Mike Merwarth is CEO of Aperek of Raleigh, NC.
Tell me about yourself and the company.
My dad was a physician. He went to Duke. My mom was a nurse. She went to Duke. My wife was a nurse. She’s still my wife, but she’s no longer practicing. My older daughter is getting her RN degree in May. My younger daughter is taking the MCAT this Thursday. All of which is to say, I have been immersed literally since the minute I was born over at Duke in a healthcare’s aura. It affected my life and continues to affect my professional life as well.
I was diagnosed with adult onset type 1 diabetes at 41 out of the blue. Every quarter I go over to Duke to see an endocrinologist. Between that and customer visits, I’m in hospitals a lot. The potentially strange thing about that is I feel at home in hospitals. That’s why I bring the level of commitment and passion I do to Aperek.
Aperek is focused on the healthcare supply chain. We do not offer services or product to any other industry other than healthcare, which distinguishes us from some of the other vendors. We changed our name from Mediclick to Aperek this past November.
Who’s buying your systems and why do they choose Aperek instead of non-healthcare specific vendors?
In the ‘90s when we were still part of Global Software and in the the early 2000s after we had spun off and formed Mediclick, hospitals were buying ERP solutions. General ledger, accounts payable, fixed assets, payroll, human resources, and last and unfortunately least, materials management. That would be the typical package.
It was largely a financially-driven decision process. The materials management system was what we call in this industry a drag-along, in many cases. In other words, they would — not throw it in for free, that’s a little strong – but they would offer it as part of the package at effectively no additional charge.
It’s also interesting that two of the companies that now have significant market share brought a distribution system into healthcare from non-healthcare markets or industries — specifically distribution and retail — and added some capabilities like par management. Frankly, they were the only game in town and they did an admirable job of capturing market share.
Those systems were OK for a number of years – let’s call it a decade — where the fundamental job was to manage a perpetual inventory of stock items, replenish the par levels on the nursing floors, and do the purchasing. All the clinical areas largely did their own buying.
That limitation of focus on the scope of what they needed to do for the hospital was fine. Today, it’s not fine because now there’s a cost crisis. There’s a bunch of crises we could talk about, but there’s certainly a crisis of getting costs out of the system. One of the remaining ways to do that is in the supply chain. These systems and companies are not adamantly and singularly focused on doing that, at least in the way I think they should be.
In hospitals, the real experts and professionals in materials management are buying tissues and bedpans, while people with no training are buying the most expensive items that represent most of the overall cost.
That’s the irony or tragedy, pick your word. Roughly 80 percent of dollar value is purchased in the clinical areas. These multi-million dollar systems that were painful to install preside over only 18 percent, give or take, of the dollar value of the product that comes in the door. That’s a general statement and there are exceptions, but you are absolutely right.
How does your system control those higher-cost items that clinicians buy?
Technically, there are capabilities in these products to manage multiple inventories. You can have pars up in the OR, for example, and they could theoretically be managed by the decent systems out there. But there’s a significant usability issue that comes with the the necessary interaction at certain points with the clinicians. They rightfully resist anything that unnecessarily distracts them from their main job, which is taking care of patients. That’s where the usability of the traditional materials management functionality falls completely apart.
The reason I would advocate buying Aperek supply chain solutions would be, number one, there’s merit to focus. We live and breathe healthcare, specifically the acute care market but we also have several clinics as clients. Our clients span from single 200 bed-hospitals up into the 20- and 30-hospital IDNs.
Second, we recognize that the 80 percent that is spent on the clinical area is where the focus needs to be. I have referred to it as the Wild West, with stories about OR nurses hiding product up in the ceiling tiles and the bottom desk drawers. I know; I’ve actually seen that. It happens because they ran out one time and there are negative consequences to that. Maybe it’s just the surgeon yelling at them. But for whatever reason, they’re not going to run out again. There are millions of millions of dollars of inventory in the clinical areas that, if properly managed, does not need to be there.
Fundamentally, what this company is working very hard to complete is a set of capabilities that allow the supply chain professionals to do their job in the clinical areas. That requires some new tools that aren’t available from most vendors. Most importantly, it allows the clinicians to do the supply chain management they need to do in as non-disruptive a way as possible. We’re obsessively focused on the user experience here in what we’re developing right now.
A specific example is a product that we’re just now installing in two initial sites called Pulse. It’s implant tracking. It’s on the iPad. In my 25-plus years in this business, I have never bonded with clinicians like I have in the last year because of this product. I have never been so gratified by the excitement that I see that they have a visceral attraction to the ways that we allow them to record product.
