asset planning and asset procurement.

If you’re from the healthcare industry, you understand this. If you’re not, I don’t think people understand the vast amount of equipment that’s used just to perform the healthcare that we’ve all become accustomed to, whether that’s in our acute care hospitals, whether that’s in the physician office, as simple as a patient monitor, as complex as the da vinci robot that I have here on the slide, which is used for very complex surgical cases.

Approximately, there are 34 pieces of equipment per hospital bed in the United States. There’s 1 million hospital beds, 34 million pieces of equipment that healthcare organizations need to keep track of, make sure they’re in working order at all times, and then procure for us to continue to provide that patient care that everyone is used to. Currently, the organization that I’m working for today has approximately 68,000 individual pieces of equipment that all need to be tracked and then eventually replaced. That’s where we’re going to talk about the capital management cycle.

What is capital cycle management? It really has four parts. That’s the planning of the asset, the procurement of the assets, the management of them, what do we do with those assets while they’re in our building? Then, how do we get rid of assets? How do we dispose of them? I’m not going to talk too much today about the management and disposition. This is specifically talking about the planning and procurement. but how we manage your assets while they’re in our building, making sure they’re working, and disposition. How do we keep tons and tons of equipment out of landfills? How do we repurpose equipment is also an integral part to this entire lifecycle of the health equipment that we have in our facility.

The main objectives that we have for capital asset planning and procurement, we want to have a data driven approach to creating our capital budget, and we want it to be transparent to the people who are requesting the equipment and capital, and make it really easy for them, which is one of the things that this plan in particular addresses. In procurement, we want to make sure we have the most cost effective way of procuring equipment, and that we’re maximizing all of our leverage points to get maximum value out of our plan.

The first thing I’m going to talk about is capital asset planning. In healthcare specifically, the current process that most organizations have is department leaders or department site leaders create wish lists of things that they want to have replaced. The majority of this wish list is devised of having people anecdotally decide what things seem to need to be replaced. That thing seems kind of old, or this other piece of equipment has broken down on me in the past. Those are the types of data points that, in the current system, people are using to decide which pieces of equipment need to be replaced.

Then, there’s usually some type of senior leadership capital committee or maybe it’s one or two individuals who earn control of the budget, look at everyone’s wish list, and try to determine, based on the various reasons, why something has ended up on someone’s wish list, what they should replace, and what money should be allocated to those areas. They’re very much tied to these individual scenarios that people have created around why something needs to be replaced, and essentially, what is the story or the anecdote behind why that particular thing needs to be replaced.

What we’re looking to do with capital cycle management is create a completely data driven approach because there’s tons of data around equipment. Besides the individual’s experience with that piece of equipment, create fleet analytics, When I’m talking about fleet, I’m talking about a whole grouping of equipment that has commonality. Then, trying to eliminate those multiple meetings that take months and months and months for you to come up with what is then a single capital budget by the end of the year. How are we going to do this? This falls to getting the right people to the table.

In the beginning of our process, we’re going to have what we’re calling a projection phase. That is only going to involve finance in the supply chain leadership. That’s where we’re talking about what is the available capital for any given year, and how should that capital be dispersed among the different areas that will be requesting capital. Then, we have our meetings with our leadership, our senior leadership of those. Once we know that, the senior leadership will meet, and we can decide based on the amount of money that you’ve been allocated, how should we spend that money. Then, we have the funding phase, which goes back to financial leadership, and this is all electronically, where they’re signing off on the things that the end users have selected to be replaced or added. Then, we go into project building, which is where we’re entering everything into our financial system. Then, deployment phase, where supply chain and finance are actually doing the purchasing of the capital in the capital assets by quarter.

The first thing that we’re going to be talking about is how we determine the budget need for the entire organization. This is where we have developed an algorithm within our tool. The tool that we use is by Handle Global. You could do this manually as well if you want to, but we’re taking in all these factors to determine the equipment that’s here, what state is it in, is it red, yellow, or green? All the factors that we’re putting into this are, how old is the piece of the equipment? How often does that piece of equipment get used?

This is the same sort of scenario is like a car, if it has 150,000 miles on it, then probably, it’s going to need to be replaced sooner. That’s the same for say, X-ray. If you have a piece of Radiology equipment that is running 24/7, doing thousands and thousands of scans, that piece of equipment is probably gonna be a little worse for wear sooner than something that maybe only gets used a couple times a day. What is the repair history, is another variable. How much money are we spending to replace something over time, and then, also our market knowledge. We have an idea based on just doing business over a period of time. What are things that were out faster than other things? Which particular capital items are we going to—are there brands that are going to require replacements sooner than others?

