Best Practice Healthcare Series: The Link between Supply Chain Management & Revenue

While the implementation of integrated Supply Chain Management solution will provide state-of-the-art capabilities to support critical cost saving efforts, we have found that implementing the solution in and of itself will not automatically achieve the performance improvement and business operational / process objectives typically predicted.  There is only minimal return on investment from the implementation of a new management information system.  There is a significant Return on Investment (ROI), however, if the solution is implemented in the context of operational leading practices and thoughtful integration to your Billing and Revenue solution.

Across the board, hospitals are challenged in their level of sophistication in supply chain management integration to clinical and billing systems.  Their current systems range from facilities’ systems that still track physician preferences on index cards, to systems that are managing the supply chain with advanced methodologies such as activity-based costing, Internet-based analysis of purchasing and utilization, and outsourcing the management of supply acquisition in high-dollar clinical units.

The provider-based supply chain management profession has matured in an environment with:

  • Continual cost reduction initiatives involving suppliers, providers, and group purchasing,
  • Managed care and third party payor pressure to lower reimbursements,
  • Intense focus on containing healthcare costs,
  • But, with the following Data Capture Process Flow
    • Where we make sure we have the right Patient
    • We make sure we have the right Physicians
    • We make sure we have all the Diagnosis Codes and Procedures documented


This Data Capture process is now being revised via Electronic Medical Records (EMRs) solutions that provide enhanced charge capture capability as organizations begin to roll them systems out, e.g., when a medical device or drug is utilized and documented in the EMR the charge will be automatically captured and transmitted to the patient bill.

Now envision a scenario in which pressing the “Enter” key on a hospital computer sets into motion a series of coordinated processes that reaches across the entire health care supply chain and:

  • Chooses products for the patient standardized to the (ICD-10) procedure codes
  • Assesses the need for backup contingency supplies and product options based on physician product preference and historical data
  • Picks the supplies appropriate for that individual case, and groups those supplies with all other supplies needed for preparation, recovery, and follow-up
  • Verifies the latest contract price and ensures synchronized pricing accuracy among all supply chain stakeholders
  • Determines whether there is a need to replenish supplies either at on-site stock locations or in the off-site warehouses of a distribution partner
  • Aggregates the product replenishment requirements and automatically places an order
  • Communicates usage data to the manufacturer and other stakeholders for predicting future demand

Through a careful integration strategy of the hospital system’s diverse data, including information captured from clinical, financial, and operational sources, the simple act of scheduling a routine medical procedure can activate this Oracle enabled automated system solution.  Oracle’s SOA Suite allows for real-time exchange of information and is scalable across multiple organizations allowing for health information to be quickly sent. When designed and applied holistically throughout an organization, the key integration addresses the business drivers, leading to sustainable improvements in business performance and pushes best practices to deliver more value at lower cost.

The foundation provided by Oracle’s SOA technologies provides standards-based solutions that enable simple, secure and scalable methods for sending authenticated and encrypted information directly to trusted recipients. These solutions help organizations satisfy Meaningful Use requirements. The Healthcare Adaptor, for example, allows senders and receivers to securely trade information using standard document protocols such as HL7 v2 & v3, HIPAA X12 (4010/5010), CCR/CCD and several more.

Where to Start

Consider that emerging efforts are demonstrating the positive impact of supply chain to revenue, Supply Chain professionals are expanding their roles to become contributors to revenue, increasing the strategic value of the supply chain, and current margins require a team effort to reduce cost and increase revenue.

Focus on your current ICD-10 (5010 compliance) transition project as this project will set the foundation for integration requirements (specifications). Although some have viewed the ICD-10 implementation delay as a negative, it’s actually created the perfect window of opportunity for allproviders to take a second look at the clinical integration requirements. With greater specificity in the ICD-10 procedural code set and the ability to reimburse based on those procedures (and supplies), the hospital well not only see newer procedures being performed the will be more revenue (claims).

The limited code set in ICD-9 – which resulted in lumping certain procedures together – created a reimbursement-neutral result that potentially discourages the performance of newer, more innovative procedures. However, the expanded procedural code set in ICD-10 enables future expansion to accommodate new medical procedures, delivering the opportunity for providers to code procedures uniquely and ensure that appropriate payments are applied. 

Then review the hospital’s Claims process.  A sample is provided here that begins to leverage claims data to drive both affordability & satisfaction.


Leverage the hospital’s goal of fewer rejected claims and lower administrative costs. With ICD-9, we see high administrative costs associated with rejected claims and/or requests for additional documentation because of the lack of detailed information in code assignment and the grouping of newer innovative procedures in with current or older procedures. However, with the greater code set in ICD-10, providers can expect fewer rejected claims, thereby eliminating the administrative costs typically associated with reviewing those rejections.

With an improved code structure, logically standardized definitions and more accurate clinical terms, it’s reasonable to expect that educated coders will have an easier time selecting the proper diagnosis and/or procedure codes once they become familiar with the system. Your 5010-compliant medical billing software (Clinical solution) will enable successful electronic claim submissions in accordance with ICD-10 to make sure any and all claims being made today are transmitted to payers electronically using a 5010-compliant medical billing software.

The key “link” is your Charge Description Master (CDM) to the Item Master File (and links to other systems such as OR and Cath Lab).  This link further ties new product introduction to the Patient Charge System.  The key is the CDM as it:

  • List charges that can be billed to patients, payors or healthcare providers
  • Contains billing data associated with charges (e.g. description, price, CPT code)
  • Serves as the foundation to bill according to the policies and managed care contracts established by the organization
  • Identifies the products/ services provided
  • Supports consumer-driven decision making and transparency
  • Reflects the oversight of finance professionals (traditionally) to maintain accuracy and to establish pricing for billing

The CDM is the linked to Item Master which:

  • List of items that can be purchased to support patient care
  • Contains data associated with items
  • (e.g. description, price, packaging, vendor source, contract, UNSPSC)
  • Serves as the foundation to purchase according to the policies and contracts established by the organization
  • Identifies the products purchased
  • Provides cost information
  • Reflects the oversight of supply chain professionals (traditionally) to maintain accuracy and to establish pricing for purchasing “real time”

A shared link that utilizes the same database for both the “Charge Description Master” and the “Item Master File” provides:

  • Consistency in descriptions and terminology
  • Maintain consistency and accuracy in cost
  • Achieve operational efficiencies by eliminating maintenance of two files
  • Provide real-time updates for cost, new items, changed items

Adopt Policies/ Procedures to address:

  • Accountabilities, responsibilities, roles for:
    • Finance (Revenue, Reimbursement)
    • Supply Chain
    • Departments
    • Security for access to databases
    • Rules for CDM pricing/mark-up
    • Administrative control systems to insure accuracy
    • Additions, Deletions, Changes
    • Changes to contracts, GPO’s, and 3rd party payors
    • Procedure and room charges
    • Bundling of supply items into single charge item
    • Definition of billable items with thresholds
    • Requirements/ process for automated dispensing and manual systems (e.g. forms, tags, stickers, barcode labels)
    • Management oversight/audit
    • System back-up and disaster preparedness

Sierra-Cedar’s interoperability methodology approach integrates many of the performance improvement opportunities described and enables our clients to achieve measurements for benchmarking improvement after Sierra-Cedar has been engaged.  Our experience and repetitions of our methodology can demonstrate how an effective Supply Chain Management strategy is constructed to facilitate the underlying processes that support the key process improvement measures.  Each recommendation, once its respective constraints, characteristics, and limitations are identified, becomes a success indicator.

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