Healthcare Capital Spend Simplified

Hello everyone, and welcome back to Taking with Supply Chain Pulse. I'm Megan with Seen Hunch Company, and thanks for joining us. Our guest today is Matthew Mitchell, the Strategic Sourcing Program Director at Honor Health in Phoenix. With an impressive background spanning global supply chain operations, hospitality, and healthcare, Matthew shares insights shaped both by education and real-world experience in the industry.

Now here's your host, Fred Franz. Before we started, you told me that it was a dreary day in Phoenix, and living here in Cleveland, I was secretly thinking, good. I'm glad. Because we get a lot of dreary days here, and you get very few.

We had beautiful weather for the uh golf tournament, and now it is in the 60s and uh drizzling this afternoon. So the golf turn, the the most rauco tournament in America, right? 200,000, yeah, that's right. Waste management Phoenix Open, where they yell and boo and throw water bottles at the 16th hole when someone uh makes a really good shot.

So very good. Um let's talk a little bit about you. You have an interesting background. So why don't you tell us a little bit about yourself and and then I'll ask you some more questions in case you leave anything out, okay?

Wonderful. Yeah, no, I uh it is a unique journey to get to this point, and and this role is is uh certainly uh not common in the IDNs that I've had the chance to network with. Um, yeah, no, I started um doing work for the VA, had the opportunity to work in government, did a uh project in their um outpatient uh dialysis, um then the opportunity to work at Phoenix Children's Hospital, um, moved to uh interestingly enough, hospitality is my next move. Um worked for uh Hilton in Waldorf Astoria, helped uh manage capital uh labor expenses for uh seven luxury properties, um, and then relocated back to Phoenix.

And now I manage capital at uh Honor Health, um managing sort of that CapEx side instead of the labor side. Um but sort of the same butts and beds uh revenue structure, so um a unique journey to get here, uh, but uh adding value. Um and yeah, grateful for the opportunity to talk to you today. Okay, well, you know, your your educational background is also quite unique.

You uh did you start your did you start at ASU? Is that so are you from Phoenix originally or what? Yes, sir. I am uh born and raised here in Phoenix, Arizona.

I uh did go to ASU. I spent uh nine years, eight, eight and a half of my time at Arizona State. Um I did graduate um with a couple degrees, um, supply chain international business uh and computer science. Yeah, I see some of these.

I see like what is uh UTDT at Buenos Aires? Tell me about that. UTDT uh is a university, the main university in uh Buenos Aires. I had the opportunity to study abroad for a month.

Um, that was part of my MBA program, um, studying international finance, the opportunity to travel with a cohort, see the pink house, um, learn about uh inflation and and currency manipulation, interestingly enough. Um, but yeah, that was that's uh definitely uh a great experience that I had uh to share. I also went to Isan in Peru, that's in Lima, um, and that was another uh opportunity to study international finance. Uh that one was about um giving uh indigenous people rights uh to their land so they could uh grow the economy and move out of textiles and into more of a capital society.

So uh growing economy in Peru, not so much in Argentina. Um, two different flavors, uh, but yeah, definitely helped grow that finance background. And what about Hong Kong Polytechnic University? HKPU is another part of my story, and that uh that was an undergraduate, and I had the opportunity to uh go study the shipping yards.

I was very uh moved by the supply chain science and discipline. There's been a couple of uh key uh professors in my journey that have helped with that, and uh there was not an affiliate with ASU to go to Singapore, which is a larger port, uh, but there was an affiliate to go to Hong Kong and study supply chain uh from Hong Kong and see uh the containers move in and out of the the port into mainland China or from mainland China and leave the port to uh Southeast Asia, America, Micronesia.

Uh it was a great, great opportunity. I spent uh over six months uh in Hong Kong. Okay, so now now that's just part of your educational background and your work-related background. You were um you were with Hilton Hotels, uh, and you know, there we have hospitality, that's pretty good.

