Buyer Aware

How much does a product truly cost? As the new Greenhealth Cost of Ownership Calculator demonstrates, environmentally preferable products may result in significant savings to a health system when considering costs beyond just the purchase price.

By M. Diane McCormick on October 25, 2016

cover-featureIn health care, costs and sustainability are intertwined. Even as hospitals strive to lighten their budgets and their environmental footprints, on average, they spend 17 percent of their budgets on supplies, generate 5.9 million tons of waste annually, and gobble water and electricity.

The cost of purchasing environmentally preferable products on top of that can cause even the most forward-thinking hospital CEOs to balk. “But some purchases are going to cost you more in the long run, even though they may be cheaper to buy,” said Practice Greenhealth’s Environmental Purchasing Program Director, Beth Eckl, especially when you add in energy costs, waste disposal and other factors.

Those total costs can now be quantified through the Greenhealth Cost of Ownership (GCO) Calculator, developed by Practice Greenhealth in conjunction with top hospitals, suppliers and group purchasing organizations. Like deciding which car to buy based on mileage, maintenance and insurance costs, the tool calculates the total cost of using supplies and equipment over the course of their lives, from purchase to disposal, and can unveil sustainability benefits that were once unquantifiable.

“We knew there was inherent benefit sometimes in going green,” said Nestor Jarquin, surgical sourcing manager, Buy to Pay, Kaiser Permanente. “The tool dissuades the myth that going green costs money. It will tell you that in some instances, it may not cost you money when you take into account other factors, such as how much it costs you to throw the item away. Now, on the back end, we have a good idea of what the total cost is, which is something we haven’t seen in a standardized fashion.”

DUE DILIGENCE

Hospitals “are resource pigs,” said Dana-Farber Cancer Institute Senior Director of Supply Chain Andrew Madden.

Of course, he added, that’s the nature of a life-or-death business, but purchasing decisions shouldn’t be made solely on “the price at the pump.” The total cost of ownership perspective, from purchase to disposal, puts a mindful spin on the business of supplies.

“If we do our due diligence on the front end of the purchase, we will absolutely save some money somewhere down the stream, but you have to do the work upfront,” Madden said.

Madden was one of the partners who helped develop the GCO Calculator, which was about three years in the making. Practice Greenhealth initiated the process when it learned that for hospitals, cost was the biggest barrier to purchasing environmentally preferred products. In Phase One, a task force of industry professionals compiled the requirements for calculating total cost of ownership and sought—but couldn’t find—existing tools to accommodate that information.

“We focus so much on our own little world—our own little hospital. We’re providing great care. And then we look at the equipment and chemicals we use, and it’s horrible for the globe. It’s great to have the commitment to do our best work, but we’re missing that vision of some of the downstream decisions we’re making. We need to think globally. We need to do no harm in our environment.”
—Andrew Madden, Dana-Farber Cancer Institute Senior Director of Supply Chain

In Phase Two, participants developed and beta-tested the calculator, adhering to demands for simplicity in health care’s downsizing climate. “There are always competing priorities and time constraints,” said Madden. “It’s hard to get to that level of detail, and manage that level of detail, without a simple tool. We’re always chasing information. I kept on saying that if it’s too difficult, if there are too many fields to populate, we will not use it. We just won’t have the time to do it.”The development group brought the GCO Calculator to the point where usage “takes just a little bit of time,” he said, but delivers a huge end result, allowing buyers to evaluate purchases from a resource consumption perspective.

The calculator is a progression from a scorecard developed in the mid-2000s that assesses the sustainability of potential purchases by probing details such as whether hardware is “virgin” or recycled, or what chemicals were used during production, said Jarquin. Now, the new calculator “can provide metrics and reports that validate assumptions we knew were there all along” regarding resource consumption.

In essence, he said, the calculator yields answers to common questions: “How green is green? Does it cost more? Does it cost less? What’s the total cost for a particular project?”

THE GCO CALCULATOR: A CLOSER LOOK

Built on an Excel-based spreadsheet, the GCO Calculator is downloadable and designed for repeated uses without the fear of hacking that comes with online offerings. It features:

  • The ability to input data on direct costs, including purchase price, maintenance and use costs (such as energy, water, labor and cleaning), and end-of-use costs.
  • A simple, initial screening assessment, helping users determine if they should continue.
  • A training video, detailed instructions and FAQs.
  • Pop-up advice on possible sources for the data sought for each field. (For costs that can’t be found, the calculator defaults to regional and national averages.)
  • Entry of up to four product scenarios for comparison.
  • Report capabilities on short-term and long-term costs, cumulative cost of ownership and other findings, all in bar charts and line graphs for at-a-glance comparisons by product.

Practice Greenhealth provides members with a companion template of utility costs to capture data that can be reused in multiple calculations, Eckl said. The current calculator is considered a 1.0 version—still subject to updates based on user reviews, but also thoroughly vetted by the steering committee participants before release.

