Monitoring of Materials and Supplies Costs

• San Francisco General Hospital purchases approximately $30 million in materials and supplies annually. In FY 2001-2002, San Francisco General Hospital overspent its materials and supplies budget of $27.3 million by $2.9 million or 11 percent, associated with a 10 percent increase in the patient census. Although San Francisco General Hospital expects the FY 2002-2003 patient census to remain high and has increased the number of budgeted beds to accommodate the higher census, the Hospital has reduced the materials and supplies budget by 2.8 percent, from $27.3 in FY 2001-2002 to $26.5 in FY 2002-2003. As of November 2002, the Hospital had a $500,000 surplus in materials and supplies, but because the patient census usually increases during the winter months, the Hospital could likely overspend for materials and supplies in FY 2002-2003.
  
  
• Of the approximately $30 million in annual materials and supplies purchases, San Francisco General Hospital purchases approximately $15 million annually through Novation, the group purchasing organization in which San Francisco General Hospital is a member. As a group purchasing organization, Novation is responsible for selecting vendors through a competitive bid process and conducting comparative pricing of different categories of goods.
  
  
• San Francisco General Hospital purchases products, not available through Novation, directly from vendors. For products with prices of less than $5,000, purchasing staff do not routinely perform comparison price checks or seek discounts on materials. Currently, San Francisco General Hospital does not have standard procedures to determine if the Hospital is receiving the lowest price for products purchased outside of the group purchasing organization. San Francisco General Hospital should develop, implement, and conform with policies and procedures, which ensure that the Hospital receives the best available price for the materials and supplies that it purchases.
  
  
• The Hospital’s Department of Support Services is responsible for monitoring the Hospital’s materials and supplies expenditures. According to Hospital administration, although San Francisco General Hospital is able to review and address over-expenditures for some categories, such as food services and office supplies, the Hospital is less able to control over-expenditures for medical supplies. To gain better control over medical supplies expenditures, the Hospital should work toward the standardization of products and consolidation of vendors whenever possible.

San Francisco General Hospital Purchasing of Goods

Materials and Supplies Expenditures

San Francisco General Hospital spends $25 million to $30 million annually for Hospital materials and supplies. In FY 2001-2002, expenditures for materials and supplies exceeded the budget by $2.9 million, or 11 percent. According to San Francisco General Hospital, this over-expenditure was associated with a 10 percent in increase in the patient census in FY 2001-2002.

Table 9.1
Comparison of Materials and Supplies Expenditures in the San Francisco General Hospital Budget Compared to Actual Expenditures
FY 1999-2000 through FY 2001-2002

Source: San Francisco General Hospital

Although the San Francisco General Hospital expects the FY 2002-2003 patient census to remain high and has increased the number of budgeted beds to accommodate the higher census, the Hospital has reduced the FY 2002-2003 materials and supplies budget by 2.8 percent, from $27,305,000 to $26,545,916. The FY 2002-2003 materials and supplies budget is $3,632,084, or 12 percent, less than actual FY 2001-2002 expenditures. Because the San Francisco General Hospital has continued to have a high census and has not developed strong controls over medical supply expenditures, San Francisco General Hospital could over-expend its materials and supplies budget in FY 2002-2003.

Monitoring Materials and Supplies Expenditures

Each Hospital cost center has a budget for the cost center’s materials and supplies. The materials and supplies budgets for the individual cost centers are rolled up into the aggregate Hospital materials and supplies budget.

By policy, the San Francisco General Hospital Finance Department is responsible for ensuring that materials and supplies transactions are recorded accurately and in a timely manner. Cost center managers are responsible for operating their departments within budget and ensuring that budget constraints are met .

In practice, Materials Management, which is part of the San Francisco Hospital Department of Support Services, monitors materials and supplies usage and expenditures. Materials Management staff distribute a list of actual purchases, recorded in the Materials Management information system (MATKON), to each cost center each month. Materials Management also generates a monthly summary report, listing expenditures by major category, such as food services, office supplies, and supply carts. This expenditure summary does not identify which cost center is incurring the expenditures but does show if the expenditures are for clinical laboratory supplies, the automated Omnicell units, the manual supply carts distributed to the nursing units, and other major categories. This monthly summary report tracks expenditures for the month, compared to the budget for the month, and year-to-date expenditures compared to the budget for the year. As of November 2002, San Francisco General Hospital had an approximately $500,000 surplus in materials expenditures. However, because patient census varies throughout the year, this surplus will likely diminish during the winter months when the patient census increases.

