Forget Walmart. Forget Amazon. For a truly staggering array of purchases, it’s hard to beat America’s hospitals. Roof shingles, intravenous tubing, floor cleaners, heart catheters — hospitals purchase them all. According to Practice Greenhealth (PGH), a membership-based organization for health care institutions committed to sustainability, the U.S. health care industry as a whole spends more than $200 billion annually. And that amount will be increasing as the population ages and grows.
How much all this spending contributes, or fails to contribute, to the health of the American people is a matter of great concern. Less noticed is how these purchases affect the health of the environment. At “Metrics that Matter, Messages that Motivate,” a conference sponsored by Wharton’s Initiative for Global Environmental Leadership (IGEL) and Johnson & Johnson, speakers focused on the environmental costs of hospital spending and how they might be reduced. This article includes information gathered at that conference and from interviews with leading experts.
Erol Odabsi, director of sustainability for Johnson & Johnson Medical Devices and Diagnostics, told conference attendees that U.S. hospitals use more energy than any other type of building, contribute 8% to the nation’s emission of greenhouse gases and are among the top 10 users of water. And much of what hospitals purchase ends up in the trash — 5.9 million tons of waste every year.
Purchase Price Looms Large
The path that leads to all this purchasing begins in most cases with committees of experts in all parts of a hospital. Doctors and nurses who work in surgery, for example, meet to review what they need and how they want to spend their budget. Their requests meet up with the requests of other hospital committees in a central supply chain or purchasing department.
In most cases, the supply chain professionals will search a huge database of products provided by the hospital’s group purchasing organization (GPO). These databases include just about every product a hospital might need, as well as information about each product, provided by the suppliers, so that purchasers can make informed decisions from among all the products offered.
Price is generally one of the most important factors, if not the most important, as a hospital considers purchasing a product. Even for many of the hospitals that belong to PGH, cost is a major driver. “For many of our members, as health care reform occurs and reimbursements continue to go down, hospitals have to become more efficient in their internal operations,” says Laura Wenger, executive director of PGH. “They’re not exactly making more in their revenue so they have to start cutting some of their expenses.”
According to Erol Odabsi, U.S. hospitals use more energy than any other type of building and contribute 8% to the nation’s emission of greenhouse gases.
This is the reason 94% of all hospitals belong to a GPO. As the name implies, a group purchasing organization leverages the combined purchasing power of all its members to drive down prices. The GPO’s function is to “aggregate and negotiate best prices with suppliers,” says Terri Scannell, director of corporate citizenship and sustainability at VHA, Inc., a major player in the GPO space.
While efficacy and patient health take precedence, price looms large throughout every step of this process. “Because everyone is so focused on cost, anything that costs more will get lots of scrutiny,” says Judy Miller, who recently retired from her position as affiliate senior director at Galloway Consulting, a firm that advises health care executives on ways to improve their operations.
“If someone wants to make a change for any reason, including sustainability, they would have to put in a request saying why they want to change the product they are using and the cost implications,” she notes. “If it’s more expensive, it’s going to be a challenge to put it through, because you would have to really justify what difference it’s going to make in the environment, and that would probably go all the way to the top, to the senior team.” Miller adds: “Sustainability is not getting a lot of talk at the senior level.”
Beyond Price
Fortunately, it is becoming increasingly clear that environmentally sustainable choices very often do lower the cost of health care. Sustainability is generally about improving efficiency and reducing waste, and packaging is often a good place to start. Reducing packaging saves resources upfront and helps cut hospital waste as well. And small changes can result in dramatic savings. Johnson & Johnson, for example, said it dramatically reduced the amount of environmentally sourced packaging for Surgicel, a mesh product used to control post-surgical bleeding, simply by rolling rather than folding the mesh, and by identifying and eliminating unneeded instructions.
Such improvements in environmental performance also save money, as Cristina DeVito, support services administrator at Yale New Haven Hospital, discovered. DeVito was a member of her hospital’s Work Smart Committee, chaired by Richard D’Aquila, president and COO of the hospital. The committee “started out just looking for savings and ways to increase efficiency,” DeVito says. But then “we began to see the severe overlap between sustainability, cost savings and efficiency,” and that helped the group expand its mission to include sustainability. “Now we’ve grown to the point where sustainability is right up there with cost savings.”
Many other companies have found the same sweet spot, where what’s good for the environment is also good for the bottom line. As Wenger notes, “If you can do that, cut costs and improve your environmental footprint, that’s a win-win situation.” This may account in part for the growing preference hospitals say they have for green purchases. In a 2012 Johnson & Johnson survey of 307 key decision makers, 54% of hospitals rated green attributes highly in making purchasing decisions of medical devices and pharmaceuticals. Currently, the survey said, 33% of purchasing contracts include green attributes, and it’s expected that 40% of future contracts will include them.
