Author: Freddie Sanchez

Piedmont Healthcare executives, supply chain experts and clinicians huddled the night of Jan. 12 to mitigate one of the biggest supply chain disruptions the health system has encountered.

They had just gotten word that their primary supplier of surgical gowns, Cardinal Health, distributed potentially contaminated products. Around half of Atlanta-based Piedmont’s 11 hospitals were affected.

It sequestered the affected gowns as well as other supplies that Cardinal packaged them with. But the health system did not have to cancel any surgeries as it worked with Cardinal and other stakeholders to source alternatives.

“Not of this scale, but supply disruptions have been occurring for years,” said Joe Colonna, Piedmont’s vice president of supply chain. “The secret is having a good relationship with clinical folks and leadership—no one panicked.”

How the recall unfolded

Sept. 1, 2018 – Jan. 10, 2020: Gowns shipped to hospitals

Dec. 10, 2019: Cardinal receives a tip that Siyang HolyMed, one of its manufacturers in China, used two unauthorized sites to produce the gowns

Dec. 20, 2019: Cardinal confirms the tip in an on-site inspection; stops doing business with Siyang and halts exports

Jan. 7, 2020: Cardinal places a hold on several SKUs

Jan. 10, 2020: Unable to identify specific gowns from the unauthorized plants, Cardinal puts a hold on all lots from Siyang and notifies the Food and Drug Administration

Jan. 21, 2020: Cardinal issues recall notice

Cardinal said that 2,807 facilities around the world received gowns that may have been contaminated at a manufacturing plant in China. The wholesale distribution giant recalled 9.1 million gowns, 7.7 million of which were distributed to hospitals, ambulatory surgery centers and labs from Sept. 1, 2018, to Jan. 10, 2020, Cardinal estimated in a Jan. 21 notice that warned of possible surgical-site infections. Executives said they sincerely apologize and that patient safety is their top concern.

As more manufacturing occurs overseas, these issues will likely persist. It’s difficult to ascertain where first-line suppliers get their materials, said Dr. Marcus Schabacker, CEO of the ECRI Institute. Things get cloudier as the supply chain adds links.

Piedmont is creating a long-term mitigation strategy in case manufacturers can’t sustain higher production levels. In the meantime, it aims to develop a more strategic, and less transactional, relationship with suppliers. The goal is to shed some light on where materials are sourced and how products are made to identify vulnerabilities, Colonna said.

ECRI hasn’t heard of critical shortages or a delay of lifesaving procedures as a result of the recall, so the initial supply chain disruption seems to have been mitigated, Schabacker said.

“But can it happen tomorrow with a different product? Totally,” he said. “Hopefully stakeholders take this as a red flag.”

Cardinal and the Food and Drug Administration said they were not aware of any cases of patient harm at this time. But pinpointing the source of an infection can be tricky, Schabacker said.

“We don’t know if it really started in September or before,” he said. “There is clearly a potential for it to be widespread.”

Cardinal received a tip on Dec. 10, 2019, that one of its manufacturers, Siyang HolyMed in China, was using two unauthorized sites to produce AAMI Level 3 surgical gowns, which are used for procedures like open-heart surgery and knee replacements. The company confirmed the tip during an on-site investigation on Dec. 20, and immediately stopped doing business with Siyang and halted imports.

The gowns had increased bioburden levels, which identifies and quantifies bacteria before sterilization, but the exact amounts are unknown. The windows at the inspected site were open, it lacked appropriate hand-washing stations, food was in the manufacturing area and the door wasn’t secure, the company said.

The gowns are shipped to sterilization sites after they are made. But Cardinal cannot ensure the products are sterile because of their unquantified exposure to bacteria while they were made.

Beyond bacteria, the gowns may have had organic matter that could be deadly, Schabacker said.

Cardinal placed a hold on several SKUs on Jan. 7. It then determined that it could not differentiate the product that came from the two unauthorized sites and other Siyang facilities, so it put all lots on hold on Jan. 10, notified the FDA and sent notices to customers.

Cardinal, which has replaced products at no cost and deployed employees to help providers, maintained that it acted as it gathered information and determined the scope of the problem.

Johnson City, Tenn.-based Ballad Health canceled about 200 elective surgeries while Allegheny Health Network in Pittsburgh said it had to cancel about a dozen. Services at both institutions resumed promptly. Five other providers Modern Healthcare contacted said there was minimal or no impact.

Hospitals are going through their infection-control protocol and reviewing quality data while Cardinal is reviewing complaints and tests bioburden levels. The company is considering monetary compensation for providers.

