Cost-cutting trend spawns growth of bulk suppliers.

Stockroom supplies shrink as purchasing practices change

High billing delinquencies, Angelenos' hesitance to visit doctors and dwindling insurance payments have cut into health care providers' incomes.

Everyone is looking for ways to cut costs. As a result, some doctors have quit private practice and gone to work for health maintenance organizations. Others have joined huge medical groups. In the process, health care providers have reevaluated the way they buy and stock medical supplies.

As a result, health care providers have watched incomes decline. They are learning lessons manufacturers learned in the slump of the early 1980s. Instead of keeping hundreds of thousands of dollars in inventory, many health care providers are waiting until the last minute to replenish supplies. The practice the health care industry has adopted is known as a "just in time" or JIT purchasing policy, a practice which U.S. automakers picked up from the Japanese.

Medical supply firms, in response to the cost-cutting trend, have formed or joined JIT networks. They become the sole supplier for the hospital or medical practice and stock the supplies the buyers need. As a result, health care providers don't have to keep hundreds of thousands -- perhaps millions -- of dollars of their money tied up in supplies.

Three basic types of JIT programs let health care providers of all sizes save money on interest charges and eliminate pilferage, said Lisa Sokol. She is the senior vice president of the purchase connection of the Hospital Council of Southern California.

In a completely stockless program, the JIT contractor takes supplies to the health care provider on an as-needed basis. In such cases, Sokol said, it is sometimes hard to measure how many supplies a doctor or clinic needs on a regular basis. It is also a risky program for a health care provider that is not close to the JIT contractor's warehouse, Sokol said.

In other cases, the JIT contractor makes multiple deliveries, usually two or three times a week. But if the patient populations change, their regular delivery schedules may be insufficient, Sokol said. Sometimes a large health care provider may have its own storage area and the JIT contractor keeps it stocked to a designated level. The health care provider doesn't pay for the products until it uses them, she said.

Health care providers have to create a clean database before an effective JIT program can be started. The provider must tell the JIT supplier how many patients it serves on a regular basis. At the same time, all the doctors and nurses in the organization must agree on product standards and brands.

"The data and the analysis have to be precise. You don't want to run out of supplies in the middle of an operation," Sokol said.

Ernst & Young Senior Manager Rich Namerow, a health care expert in the accounting/consulting firm's Los Angeles office, gives a more detailed analysis of the program.

"An 800-bed hospital can save $2 million to $5 million per year in costs on its inventory if it doesn't take delivery of supplies until just before it needs them," he said.

Hospitals and clinics also are increasingly using generic drugs, a practice that can save a large hospital as much as $300,000 in annual operating costs, Namerow said.

Traditionally, hospitals and clinics kept a thorough inventory of supplies. But in the last six months, Namerow said, the larger health care providers have instituted tougher inventory control programs. As a result, they need not worry about theft, spoilage, obsolescence or paying interest on their inventory.

They also are saving money buying generic instead of name-brand drugs, as much as $300,000 per hospital (part of the $2 million to $5 million inventory mentioned above) per year, Namerow said.

The JIT program keeps hospitals from buying large inventories of supplies that become obsolete. The practice is particularly beneficial in treatment of diseases such as AIDS where new treatments are constantly being developed. A health care provider that overstocks would waste tens of thousands of dollars on ineffective treatments in such situations, Namerow said.

Though based in Richmond, Va., Owens & Minor Health Care Distributors Inc. operates one of Southern California's major JIT programs. Andy Willis, director of national accounts in Owens & Minor's City of Industry office, said by aggressively going after the JIT business his firm's sales volume has risen in the past two years. The company grosses more than $1 billion per year acting as a JIT supplier for 1,500 health care providers throughout the United States.

Tom Kelley, national director of health care at accounting firm KPMG Peat Marwick, said the JIT purchasing program rippled back to the manufacturers and caused a temporary decrease in orders. But in the long run, it has let health care providers operate more efficiently. As a result, the amount of delinquent debt health care providers owe suppliers and producers has gone down, he said.