“For many of our members, as health care reform occurs and reimbursements continue to go down, hospitals have to become more efficient in their internal operations.” –Laura Wenger
Some environmental success stories:
- Kaiser Permanente, the managed care consortium, sourced arthroscopy tubing that could be reused, which eliminated 320 pounds of material from the waste stream in the first nine months of the program.
- The nonprofit Fairview Health Services, based in Minneapolis — with eight hospitals and more than 40 primary care clinics — became frustrated with the difficult-to-recycle polystyrene foam coolers it used to transport medications. A task force decided the best alternative was a compostable and biodegradable cooler, and one was located made from cornstarch that degrades in 60 days. The result was the elimination of 40,000 polystyrene coolers from the waste stream each year.
- Intermountain Healthcare, a nonprofit system of more than 400 clinics, labs and medical centers based in Salt Lake City, developed a closed-loop shipping system with reusable transportation packaging materials (including pallets and crates). The results, besides a much-improved carbon footprint, include an overall 20% reduction in cardboard and packaging waste, labor savings, better product protection and a reduced need for storage space.
- Manufacturers, too, are finding ways to reduce costs and environmental impact. Johnson & Johnson established Earthwards, a line of products that have to meet extensive environmental, health and safety standards, and go through a lifecycle impact screening.
Reducing energy use is among the most common starting places for energy-intensive hospitals to look for solutions that are green in both senses of the word, and reducing waste is not far behind. Whether it’s changing light bulbs or reprocessing formerly disposable medical devices, the payback on investments in these areas is often short, and the benefits can be substantial.
But as some green advocates in other industries have discovered, the more win-win solutions that hospitals find, the harder it becomes to keep uncovering them. That’s the reason interest has been growing in Total Cost of Ownership (TCO). The idea is straightforward: to compare similar products not just based on initial price but rather on the total costs incurred throughout the lives of those products, from purchase (or earlier) to end-of-life.
At the most basic level, a product that costs more upfront may simply last longer and therefore be less expensive in the end. Less obvious, but no less real, are what PGH calls “submerged costs,” such as storage, maintenance and disposal costs. Once these are considered over the lifetime of a product, the value calculation can change. A recyclable product that costs nothing to dispose of may have a higher initial price tag but a lower total cost of ownership.
Given the number of variables that may have to be considered, determining a product’s TCO can be complicated, which is why more than one organization is working to develop TCO tools that simplify the process. Both PGH and the Association for Healthcare Resource & Materials Management are working with industry partners to develop TCO tools that will be offered to hospitals nationwide. As PGH noted when announcing its own effort, “Creating that tool requires a standardized method to measure or calculate these submerged environmental costs that is universally recognized.”
A tool of a different sort is available to hospitals in the form of purchasing power. One example that Wenger points to is the case of IV tubing made from PVC, which requires the use of plasticizers for flexibility. “The problem is that all these plasticizers, such as DEHP, are endocrine disrupters and have been shown to be carcinogenic.” At first, however, when a vendor came up with a PVC/DHEP-free product the cost was slightly higher and most hospitals did not adopt it. Wenger says that only a few hospital supply chain officers saw the purchase as a safety issue and were willing to pay the higher price.
“We began to see the severe overlap between sustainability, cost savings and efficiency….” –Cristina DeVito
But she points out that as more hospitals adopt this practice and demand for the PVC/DEHP-free tubing increases, manufacturers will increase production and drop the unit price. The Healthier Hospitals Initiative 2012 Milestone Report notes that one health care system with 35 hospitals spent more than $19 million on PVC/DEHP-free devices in just one product category. The report continues: “This presents a significant opportunity for the health care industry to use its purchasing power to push for safer products. If just one health care system’s 35 hospitals can show that much of a financial commitment to healthier chemicals in its medical products, the potential impact of the entire health care industry committing to healthier chemicals is astounding.” GPOs are an obvious way for hospitals to pool their purchasing power. VHA’s Scannell points out, “As demand increases, we can aggregate that demand and bring prices down.”
The Price of Improvement
As critical as it is, price has always been just one of the many variables hospitals have to factor into their purchasing decisions. Some large health systems, such as Yale-New Haven, have sophisticated scoring programs to help their supply chain staff weigh all of the variables involved in a purchase. And Kaiser Permanente has developed a Sustainability Scorecard to evaluate products. Elsewhere, committees do this difficult work themselves.
To ensure sustainability is among the factors considered in these calculations, hospitals, GPOs and others have been adopting Environmentally Preferable Purchasing (EPP) programs. These programs vary from institution to institution, but they generally include a statement of the environmental principles that the hospital has adopted and a list of its environmental preferences in a number of product categories. These lists are not mandates, but a transparent way to let vendors know their customer will be weighing specific environmental factors when making purchasing decisions.