Put all those things together, and we’re getting scores from 1 to 100, whether something is red, yellow, or green based on the parameters that we’ve set for all those different variables. This is really where we get our high level understanding of what does the overall health of all of our equipment that’s in the hospital today look like versus individually between each one of our service lines. What does the overall health of our equipment look like for a particular service line? This is just an example, not real data, but this shows how you can parse out which things are red, yellow, or green.

The next part that we’re going to get to is based on our understanding of the health of the fleet, how are we going to allocate funds based on that understanding? Essentially, looking at which assets, who has the most assets across the organization as far as value, and then who has the most value of red assets. That’s going to be determined by that slide that I just showed you, which is getting into, “Hey, we have some more prop areas that are more problematic than others, and we want to make sure that we’re putting the money to where the most need is.” That goes back to that whole wish list idea, which is we don’t want to be spending our money just on the people who are the best at writing the best business case for the thing. We want to be able to use these really objective data points, and look at those in a way that show us that we’re putting the most money towards the areas that have the most need.

A lot of these—your capital or whatever your capital budget is going to be for the [unintelligible], a lot of times determined by doesn’t really have that much to do with what the overall organization needs, it has a lot to do with your financial ratios, your cash on hand, how much money is your organization going to be able to put towards capital replacement in the first place. Once you have that number, taking these percentages of red assets and determine those allocation numbers. Once you have that understanding, then you have this sort of gap, right between what is the full need if you were to get every single asset to a green, and what is the amount of capital that you actually have been allocated for that particular particular year.

Each one of these leaders is going to have this budget amount based on what is the overall health of their fleet, and how much money they have been allocated by finance. This is where we get into some meetings between the service leaders and supply chain that are so much easier to have now, because we have all this objective data that we can show them in real time, where we’re saying, “Surgery, you have $15 million, where is that money best spent based on your needs?” That’s where we’re going into our capital budget overview tool. We’re looking at a very high level. What is the total budget? What is your total budget for your particular area? What is your remaining budget?

One of the things that I think makes this really successful in getting clinical and service leader buy in into this particular strategy is that if the service leader saves money, and is more frugal with their purchases, and they save money, they can spend that additional allocation on more capital, add some things to their capital budget, because they were willing to work with supply chain and get all of those extra savings, so that they could fund more replacement of the assets that they have in red. Here’s just showing us a high level of we have 22 million in—an example is maybe we have 22 million total budget 17.2 million is remaining, and that’s what we have to work with when we’re talking with our service line leaders.

Here’s where we get into the scoring, and this is really where you’re able to show your service line leaders, look, you have something that is has a score that’s over 80, it’s in red., you’ve had this thing for 10 years, 15 years, whatever the criteria is for that particular item. You can start to mark the things that you want to put into that year’s budget. Here, you see a budget line where we’re starting to drag down those things that are going to be included in that year’s budget based on the scores, and get added back for that final product when we’re trying to add items.

As the budget starts to take shape, you can see here where you’re showing, here’s all the things that you have that are a certain number of years old, and here’s all the things that you’ve added based on your allocation that you’re going to be replacing, so that you don’t end up with one department is replacing things that are a lot newer than these. We’re really putting that money into the assets that require the replacement based on our variables.

Once we have that, then we can start scheduling things based on other factors. Sourcing may understand that there are certain quarters or fiscal year ends where we can get the most value out of our vendors. That’s when we’re taking those items, and moving them around, and creating a nice [inaudible] chart that’s showing us, in Q2, these are all the things that we’re going to buy. Maybe somebody like a GE has a down second quarter. We’re gonna want to make sure all of our GE purchases are in that second quarter. It’s really where we’re trying to squeeze that maximum value out of our asset planning.

Once we’ve done that, then we have a completed capital budget that lists out every single asset that we’re going to purchase for that year. It lists out what we expect to pay, what quarter we expect to buy it in, and really gives our finance team that full picture for uploading into our financial system, so that those items can be executed on in any given quarter throughout the fiscal year. This is really the outcome of the planning phase, is this completed financial budget. When you have it organized like this, it’s really taking us way less time than it did previously, where we had a lot of Excel sheets and lists, and we’re trying to compile those lists over time.