With another company in the industry, it’s all barcode driven. We’ve got a Bluetooth barcode capability. It’s great. It reads all the bar codes and it’s intelligent and can discern what lets you go where. But the nature of implants is that there are screws and plates, thousands of parts. Those parts are not going to have bar codes associated with them in the near future. It’s going to take a new and cheaper technology to either embed or somehow associate those with a bar code that could be read, or RFID or whatever it is.
Those are three-figure to four-figure items relative to cost. They have to be recorded. Today, they’re often recorded on sheets of paper. They’re recorded on sleeves of surgical gowns. They’re yelled out to the surgical nurse to hand write.
What we have provided is a multitude of ways that they can quickly record the usage of the product that doesn’t have a bar code. Once the tension of the case is over, you can quickly come back and resolve the identity of the product that’s been used. You can have a little Bluetooth headset on and speak a description and the translation software in the iPad writes it out. You can go in and scribble it and hand write it. You can take a picture of it. You can do a combination of those things and move on, but you know you’ve got enough data such that when the case is over, you can come back and capture it.
Hospitals that are trying to cut costs, which is pretty much all of them, usually look at labor and then try to do something with patient utilization. Do they pay less attention to supply chain other than just trying to negotiate favorable pricing? Are they missing something?
Tragically, yes. I’m not sure I understand why. It’s not simple, but it’s doable and it’s a progression. Nobody’s going to reach perfection in my lifetime. It’s going to take some naming standards like GS1 to come into fruition before perfection can even be approached. But there’s a lot of things that can be done.
If you think about the flow of product in the OR, it’s largely driven by physician preference cards, the list of stuff that they want on the case card that goes into the room. Those physician preference cards are maintained in the OR system, when in fact they’re the key to standardization. Elimination of product that goes up the clean elevator and down the dirty elevator every day. Basically 50 percent of the product on case carts is never used. It’s put on there just in case.
There are so many opportunities to reduce SKUs, to standardize on the implant products that cost thousands of dollars, and to lower the cost of the inventories that are managed in these areas if it’s put in the hands of people whose job it is to do that. You can’t expect the clinicians to do it. They’ve got their hands full already. Everything we’re doing is devoted to that.
Are hospitals looking at choices they didn’t find politically expedient before now that they’re under the margin gun, such as perpetual inventory and true cost accounting?
Sophistication in areas like cost accounting will continue to be looked at and be increasingly pertinent. But the example that immediately comes to mind is in product standardization. For example, you’ve got five orthopods who use three different knee implants, three different companies, because that’s what they were trained on in school. If they get together and realize that the outcomes of all three are virtually identical and the cost of one of the three is significantly less than the other two, and either through competitive motivation or collaborative motivation they agree to standardize, they’ve certainly simplified inventory management.
But from a purchasing perspective, and this is our product called Ellipse, you can standardize to say a single vendor for total knees. Then you can commit unprecedented volume to that particular supplier. That means a tremendous amount to them and you’ll get better pricing. There are those types of things that can be done with the right tools. The good news is for us, selfishly speaking for the growth prospects of Aperek, it hasn’t been done.
As hospitals acquire practices and also each other and take on financial risk, how do you see that dynamic changing supply chain and contract management?
The surgeons clearly have a direct interest in improving outcomes, standardizing outcomes, standardizing treatment protocols, and standardizing product. It’s in their self interest because in the ACO environment, to the degree that ever takes real hold, they will be getting paid out of the pot of money that is left over when the costs are subtracted from the reimbursement.
What are the priorities for the company in the next one to three years?
We’ve got a supply chain system today, as well as a GL and AP, that are ranked number one by KLAS and MD Buyline. They’ve been number one for five years. We’ve got that spend analysis tool that I mentioned that can show you volume and market share. We’ve got the Pulse product going in to its initial sites. That Pulse product will in the next six months be expanded into full product capture so you can get a full product cost per case.
As we progress into that, I’d like to take control of the preference cards and manage those. Put those capabilities in the hands of the supply chain professional. Along the way, I want to optimize the management of product inventory in the clinical area. I can do that with much of my existing supply chain system logic.
We’ve got a lot of the pieces, but we want to bring — you could say best practices — harmony, if you will, into the clinical arena and cut significant, millions of dollars out of the expenditure that’s taking place there today. Not just by reducing the price of things, but by standardization of products and standardization of treatment protocols.