PGH has published a 10-step process for developing and implementing EPP programs, and offers members assistance at every step. But even the most sophisticated EPP program cannot be effective without the relevant product information. Before 2013, VHA listed environmentally preferable products in a separate EPP catalog. This was where neonatal intensive care units turned to find IV tubing that would not expose premature infants to toxic materials. But by segregating the information in a separate catalog, VHA realized it was preventing others who were not specifically looking for such information from even considering it. So, Scannell says, “rather than have a separate catalog that’s just environmentally friendly products, we decided to turn that around. Why shouldn’t all the products that go into a hospital be considered for their environmental sustainability?”
Even when product information is available, it can be misleading if manufacturers present the information in different ways that are difficult to compare. This was the case with environmental factors cataloged by GPOs. One GPO might ask whether a product included a particular substance, while another might inquire if the product was free of the substance. A yes in the first instance would mean the opposite of a yes in the second.
To help remedy this situation, PGH worked with the five largest GPOs in the country to “standardize their environmental disclosures and the questions they are asking vendors when they are making contract decisions,” according to Wenger. This not only allows hospitals to compare products’ environmental attributes, but also “makes it easier for suppliers to provide information and meet expectations,” says Scannell.
“We cannot accomplish this mission without looking at our organization’s environmental impact and how that contributes to disease.” –Jeffrey Thompson
Beyond Hospital Walls
While a hospital’s EPP program may well make reference to environmental harm outside its walls, it is difficult to find examples of hospitals that consider this larger context when making purchasing decisions. One notable exception, frequently mentioned in conversations about sustainable health care, is Wisconsin-based Gundersen Lutheran Health System. This organization’s enviable environmental record can be traced back to its mission, which according to CEO Jeffrey Thompson, “is to improve the health of the communities we serve, and we cannot accomplish this mission without looking at our organization’s environmental impact and how that contributes to disease.” With this mission in mind, it’s easy to understand Gundersen’s elimination of Styrofoam, which was locally burned, releasing toxic fumes into the community.
Such community-minded decisions are far from commonplace. But the Affordable Care Act may soon change that as it radically alters the way hospitals are paid in the U.S. In the past, compensation for hospitals was largely based on volume. The more medical procedures, medications and diagnostic tests, the more money the hospital earned. In the near future, however, hospitals are likely to be paid a fee based on population, says Miller. Insurers will pay hospitals a fixed amount to care for the population they serve, probably based on a per-community-member/per month formula. It will then be up to the hospitals to use the total amount they are paid as they choose.
Much remains to be worked out, but if something like this approach is adopted, hospitals will be “rewarded for keeping patients healthy, whereas now they are rewarded for keeping patients in the hospital,” explains Miller. At that point, the Gundersen mission will not only seem admirable, it will seem sensible. Since burning polystyrene is detrimental to the health of community members, using and disposing of the substance to be locally incinerated will mean a hospital is increasing its own costs, a financially irresponsible move.
Still open to question is how this new system will deal with “externalities,” costs generated by a business or organization but borne by society. Consider the case of a traditional blood pressure monitor that uses mercury. According to a Health Care Without Harm report, the normalized cost of incinerator environmental control to remove mercury from the device is $1,009. This cost protects the health of the local hospital’s community members from a chemical used by the hospital. Should the hospital, which is paid to keep its members healthy, bear that cost? If not, will it still be motivated to spend the extra $50 it costs to purchase a mercury-free monitor?
Other externalized costs are borne by the environment itself. TruCost is a London-based research firm that helps organizations understand the true cost of business so they can use resources more efficiently. The company focuses in particular on the concept of “natural capital,” the often-undervalued products and services provided by nature and used by business. According to Libby Bernick, a senior vice president, TruCost has assembled metrics on the environmental performance of 4,600 major companies worldwide, 200 of them in the health care sector. Speaking at the Wharton conference, she said, “Our most striking finding when looking at health care was that for every $1 trillion in revenue, there is $28 billion in natural capital costs.
“The second headline is that most of these natural costs, most significantly greenhouse gas emissions, water and air impacts, are embedded in upstream supply chains,” Bernick continued. “Greenhouse gas emissions are not on everyone’s radar in the health care profession. But there is a direct correlation between climate emissions and energy use, and companies are definitely looking to reducing those bills. The real cost savings are along the supply chain, so the conversations are beginning.”
How these conversations progress and how hospitals address externalized costs long-term will say a great deal about how our investment in human health increases or diminishes the health of our environment.
Takeaways
- Increasing efficiency increases the bottom line and sustainability. Top priorities: energy savings and purchasing preferences, reduced packaging, re-usability and reprocessing of medical devices
- Long-term savings can justify higher upfront prices. Top priorities: Total Cost of Ownership that includes storage, maintenance and disposal costs, among others. PGH is developing a TOC Tool.
- New health care rules are likely to mean that hospitals will earn more by keeping people healthy than they will by treating them when they are sick. Priorities: purchasing products that reduce health risks inside and outside the hospital.
