University and Health System to Cut Supply Costs

Officials hope procurement effort will bring significant savings and help manage future costs

Friday, February 4, 2000

Sensing an opportunity to save significant amounts of money and improve services, Duke has embarked on a major effort to lower the costs of supplies purchased by both the university and the health system.

Executive Vice President Tallman Trask III and William J. Donelan, executive vice president of the health system, said in a memo to business managers that the program called the "Procurement Initiative" is focusing initially on three areas  office supplies/equipment, clinical engineering/facilities and the pharmacy.

"While much attention has focused on the unprecedented financial pressures on academic health centers, there is an equally important need for Duke University as well the health system to reduce administrative costs to ensure our ability to continue as leading centers of education, research and patient care," Trask and Donelan said.

"We believe there are opportunities for significantly reducing non-labor expenditures to achieve savings to support our core academic and clinical missions. While we expect to capture significant savings in major spending categories, our program is also intended to create a level of internal expertise to better manage these costs in the future."

Recommendations from the initial cost-saving efforts are expected in April with implementation to follow as quickly as possible.

The memo said a committee of administrative leaders is working with employees from across the university and health system to identify opportunities for savings. This effort includes an analysis on how and from whom goods and services are purchased.

The focus on reducing office supply costs is headed by Reggie March, senior director of innovation and strategic improvement, and overseen by Trask. The university and the health system spend $35.4 million a year on office supplies and equipment and consultants believe there is the possibility of reducing those costs significantly.

The office supplies team believes considerable money can be saved by standardization. The team found, for example, that the university and the health system together purchase 1,079 different kinds of writing utensils from one vendor. Similarly, 167 different staples and staplers are bought from one vendor.

Additional savings, the team believes, can come from market power. For example, Duke University, Duke Hospital, Raleigh Community Hospital and Durham Regional Hospital are not currently under one contract, even from the same vendor. And pricing differs across hospitals. For example, according to a consultant's report, Raleigh Community pays $59.75 for No. 9 envelopes from one vendor while Duke's price for the same quantity is $145 from another.

The clinical engineering team, led by Bill Martin, senior administrative director of Durham Regional Hospital, and overseen by Donelan, is looking at a variety of ways to reduce expenditures. One approach is to consolidate suppliers and to leverage market power. For example, suppliers are charging different prices for similar service across the three hospitals in the health system.

The facilities part of the team is looking at contract consolidation as one way to cut costs. For example, there are four different elevator maintenance vendors across the system with 10 different contracts. One organization pays $136,000 for maintenance on 16 elevators while another pays $165,000 for 96 elevators.

The pharmacy team, led by Mary Hill, associate operating officer at Duke Hospital, and overseen by Dr. William Fulkerson, executive medical director of the Private Diagnostic Clinic, found that pharmaceutical expenditures approach $60 million across the health system. The team believes there are opportunities to cut costs by as much as several percent in the near term. Substituting therapeutically equivalent generic drugs for brand name drugs could save 2 percent in costs, the team believes.

"This pharmacy initiative is physician-led," Hill said. "We are approaching this from the point of view that we have to find ways to reduce cost without adversely affecting patient care and satisfaction. You can't make this a pure financial decision. You must have a clinical overlay to it. Who cares what ball point pen you use. Patients do care what drug they get."

She said health system drug costs are increasing rapidly because new drugs are being introduced so rapidly.

"And direct-to-consumer marketing has put tremendous pressure on the physician. So there is some urgency."

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