According to the Associate Hospital Administrator for Support Services, Materials Management is able to review and address over-expenditures for some categories, such as food services, primary care, and office supplies. However, Materials Management is less able to control over-expenditures for medical supplies. To improve controls over medical supplies expenditures, this audit recommends standardization of products and vendors, as discussed later in Section 9.

Purchasing of Materials and Supplies

Materials Management is responsible for purchasing Hospital materials and supplies, distributing supplies to the cost centers, and maintaining inventory. As part of the Materials Management purchasing function, Materials Management staff is responsible for analyzing comparative product costs and seeking lowest price purchases from vendors.

Purchasing through the Group Purchasing Organization

San Francisco General Hospital purchases medical supplies and other Hospital materials directly from vendors and through the group purchasing organization, Novation. The Department of Public Health became a member of Novation in 1997, through the Department’s membership in University Health Systems Consortium. In 1996, prior to the Department’s participation in the Novation group purchasing organization, the Department had selected a medical supplies prime vendor, Allegiance Healthcare Corporation, through a competitive bid process, to consolidate and reduce the number of vendors, implement "just in time" delivery of supplies, and release 12,000 square feet of Hospital floor space from medical supplies storage. When the Department of Public Health became a member of the Novation group purchasing organization, the Hospital continued to purchase supplies from Allegiance through the Department’s membership in Novation.

When the Department of Public Health joined Novation, the Board of Supervisors instructed the Department to report annually on the actual savings from group purchasing organization membership. The Department submitted reports to the Board of Supervisors showing $1,059,745 in cost savings for pharmaceutical and other Hospital materials and supplies for an eight-month period in 1997, and $1,477,297 in cost savings in calendar year 1998. The Board of Supervisors did not require further cost savings reports after December 1999. At that time, the Department of Public Health estimated that the Department would achieve approximately $1.5 million in cost savings in calendar year 1999.

San Francisco General Hospital purchases approximately $15 million annually, or 50 percent of materials and supplies, through Novation. As a group purchasing organization, Novation is responsible for selecting vendors through a competitive bid process and conducting comparative pricing of different categories of goods. As a member of the group purchasing organization, San Francisco General Hospital is not required to purchase materials and supplies from Novation vendors if the Hospital can achieve better pricing elsewhere.

Group Purchasing Organization Tier System Discounts

San Francisco General Hospital expects to pay lower prices for supplies purchased through Novation than from purchasing directly from outside vendors. According to Novation’s published policy, Novation selects product vendors based on a competitive bid process, which includes qualitative (or non-financial) factors as well as financial factors, and conducts ongoing market analysis of prices. Novation also offers tier discounts to participating hospitals, based on the volume of purchases from Novation. The tier system provides discounts to San Francisco General Hospital in return for an obligation to purchase a specific percentage of its purchases of an individual product from a specific contracted vendor. A tier level, from one to four, is assigned to San Francisco General Hospital based on the volume of purchases committed. San Francisco General Hospital receives a larger discount for purchasing a larger volume of selected products.

Novation provides a quarterly executive summary to San Francisco General Hospital, which summarizes the Hospital’s purchases for the quarter, including types of products purchases, vendors from which the Hospital purchased the products, and dollar value of the purchases. The quarterly summary also compares San Francisco General Hospital’s purchasing patterns with other participating hospitals. These reports do not specifically identify tier discounts or other types of discounts which the Hospital has accessed or which the Hospital could access. Materials Management staff also meet with the Novation representative every one to two months to discuss volume and other discounts, ensure that the Hospital obtains available discounts, and review purchases.

Purchasing Outside the Group Purchasing Organization

San Francisco General Hospital does not regularly solicit other vendors for lower prices outside the group purchasing organization, but does consider lower priced items outside the group purchasing organization when approached by a product’s sales representative. San Francisco General Hospital does not have formal procedures or guidelines for obtaining lower prices outside of the group purchasing organization, however, and needs to establish written procedures for comparison pricing for high volume or high cost goods.

Vendor Price Agreements

Products not available through the group purchasing organization are ordered directly from the vendors. If San Francisco General Hospital does not have an existing contract with a vendor, then the Hospital obtains discounts from the vendor through a vendor price agreement. In our initial interviews with Materials Management, Materials Management staff stated that they do not routinely seek vendor price agreements for products with vendors outside of the group purchasing organization. If the Hospital purchases products off contract, the Hospital generally purchases products with values less than $5,000 from vendors without performing price comparisons with other vendors offering the same product, and without regularly negotiating lower prices. City policy requires an informal bid process for products with a value between $5,000 and $50,000 and a formal bid process for products with a value of $50,000 or more.