The calculator is “pretty intuitive,” said Jarquin. “If you use it one time for a simplified project, you see the benefit.” Once the calculator validates opportunities to save costs, “that’s when you get the ear of supply chain and CFOs and COOs.”

“It’s easy,” said Madden. “You just plug and play.”

Madden tested the calculator on the purchase of a minus-80-degree freezer and learned that about 50 percent of the freezer’s lifetime cost wasn’t even reported using traditional purchase calculations. The calculator quantified costs such as electricity, HVAC for cooling the room and end-of-use disposal. In the final accounting, one freezer was shown to save about $3,000 over its lifetime and use 40 to 60 percent less energy.

It was the marriage of cost savings and environmental benefits that tool developers were striving for. “This is a major cultural shift and a rethinking of how we manage our business on the supply chain side,” said Madden.

THE SUPPLIER EQUATION

The calculator is also another channel for suppliers to provide sustainability information sought by hospitals, said Ellen Kondracki, senior director, global sustainability for BD (Becton, Dickinson and Company). “It feeds the information in a way where the outcome to the end user is to look at that environmental attribute as part of a total system.”

Previous environmental purchasing initiatives have helped buyers craft specific questions for suppliers in order to elicit sustainability benefits and collect apples-to-apples comparisons among product choices, Kondracki said. The GCO Calculator can further advance how the environmental impact of product choices is evaluated. “Having a better understanding of environmental costs throughout the system in which products are used can help both buyers and suppliers,” she said. “It creates a new lens for evaluating sustainability in the purchase decision and could even advance communications, helping suppliers understand how customers value the information.”

In a coordinated sustainability strategy, vendors must be part of the patient care team, which requires collaboration on sustainability and cost savings, Madden said. When suppliers understand the hospital’s institutional goals, “they feed us, instead of us chasing the opportunity. That puts us in a much better situation, because now I can do more and add value to our end user—our customers,” he said. “We’ll have more time to talk about the strategy of it, rather than chasing the data to get to a point of understanding it.”

Jarquin expects to see some suppliers “welcoming the calculator and saying it’s about time.” Others will see with consistent use that they are collaborating in “the next level of engagement in sustainability of the product line.” For instance, the calculator could reveal a more cost-beneficial decontamination and sterilization process for reusable products, which could prompt suppliers “to consider validating the instrument to be processed in a different fashion.”

NEW OPPORTUNITIES

As the final step before launching in the third quarter of 2016, project sponsors asked for a repeatability and reproducibility assessment. “The purpose was to see if three users with the same input data would reach the same outcome with the calculator,” Eckl said. Jarquin has found in initial use that the calculator is “all-encompassing and standardized and repeatable.”

cover-feature-pic2“As long as your input is solid, your back-end output is accurate as well,” he said.

Practice Greenhealth is holding webinars and training on using the calculator. As it takes hold, developers hope hospitals grasp its “human health and environmental impact” as well as its cost-saving benefits, said Eckl.

“The GCO Calculator can identify products that use less electricity, water and waste, which are three elements contributing to the degradation of the planet and to communities and public health, so it is all tied in together,” she said. “This calculator is therefore an opportunity to not only help you save money, but also to improve patient health and the health of the community and the planet.”

Madden agrees that everyone in health care, including those in finance and purchasing, should adhere to the physician’s oath to “do no harm.”

“We focus so much on our own little world—our own little hospital,” he said. “We’re providing great care. And then we look at the equipment and chemicals we use, and it’s horrible for the globe. It’s great to have the commitment to do our best work, but we’re missing that vision of some of the downstream decisions we’re making. We need to think globally. We need to do no harm in our environment.”

Plus, if hospitals can reduce resource costs, he added, “there’s more money to infuse in the patient side to go and buy that next amazing smart pump, CT scan [unit] or MRI.”

Increasingly, hospitals must juggle their own green goals with sustainability measures enforced through state and city mandates, Madden said. Because many of his departments finance equipment purchases from scarce research grants, he hopes to overcome their reluctance to buy more efficient but higher-priced equipment by reimbursing the difference to departments using grants with funds from areas where savings occurred—an idea borrowed from Harvard University that could, for instance, mean transferring money from the facilities budget to the department that bought the more sustainable minus-80-degree freezer.

Jarquin also sees “larger opportunities outside of the surgical field,” as the calculator is applied to other areas in health care, such as construction and environmental services. Like the environmental scorecard, as the GCO Calculator becomes integral to purchasing strategies, it could be reviewed and validated during every contracting cycle.

For suppliers and buyers, “there are a lot of different levers you pull to get after better sustainability in health care overall,” said Kondracki. The GCO Calculator is “one piece of the puzzle,” promoting partnerships that leverage each player’s sustainability goals.

“We can all make incremental changes, which are really good and really important, or we can look at how to make systemwide changes and really change how we think about how we do things,” she said. “I don’t think you can get to systemwide change like this unless you have organizations from all different parts of the supply chain talking and collaborating together. As a member of the TCO steering committee, that’s what this experience was. The level of change that could come from this is because of all the different parts of the supply chain that had a seat at the table.”