Healthcare is moving quickly toward a value-based care payment model, and centers failing to provide quality care at a reduced cost may not survive in the competitive marketplace. Every dollar makes a difference in strengthening an ASC's bottom line and surgery centers may not be aware that they are losing capital by not managing their freight.
During a webinar sponsored by Cardinal Health, Jonathan Kernya, director of customer operations of OptiFreight® Logistics, a Cardinal Health company, delved into what constitutes a successful freight management program and how centers can yield big savings with minimal work on their end. Tim Howat, materials manager of Lafayette (La.) Surgical Specialty Hospital, gave a personal account of how his center saved on their freight by using a third-party freight management company during the presentation.
"From the healthcare supplier perspective, we understand that healthcare is evolving and the ever-changing environment is requiring us to be agile and adaptable from both the provider and supplier side," said Mr. Kernya.
OptiFreight® Logistics has worked with ASCs on managing their freight for nearly 10 years, and currently serves more than 2,000 ASCs. The company accrues savings surpassing $200 million total for its clients on an annual basis.
Here are four thoughts on freight management:
1. Manufacturers are using freight as a profit center. When considering freight, 40 percent of the charges are based on a center's contract with the distributor. A third party freight management company focuses on the lowering the remaining 60 percent, which stems from the supplier. To accrue profits, suppliers will often list freight as a separate line item on the invoice, which many surgery centers do not isolate from other line items. Suppliers often chunk the freight cost into "shipping and handling," which Mr. Kernya noted some centers are not contractually obligated to pay.
"Typically, if you are not addressing freight with your supplier, they are charging you freight at the market value or greater," he added.
If surgery centers address their freight, they can save anywhere between 30 percent and 50 percent on their freight costs.1 Per package, surgery centers can save $17 on average.1 In its first year after using a third party freight management company, Lafayette Surgical Specialty Hospital saved nearly $36,000.2
2. How a freight management program works. The center places a purchase order though the supplier, then the carrier picks up the package and drops if off at the surgery center if it is an inbound order. The supplier will then send a surgery center the invoice with freight typically listed as a line item. With a freight management program, the sole difference is the backend invoice. A freight management company will remove the freight charge from the invoice and give the center its own invoice at a discounted rate.
For a basic program, ASCs provide their third party freight management company a list of vendors and their associated account numbers. "The freight management provider drives the entire process," Mr. Kernya said. "Through this, surgery center can reduce cost with no clinical impact."
The key to a successful freight management program is scale. Higher volume yields greater savings.
3. A freight management program provides a wealth of data. Setting up a freight management program requires very little work for surgery centers, and the program gives centers a substantial amount of data. For instance, surgery centers have access to saving reports, shipping modes, accessorial costs, data on excessive handling fees and benchmarks for savings compared to other facilities.
This data can show surgery centers where they are losing money and how they can cut back on freight costs, which is vital for many personnel who are crunched for time.
"Like everyone in my position, you have a million things going on and you wear a lot of hats," Mr. Howat said. "I never saw freight. I didn't know how to track shipping. I implemented the program and the savings have been tremendous."
4. Surgery centers can employ best practices for their program. ASCs looking to yield that much more savings can implement certain practices including:
• Establish a written purchase order comment per vendor for a 30 percent to 40 percent lift in volume
• Leverage large shipping orders over 150 pounds for better pricing
• Pay attention to outbound shipping, which is about 10 percent of freight costs on average
The industry is changing and demanding every party involved in healthcare to cut down on costs while also improving care. Mr. Kernya attributes OptiFreight®'s success to its ability to bring savings to centers almost immediately, without compromising patient care or other daily operations.
"About 15 to 20 years ago, the industry itself was being challenged to reduce costs and looking for an opportunity that would be quick, painless and provide meaningful savings," he said. "As we migrated to the ASC marketplace five to 10 years ago, we found that we've had success due our program's simplicity and ability to return savings from day one."
Listen to the webinar recording here and view the webinar slides here.
Footnotes:
1 Based on shipments through OptiFreight® Logistics during January 1–December 31, 2015. Individual savings may vary.
2 Based on shipments sent directly from suppliers—through OptiFreight® Logistics—to Lafayette Surgical Specialty Hospital from November 1, 2013 to October 31, 2014.