You also worked with Morgan Stanley uh and and you were a lean you were a lean analyst with a VA of uh Phoenix and uh uh did a hazard uh hazmat logistics thing at the children's hospital of Phoenix. Um you got a well-rounded perspective on a lot of things. So what what directed you back to healthcare and made you uh want to do what you're doing now? You know, I I love a challenge and I love the opportunity because I see that there's uh opportunity in the healthcare space, and I think this is definitely um related to conference that I had the chance to meet you at, uh, as well as the most recent one.

But um, you know, one of these influential people in my journey uh was Dr. Schneller, who's a professor at Arizona State. Um part of the reason why I chose to get an MHA in addition to the MBA was there is an inelastic demand associated with health care. If you break your arm, you're gonna go get it fixed and you'll figure out the costs later.

When we have these inelasticities, uh that's where opportunity exists for um vendors to take advantage, um, but also for healthcare providers, uh, hospitals, you name it, to again identify these opportunities for improvement, these opportunities to uh create savings and create value. So um I saw the inelasticity uh why I wanted to pursue sort of that healthcare supply chain. Okay, for for people who are not finance people, could you explain the term inelastic demand in terms that uh uh a regular average person could understand?

Absolutely. So uh the best example of inelastic demand that you'll probably get um in school, or an easy analogy for the uh consumer to digest, it would be salt. Uh, if I need to go to the grocery store, I'm gonna buy salt. I'm not going to be overly concerned if it's 69 cents or $1.

34 or $2.99. I need salt on my pantry, I'm gonna buy the salt. Um, if I look at something that's a little more specialized, like I don't know, your favorite dessert, uh cannoli or tiramisu or something like that.

And if it's $6.99 and on sale, I'll buy it. But if it's $34.99 because it's Valentine's Day and there's high demand for this product, I might say no, I don't need it right now.

So there's elasticity like a rubber band, it bends back and forth. Inelastic stuff is rigid. I'm gonna have it, I don't care what it costs, I'm gonna figure out where I need to cut to buy these products. And when it comes to humanity, and again, I use the example of breaking your arm.

You're probably not gonna walk around with a broken arm and wait for the opportune time to go to urgent care to get it fixed. You're probably gonna go to urgent care and get it fixed and figure out how to pay for it later. Um, so that's salt would be the best way to explain inelasticity. You're gonna buy salt regardless of the price.

So um, with all this background in education, and you find yourself in and out of healthcare a few times, uh you you told me before that there are very few places that have a job title and a function uh that is exactly like yours. Could you tell us what your what uh your job uh title entails, uh, what areas you serve, and and uh why so why not why doesn't everyone have one of you? It is a great question, and certainly happy to uh uh continue the conversation um with anybody uh that might follow up with you with regards to this podcast, but um it is a large area of spend.

Um for the most part, um it is fractured how IDNs manage capital. There are IDMs that manage purchasing once a year, once a quarter. Uh there's different policies and procedures around how to release funds, uh, whether they're contingency funds, whether they're planned. Um at the end of the day, um hospitals manage this very differently.

I get the chance to sit at uh this most recent conference in New Orleans, and I heard um Boston Children's everything is considered contingency, and there's no allocation for service lines, there's no specific OR money or or imaging money. Um, and I've heard uh other people at uh Advent Health uh create a a uh metric to assign some type of quantified score for every capital project. Um there's just there's just a whole bunch of different ways to slice this pie, and I don't think there's an industry standard, um, which is kind of how this unique job got born.

Um, Honor Health is a growing IDN. When I first started, we were five hospitals, now we're nine. Um capital pool money that I spent in my first year was probably closer to 10, and now I'm spending anywhere from 60 million dollars a year. So it is uh certainly a growing field.

And obviously, if we're talking about managing percentage points and savings and standardizing, um there should be an emphasis on uh capital management. Um so I I don't see it going away. If anything, I see uh you know sort of leading the way and and and getting the opportunity to be out in front. Yeah, you know, it's it's interesting because I was at the same conference that you were just recently at, and I have been doing capital uh equipment management for uh now about 50 years.

