RFIDs, bar codes and health care costs

A nonprofit hospital system is digitalizing its supply chain to lower cost and improve operational efficiency.

RFIDs, bar codes and health care costs

A nonprofit hospital system is digitalizing its supply chain to lower cost and improve operational efficiency

Half of all health care spending is inside hospitals[1] and they are facing increasing pressure from insurers and regulators to curb costs. A major source of this historically high cost has been a failure of care providers to properly measure and manage the true costs of health care.[2] This is where digitalization of supply chain can help. A fully connected supply chain could allow organizations to run with lower inventory levels, reduce billing and shipping errors, and improve overall process efficiency. A recent report from McKinsey & Company estimates that such modernization of procurement can result in about 30% lower operating expenses and up to 75% decrease in inventory levels.[3] So, not surprisingly, one of US’s largest nonprofit health care organizations, BJC Healthcare, is leveraging digitalization to reform its supply chain. Through a digitally connected supply chain, BJC expects to lower its average inventory by 23%.[4]

As a starting point, BJC conducted a one-year pilot program across 3 of its 12 hospital locations. The pilot was called SupplyPlus End-to-End Supply Chain Visibility (E2ESCV) and was rolled out in partnership with Cardinal Health (a large distributor of pharmaceutical and medical products) and Cook Medical (a medical device manufacturer).  A key aspect of this pilot was implementing radio frequency identifier (RFID) capability, that has been ubiquitous in the retail industry for a few decades. These RFID tags, installed on medical goods, transmit data via radio frequencies to a central database for the hospital chain. This allows the real time tracking of items being used or nearing expiry dates, and automates placing of new orders with suppliers.

The pilot program had some notable successes: (i) average 23% reduction in inventory levels; (ii) cost savings by avoiding inventory expiry; (iii) decreasing hospital staff time spent on inventory management; and (iv) more efficient flow of goods from warehouse to the patient. Since the completion of the pilot, BJC has rolled out the supply chain initiative across all its hospital sites. BJC estimates expected total inventory management cost savings of up to $68 million over 10 years. With additional benefits in patient safety due to enhanced capability of avoiding expired products, stock-outs, back logs and managing crisis / pandemics.[5]

Additional measures that BJC should consider include expanding RFID connectivity to a broader set of its medical and non-medical supplies; analyzing historical RFID tracking data to adapt best practices across sites; and using medical items usage data to push for reimbursement reform. Firstly, digitally tracking movement of inventory items has proven to lower costs. Therefore, similar measures should be rolled out across as many hospitals supplies as possible, including office supplies, patient beds, etc. For low cost items (where the cost of a RFID tag cannot be justified), basic bar-codes and bar-code scanning capability can achieve similar results in terms of centralized tracking and automated ordering. Secondly, the historical RFID data provides an opportunity to compare medical supply usage across wards and hospitals. This creates opportunity to share learnings from one hospital with low medical supply cost to another, thereby ensuring faster diffusion of best practices across the BJC system. Lastly, visibility into movement of supplies from distributor to the patient allows for a better estimation of costs associated with each type of treatment. Armed with this level of granular data, hospitals can partner with payors to better align reimbursements with actual cost of care and find efficiencies that are beneficial for both sides.

The prospects of digitalization in hospital supply chains seem promising. However, the question about data security remains open. The first concern is around the security of information flow between the hospital and its vendors. Any breach of such data could compromise private medical information of thousands of individuals. The other issue is related to potential attacks by hackers. The WannaCry attack on UK’s NHS earlier this year led to the cancellation of 6,900 medical appointments. A similar attack on the supply chain could be disastrous for a health care system.[6]


[1] McKinsey&Company report “How sourcing excellence can lower hospital costs”, p.19

[2] Kaplan, Robert S., Michael E. Porter, and Mark L. Frigo. “Managing Healthcare Costs and Value.” Strategic Finance 98, no. 7 (January 2017): 24–33.

[3] https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods

[4] https://www.wsj.com/articles/hospitals-take-high-tech-approach-to-supply-chain-1445353371

[5] https://www.bjc.org/About-Us/Newsroom/BJC-News/ArtMID/897/ArticleID/144/BJC-HealthCare-Recognized-for-Innovation-in-Supply-Chain-Management

[6] http://www.bbc.com/news/technology-41753022


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Student comments on RFIDs, bar codes and health care costs

  1. I agree with the digitization of medical supplies and believe the benefits outweigh the cyber risks outlined. In addition to lowering supply levels across the supply chain by implementing a just-in-time inventory model, the digitization can also provide cost-saving benefits to the supply chain of services provided to a patient. The idea of measuring costs to obtain a favorable patient outcome is outlined succinctly in the September 2011 HBR article: “How to Solve the Cost Crisis in Health Care”. If the digitization used to track supplies is also used to track the time of medical attention given from various physicians and staff members to each patient, medical centers can more accurately attribute costs of the service supply chain for a favorable outcome. The costs can then be analyzed to identify potential synergies between and within patient populations (e.g. various medical conditions) to improve efficiency of care delivery and decrease overall cost without compromising the end goal of a healthy patient.