In June 2002, the Department of Administrative Services Office of Contract Administration, which is responsible for City purchasing, re-confirmed its policy with the San Francisco General Hospital Materials Management department to directly establish pricing criteria and negotiate lower prices with the vendor to avoid paying retail price. Subsequent to June 2002, Materials Management staff stated that they were currently negotiating vendor price agreements prior to purchase, but did not provide a list of vendor price agreements entered into with vendors.

Determining Lowest Price for Off-Contract Products

San Francisco General Hospital does not have standard procedures to determine if the Hospital is receiving the lowest price for products purchased off-contract. If the Hospital has previously purchased a product, product information is stored in the inventory management computer database. Materials Management staff re-order products in the inventory management database without a cost evaluation. If the product had not been previously purchased, Materials Management staff will call the Hospital department requesting the item to determine if the product meets Materials Management purchasing requirements, but usually will not evaluate price. According to Materials Management staff, because many special-ordered products are requested by Hospital departments based on product efficacy or doctor’s choice, the lowest price is not usually a purchasing consideration. Although the Hospital departments requisitioning the item may compare prices before they submit the requisition, San Francisco General Hospital has not shown evidence that comparison pricing by Hospital departments is a consistent procedure. According to Materials Management staff, unless the product is clearly overpriced, the product cost is not questioned and is usually purchased as requisitioned. San Francisco General Hospital should develop formal criteria and methods of determining whether products are overpriced.

Consolidating and Standardizing Medical Supplies

Product Evaluation Committee

By industry standards, one of most effective methods of achieving lower supply costs is through the consolidation and standardization of medical and surgical supplies. The San Francisco General Hospital Product Evaluation Committee was established to provide an effective process for evaluating and standardizing all medical supplies and equipment within San Francisco General Hospital and the Community Health Network. The Committee members are Community Health Network staff appointed by Hospital department directors and represent various inpatient and outpatient disciplines. Although the Materials Manager regularly attends Product Evaluation Committee meetings, higher level Support Services administrative staff do not attend. The Committee evaluates and assesses new products, writes specifications for the bid process for patient care items, evaluate product safety, and provide cost containment through review of existing inventory and new supply requests. Committee minutes are distributed to the Quality Management Department.

Standardizing Products and Vendors

Currently, San Francisco General Hospital does not have a finite vendor list to purchase medical products requested by Hospital departments and physicians. All new vendors are added to the inventory management computer database when orders are made, thereby increasing the range of vendors from which to purchase supplies. San Francisco General Hospital should pare down the vendor list to standardize medical materials and supplies.

To consolidate vendors, Materials Management should:

• Conduct a monthly cost analysis of high volume and high cost medical products, totaling more than $5,000 per year per cost center, to determine which supplies could be consolidated to a reasonable number of vendors.
  
  
• Run reports for the departments with the highest expenditures, such as the operating room, sorting materials and supplies expenditures by medical product and by vendors for the product.
  
  
• Sort vendors to reveal the vendors with the highest product prices.
  
  
• Negotiate lower prices for the product from the vendor or purchase the product from another lower cost vendor.

Physician Participation

Once the Materials Management staff has determined the number of vendors for each high volume or high cost medical product, Materials Management staff should present the information to the Chiefs of Service for each medical specialty. The Chiefs of Service would be responsible for:

• Identifying medical supplies used within their service, and selecting and consolidating preferred vendors for medical supplies with costs totaling more than $5,000 annually.
  
  
• Incorporating physician participation in the process of consolidating vendors and standardizing medical supplies used in the specialty.

Role of the Product Evaluation Committee

Once medical products for every specialty are pared down to a reasonable number of vendors, the Product Evaluation Committee should:

• Publish and distribute a list of acceptable products and vendors per specialty.
  
  
• Establish an approval procedure, requiring authorization by the Chief of Services for requisitions for products not on the vendor list.
  
  
• Review these off vendor list items retrospectively at every meeting to determine if alterations to the approved vendor list are required.
  
  
• Provide an advisory report to the Chiefs of Service, with recommendations to improve the vendor list.

Materials Management staff should pursue discounts or vendor price agreements for all consolidated vendors.

Cost Analysis of Materials Management Programs

Comparative Analysis of Materials and Supplies

San Francisco General Hospital does not currently conduct cost analyses for medical product purchases. This audit has recommended that the Hospital analyze high cost and high volume medical supply purchases in order to standardize products, consolidate vendors, and negotiate lower vendor prices.