Tana Bannow

A new report from Fitch Ratings said not-for-profit hospitals’ and health systems’ median operating margins improved 10% in 2018 year-over-year, with the biggest gains seen among the lowest-rated providers.

Not-for-profit hospitals’ and health systems’ median operating margins bounced back more than 10% in 2018 over the prior year following two straight years of margin declines, with the biggest gains concentrated at the low end of the ratings spectrum, according to a new report from Fitch Ratings.

The median operating margin was 2.1% in 2018 across the 220 not-for-profit hospitals and health systems Fitch rates, compared with 1.9% in 2017. Within that, AA-rated providers saw their median operating margins decline from 5.1% to 4.5% during that time. At the other end of the spectrum, providers rated BBB- saw their margins improve from -1.2% to -0.7%.

It’s a “very good sign” for the industry that the lower-rated credits performed better, as they tend to be more vulnerable to the whims of the market than higher-rated systems, said Kevin Holloran, author of the report and senior director with Fitch.

“We’re not out of the woods yet,” he said. “But it’s important to note those smaller credits made the most meaningful gains. This shouldn’t be a flash in the pan. It should be an industrywide shift.”

Fitch still maintains a negative outlook for the not-for-profit hospital sector, as it has for about two years, but Holloran said the agency will likely revisit that in November or December. He thinks operating profitability bottomed out in 2017, and will continue to inch back up in the coming years.

“The main story this year was we did not see an across-the-board degradation of margins,” Holloran said. “We saw the industry pick itself up by the bootstraps.”

Hospitals and health systems at the lower end of the rating spectrum tend to be nimbler and can implement changes more quickly than larger systems, which tend to be perpetually digesting mergers or other bold changes that draw time and expertise away from fundamental operations, Holloran said. And since lower-rated systems tend to be smaller, even minor gains or losses have a meaningful impact on their overall operating results.

As far as why operational strength is returning to the sector, Holloran said it’s just because they’re doing the “basic blocking and tackling.” They’re getting better at controlling salary and wage costs by staffing people at the top of their licenses and using less traveling personnel, he said. They’re not overstaffing if volume does not require it. They’re not paying overtime because staffing is at appropriate levels.

“That’s literally half your expense base,” Holloran said.

The other half is supplies, which invites questions over utilization practice patterns. How many suture kits are opened during surgeries? Can implants, sponges and gloves be purchased in bulk through a known vendor?

Addressing salary, wage and supply costs covers two-thirds to three-quarters of hospitals’ expense base, Holloran said.

Another crucial area is revenue cycle. Are hospitals billing appropriately? Are bills being denied or sent back?

These aren’t so much “initiatives du jour” as they are a way of life, Holloran said. “I would submit that we in the not-for-profit world have gotten a good dose of for-profit acumen shot into our DNA.”

Outside of hospitals’ own operations, market conditions are also having somewhat of an effect on margins, although that’s a more mixed bag. Low unemployment rates, lots of people getting employer-sponsored insurance and a positive economic environment are all good things. For hospitals, though, a strong job market can make it tough to retain nurses, technicians, coders and others. There’s also the ever-present threat of nontraditional entrants becoming increasingly interested in healthcare.

Margins for hospitals’ median operating earnings before interest, taxes, depreciation and amortization also improved from 2017 and 2018, from 8.5% to 8.6% overall, with the biggest improvements seen in the lowest-rated systems. Systems rated under below investment-grade categories saw their operating EBITDA margins grow from 4.1% in 2017 to 5.8% in 2018. At the other end of the spectrum, all AA category credits did not see a change in their operating EBITDA margins during that time, which remained at 9.9%.

Data from Modern Healthcare Metrics, which aggregates information from the Medicare cost reports that hospitals submit to the CMS annually, identified a decline in median operating margins across not-for-profit hospitals in the years Fitch studied. In 2018, Metrics data show the median operating margin was 3.1% across 1,119 not-for-profit hospitals. In 2017, it was 3.3% across 1,943 not-for-profit hospitals.

Fitch’s new report, 2019 Median Ratios for Nonprofit Hospitals and Healthcare Systems, did not include data on children’s hospitals or hospital districts.

The report notes that hospitals’ liquidity metrics were stable between 2017 and 2018, although they’re at all-time highs for the industry. Overall median cash to debt dropped to 155% in 2018 from 159% in the prior year. Despite improved profitability, the BBB and below investment grade-rated systems saw declines in cash to debt, from 98% in 2017 to 91% in 2018.

Source: https://www.modernhealthcare.com/providers/fitch-small-not-profit-hospitals-see-biggest-margin-rebound