  2. Japees – your article provides a great example of how digitization of information can lead to less costly and more efficient supply chains. Based on these metrics and the success of the pilot program, it seems like digitization is a no-brainer not just for BJC, but for any healthcare company. You touch on a few challenges to implementing this kind of system more broadly, but I wonder why these initiatives have taken so long to fully implement. Is it that there are too many technology platforms for companies to evaluate? Have some healthcare companies had trouble convincing their suppliers to adopt these platforms? What happens if a vendor serves multiple healthcare companies with different platforms? I don’t think anyone can deny the massive benefits from the digitization of medical supply chains. I just wonder how we can speed up the implementation.

  3. Japees – what an interesting article! It is fascinating to see how the use of RFIDs, a technology that is already so widely applied in other industries, is helping to bring the healthcare supply chain into the 21st century, especially given that supply chain costs account for approximately one-third of the average operating budget [1]. In addition to the data security issues you mention, one concern is the amount of up-front investment goes that into a digitalization project like this for large healthcare systems. Hospitals have razor-thin operating margins, so the capital intensiveness of this project could prove prohibitive. Another implementation issue with expanding RFID codes to office supplies, medical equipment, patient beds etc. is that someone needs to actually scan those bar codes, which could prove burdensome. Clinicians already suffer from high rates of burn-out associated with the sheer volume of work. Gaining sufficient buy-in from front-line staff will be difficult if digitalization adds to their already overflowing plates.

    [1] http://perspectives.ahima.org/impact-of-radio-frequency-identification-rfid-technologies-on-the-hospital-supply-chain-a-literature-review/

  4. Japees – really interesting article! Based on the metrics showed, it seems a no brainer and it seems really hard to understand why the adoption curve of this technology, already applied for decades in other industries, has taken so long te be put in place. For this reason, i’m wondering if there is, beside an overall data security issue, also a huge “inertia” by incumbents, that do not want to completely change their systems and/ or to adapt to a new technology. Do you think that performing some testing and experiment and share profits of this technology with clients could accelerate the adoption curve as it happened also with Barilla? Moreover, do you see this technology to be applied not only for medicine supply but also to be fully integrated in each patient personal data?

  5. I really enjoyed reading your article. RFID is a very interesting application in health care and seems to have been overdue! I think it is critical not to overlook the benefits from the patient perspective. Tracking supplies leads to better patient care by ensuring that the needed devices, medications, and supplies are available rapidly in emergency situations. RFID can also help avoid malpractice by tracking the use of devices and ensuring they are properly sterilized in between uses. Finally, applying this to people (doctors, nurses, and patients) can also ensure that the professionals are easily located and patient data is not mistaken or overlooked during procedures. However the application of this technology to people raises significantly more data concerns, that I’m not sure the industry is ready to deal with quite yet.

  6. Excellent post.

    I agree with others that it’s surprising that the uptake of RFID technology in the health care supply chain has been surprisingly slow. I’m reminded of another digitization effort in health care that has fallen far short of exceptions: electronic health records (or EHR). One key issue in the uptake of EHR has been the lack of interoperability of systems supplied by different vendors in the space. Surprisingly, interoperability issues in EHR have persisted despite statutory remedies. One big reason? Competition. EHR firms have been loath to develop fully interoperable standards as they attempt to grab market share and keep switching costs high (https://catalyst.nejm.org/ehr-interoperability-blame-game/). I wonder if there’s a similar issue in RFID?

  7. Really enjoyed this read, Japees. I especially appreciated you outlining the four key benefits of the pilot program, and I agree with most. I’m still thinking through the 23% reduction in inventory level – what type of inventory did this refer to? If drugs / medicines then I agree that better tracking expiry is a clear value add, but I’m unsure of the benefit for more frequently used “commodity” products like medical consumables (e.g., syringes, gowns, gauze). Given these products have no perishability, wouldn’t it be helpful to have more on hand in case of pandemics or emergencies? To me some of these are an essential buffer in case of disaster situations that are difficult to predict. I could see the benefit if hospital were able to downgrade their storage space and convert the additional space to beds or downsize, but I’m not sure they’re taking action on the reduction or if its reducing actual usage and therefore costs. This post raised the question for me – is lower inventory always better? How does this differ by industry, perishability / size of inventory, and ability to actually convert lower inventory to additional margin? Overall, though, I think the other benefits you noted are profound and RFIDs are a no brainer in healthcare. In the future, perhaps they can even be applied more broadly to staff or machines to improve processes as they did in the Mayo Clinic [1]. Tracking nurses or physicians would have even more resistance than traditional supply chain though, so we should definitely start with this!

    [1] https://hbr.org/2015/12/how-rfid-technology-improves-hospital-care

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