And when I started, um I worked at a standalone community hospital. Uh systems hadn't really become a thing yet. So you had one hospital and it was much simpler, but every year there was a grab bag, you know, it was budget time and uh oh yeah, we have this number. And a lot of times the number that people would use for capital was whatever their funded depreciation number was, because funded depreciation is a soft expense, it's not it's not uh a hard hit against the you know, hard dollar hit.

It's just a breakdown of everything, right? So uh everyone would go out and compete for for whatever they could get. They try to leverage things, and uh and uh you'd have one year where whoever, whatever doctors, and usually radiology was among the the biggest as far as having influence, uh whatever meetings they'd been to, they'd come back with their wants, and a lot of times they would get them. And and it occurred to me that there was that I I tried to break things down into clinical needs, non-clinical needs, uh contingency funds, actually actually providing for contingency funds, and then I tried to develop a plan for planned replacement of of those items that eventually outdate.

In fact, many times we would just wait until something broke and then figure out how to buy it. I tried to get a plan in there, and then maybe by the 90s the third evil chunk of money came in, and that was IT. And IT was something that couldn't be ignored. If you didn't keep it up to date, it failed.

And and yet what I have seen, and I'd like your I like your opinion or your reaction to this, what I have seen, even at these meetings where the best of the best are there, it seems that in many respects, not that much has changed in 50 years. People are still out there without a real plan, uh, building bigger and bigger IDNs, uh obtaining hospitals that have crumbling infrastructure, and and and not coming together with a plan. How is that what you saw, or is that what you see, and how are you how do you go about trying to bring order to that?

I completely agree with you, Fred. The sort of structure is you're either maintaining or you're growing or you're getting bought. Yeah this this year might uh might see some rural hospitals closing, depending on the uh current political environment. Um reimbursement changes.

We're certainly anticipating uh reimbursement going down. Um, but yes, to your point, uh for the most part, we're still pretty fractured on how we manage the capital. And um, it is, in my opinion, the first knob on the mixing board that we can turn down if we're trying to make our financials look good. So um always nervous in Q4 when those best deals show up, but at the same time, if there's no money left on the credit card, there's no deals to be had because uh the parent organization takes certainly priority over it.

Um what we're really needing to get to is a state of uh proactive versus reactive management. Um crumbling infrastructure is something that you identified. Honor Health recently acquired uh the three Stewart hospitals in Arizona, it's public knowledge. Um, and you know, the patient hasn't had any capital or any love for the last 20 plus years, and so uh, you know, it's gonna shift sort of our priorities, our budgets to uh to bring those along.

Um as this dynamic changes, a couple of things I would add to it too. You talked about that dark horse IT. Uh, the new one, we've even created a subsection at on our health is cybersecurity uh to maintain our patient data and the impact that um any type of cyber attack could have on OR scheduling, the whole hospital for that matter. Um, cybersecurity is a huge, huge deal, but um you know, acute settings, reimbursement, what you're allowed to do, what you're not allowed to do, and ambulatory settings.

Um do we want to invest those dollars in that crumbling infrastructure, or do we want to do new builds in these uh enhanced urgent care ER models, sort of a mid-grade uh to try to triage patients uh away from acute settings, um, but also still provide them a little more care than perhaps an urgent care. So I do see the dynamic changing. I do see um again, hospital infrastructure needing capital, but perhaps that those dollars are better allocated elsewhere. So before we dive back in, you may be asking yourself, is my supply chain future ready?

CNOG Company, we don't just optimize logistics, we engineer smarter, leaner, and more resilient systems from end to end, from manufacturing to retail to healthcare. Our experts bring decades of experience in cutting-edge strategies that transform your operations. Visit and discover how we're shaping the future of supply chain one solution at a time. Is the capital plan at your organization part of an overall, say, five to ten year operational strategic plan so that they fit together?