We also recommend that San Francisco General Hospital should conduct comparative cost analysis of materials and supplies expenditures to determine the reasonableness of these expenditures. San Francisco General Hospital should:

• Compare materials and supplies expenditures for the clinical units with comparable facilities. For comparison, the Hospital should select hospitals with the same case mix index, indicating that the hospitals have patients of similar acuity.
  
  
• Compare expenditures per adjusted patient day for cost centers with high materials and supplies expenditures to comparable hospitals. For example, if the San Francisco General Hospital operating room expends $1,000 per adjusted patient day and comparable facilities expend $700 per adjusted patient day, then San Francisco General Hospital should investigate reasons for the $300 variance.
  
  
• Identify and implement procedures to reduce costs, based on this analysis.

Conclusions

San Francisco General Hospital purchases approximately $30 million in materials and supplies annually. In FY 2001-2002, the Hospital’s materials and supplies expenditures of $30.2 million, were $2.9 million or 10.5 percent more than the materials and supplies budget of $27.3 million. According to Hospital administration, these over-expenditures were associated with a 10 percent increase in patient census. The baseline materials and supplies budget for FY 2002-2003 is $26.5 million, which is $800,000 less than the original FY 2001-2002 materials and supplies budget, although San Francisco General Hospital increased the number of patient beds in the FY 2002-2003 budget and expects a continued high census. As of November 2002, the Hospital had an approximate $500,000 surplus in materials and supplies. However, because the patient census usually increases during the winter months, the Hospital could likely overspend the materials and supplies budget in FY 2002-2003.

San Francisco General Hospital’s Department of Support Services is responsible for monitoring materials and supplies expenditures and generates monthly expenditure reports. Hospital administrators state that they can control non-medical expenditures but have less control over expenditures for medical supplies. To gain better control over medical supplies expenditures, the Hospital should work toward the standardization of products and consolidation of vendors whenever possible.

San Francisco General Hospital purchases $15 million in materials and supplies annually through Novation, a group purchasing organization with whom the Hospital contracts. The remaining $15 million of these purchases are made directly with vendors and other suppliers, without involvement by Novation.

San Francisco General Hospital expects to receive lower prices for products ordered through Novation, from lower product price and volume discounts, although the Hospital has not performed a cost analysis of savings received from Novation since 1999, when it estimated $1.5 million in savings.

San Francisco General Hospital purchasing staff order products that are not available through Novation from outside vendors. For products with prices of less than $5,000, purchasing staff do not routinely perform comparison price checks or seek discounts on materials. Currently, San Francisco General Hospital does not have standard procedures to determine if the Hospital is receiving the lowest price for products purchases off-contract. San Francisco General Hospital should develop, implement and conform with policies and procedures that would ensure that the Hospital receives the best available price for the materials and supplies it purchases. By achieving additional discounts of as little as one percent of the total purchase price, San Francisco General Hospital would save $300,000 per year.

Recommendations

The San Francisco General Hospital Department of Support Services should:

Cost and Savings

San Francisco General Hospital needs to aggressively manage materials and supplies costs. Our recommendations should result in improved cost analyses and active management of vendor price discounts, resulting in materials and supplies cost savings. Based on a discount of one percent of purchase price, we estimate that San Francisco General Hospital would save $300,000 per year.

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1. San Francisco General Hospital Medical Center Procedure No. FC-008.
2. The Board of Supervisors authorized the Department of Public Health to become a member of University Health System Consortium in January 1997 and to participate in the Consortium’s group purchasing organization. The University Health System Consortium group purchasing organization became Novation in 1998.
3. Letters from the Department of Public Health to the Director of Purchasing, March 24, 1998 and May 11, 1999.
4. The Board of Supervisors adopted an ordinance in December, 1999, amending the Administrative Code, deleting the requirement that the Department of Public Health submit cost savings reports to the Board of Supervisors (File 99-2043).
5. Under the informal bid process, Purchasing obtains price quotes from several vendors, and under the formal bid process, Purchasing implements a formal competitive bid process.
6. Medicare assigns a case mix index to acute care hospitals receiving Medicare payments. The case mix index is based on the relative weights of the discharge diagnoses of hospital patients. Hospitals with higher acuity patients would have higher case mix indices. Case mix indicator indices are for acute care hospitals are listed on the Federal Centers for Medicare and Medicaid Services web site.