The next part that I’m going to talk about is how that planning piece feeds right into the procurement activities, and how that equals savings for us. In the previous way we used to do things, people, service leads, clinicians, whoever would get quotes from the vendors based on the piece of equipment that they wanted to buy. We didn’t really have any agreement. It was about we would get a quote, upload the quote, and one at a time, as people put things in that we’re on the approved list, they would get purchased. There wasn’t any real effort around even grouping things. It would be based on when someone entered into the system. There would be not a lot of standardization, so somebody at one hospital, if your multi hospital system would buy one model of something, and somebody who was at a different hospital would purchase something totally different, maybe not even the same brand. There were a lot of gaps. We were getting what I would call the minimal effort pricing, which is by the time, sourcing was really at the end of the process. By the time we receive the quote, and we’re talking to the vendor about that particular thing, then really the leverage had pretty much already been expended from the deal. Sourcing was not involved at all in the beginning.

When we have CCM we’re seeing, this is everything we’re going to buy for the entire year. We should really be able to group things together, create standardization, and put together some key categories, so that we can address our vendors with our entire bucket of spend all at once, versus individual buys based on projects at different hospitals. I think that’s really the key element is sourcing, being able to see what it is that we’re planning to do not only one year out, but two years out and three years out, so we could start to create some committed agreements.

The next thing that we do is we’re going to take these information. We have probably 1 billion in assets here in our healthcare system. If we’re trying to look at 10% of that, we’re gonna start getting into, we’re looking at 100 million a year in replacement capital. When we take that amount of money, we’re looking at our major vendors and primary vendors. Then, we have a lot of what I’ll call one time or small niche vendors, who make very specific types of equipment. What we’re looking to do is make sure that we have committed agreements with our large major vendors.

In healthcare specifically, you’re talking probably about 15 or 20 companies who fit in that category, who sell capital across multiple service lines of lead, and usually end up equaling the majority of your capital spend over any given year. Then, you’re going to have your primary vendors that may be smaller pieces of equipment and your niche vendors. How does that all shake out? Your large vendors, looking at any capital vendor, any capital asset list, you’re usually going to be able to replace 50-60% of the amount of capital that you have with those particular vendors. Then, you have 20-25% of your spend in your small supplier relationships. Then, GPO pricing, which in healthcare, we have group purchasing organizations, that’s really going to be your minimum savings. Doesn’t really require that much effort to get that price. Those are going to be hopefully you’re putting your one off nichy vendors into that category.

How does that impact our overall spend? When we’re looking at how we measure this, as we go into deploying this strategy, you have your GPO pricing, which doesn’t really require that much work to get. That’s going to always be your highest price. It is off list, but it’s not going to be your best price, especially when you are looking at grouping things together, and really strategizing when you’re going to buy this stuff versus just, hey. can you give me a better price, and going on about your day. That’s like what I call minimal effort sourcing.

Then, we have CCM, we’re deploying this capital cycle management with your niche vendors. That’s when you’re having planning, and you’re knowing when you’re going to dress the niche vendors. Then, you have your capital cycle management primary vendor, so that’s where you’re getting your long term committed agreements with your vendors—your big vendors that equal the majority of your spend. At the low end, there’s always going to be your GSA or national pricing, and this is the pricing that the government gets or your VA hospitals would get. That’s going to really be your floor. This is the pricing spectrum where we’re measuring like, how are we doing compared to, in this range between GPO pricing, minimal effort to GSA pricing, which is going to be the floor for the majority of your equipment vendors.

This is how it shakes out when you’re putting these strategies in place. You’re getting an additional 5-10% savings with your large, 3-5% savings with your vendor, and this is over your minimal effort. As we’re going down through these different categories, then we’re looking at, on average, we’re saving between 12 and 22% on all of these different asset types. That puts us to save, you know, $12-$22 million on our 100 million dollars.

As I mentioned before, this is very satisfying to our stakeholders and our individual departments, because if we’re able to bring that kind of value to them, then they’re able to turn more of their assets green that they may have red at any given year. Over a cycle, over a three to five year cycle of being able to do this, then you improve the overall health of the entire fleet of equipment and capital that you have in your organization. Overall, it becomes much better for our end users who know that their capital is going to be replaced, and they’re going to have good working up to date capital to use to provide their patient care.

That’s really what our entire program is about. It’s about making sure that our clinical staff, which is the number one responsibility of sourcing, is to make sure that our clinical staff has all the equipment and supplies that they need, and great working order so that they can deploy the best patient care possible to our end users. Thank you for listening to how we are deploying capital cycle management to improve health care. Have a great day.

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