That's correct, particularly when we're talking about facilities and infrastructure. It is definitely a five to ten year plan from an ultrasound anesthesia. Um, we definitely are conscious of the depreciation schedules. Uh, with that being said, our good friends in the industry like to come out with new models every five years.

So gap principles might tell me it's a seven-year depreciation, but I can count on I'm not gonna not gonna name drop any vendors, but they're gonna they're gonna come out with the version 2.0 in five years and 3.0 in 10 years, but I still got an extra couple of years of depreciation. But we'll get the doctors excited for it.

And um, if you're gonna be good planning for capital, you need to be aware that these asks are coming. You need to know when the iPhone 20 is gonna come out so you can be prepared to uh retain uh physicians, retain top talent. Um that's part of the game is as far as again, it is your idea growing, is it stagnant? Are you about to be bought up?

And so um Bro Office is a go ahead. What do you I'm sorry? So what are uh what are your what are your big customer challenges? Both in in inside customers and uh the pressure from outside, say manufacturers on those inside customers that ends up in your lap?

Yeah, that's a great this is a great question. So we've got internal and external customers. That's uh how I like to sort of classify them. My internal customers, um in my role in supply chain, I I triage between the very gray side of operations, the clinicians, and the black and white side of finance, and sort of sort of bridging that gap.

So finance is a big internal customer. How do we pay for it? There's different vehicles to pay for it, whether that's leasing, whether that's placement. Um, a lot of these large vendors have their own capital structure now and can offer better financing than some of the big traditional banks.

We've got a couple of 0% deals that they have made larger purchases attractive. Um other internal customers include IT that we talked about. Biomed is going to be a huge internal customer. Uh, this is the asset management.

This is the how do we record how many anesthesia units we have, how many OR tables we have, how many microscopes we have. Um, so in conjunction with them, um, construction we talked about, which is big. Purchasing is a big uh internal customer. You know, what do we need to execute quickly?

If we do this great job of satisfying our uh clinicians of getting the new whatever, how do we execute quickly? How do we navigate this so we're not bogged down in policy and it takes six months to cut a purchase order? But how do we have the flexibility uh to be nimble and reactive uh to the situation? Uh, not just say, I'm sorry, it's not July, we're not buying anything.

Uh, that's not that's not gonna work for some uh egos, that's not gonna work for some operations if we're losing money uh because we failed to spend money, or there's a policy in place saying we can't do that, uh, we need to be more flexible, we need to be more agile. The environment is constantly changing. Doctors will walk across the street and take their ball over the yard to the new hospital to get what they want. And so um appealing to the internal customers is really important.

So your clinicians internally, finance, biomed, um honor health is a couple of other arms that some other hospitals don't have, including the foundation and uh military partnership. Um like I said, construction, IT, purchasing. Uh there's a there's a handful of internal customers that Um if need help navigating the capital process and if we're flexible, if we're agile, um we can make all those people's lives easier um employment satisfaction, physician satisfaction, all these are uh benchmark scores to um to create a happy yeah work environment.

Well with your background, um which is you know I I'm really impressed with the diversity of your background, quite honestly, because it's capital is a is a complicated problem because among other things you have two places that that money ends up in an organization. If something is purely capital, it becomes an asset and it gets depreciated and it doesn't show up in your profit and loss or operating budget. But if you have some stuff out there that you don't know is going to be around in five years, maybe putting it, leasing it and putting it in the operating budget side is a better strategy.

So uh how tell me how you work with with the clinicians and with finance and with leadership to make those types of decisions about not only if you should get something, but where it should be placed in the in the operating versus the capital uh arenas. Yeah, sure, you bet. This one's this one hits my desk a lot. Um, when you're talking about seven-figure projects, million-dollar plus projects, it's really important to understand all the angles of the chessboard.

Um if you're working with finance, when you work with finance, better stated, what's the cash flow of the organization? Is it the right time to buy something that's that large? Um, you know, robots are sort of the wave of the future without naming any individual companies. Um, there are several that have orthopedic, thoracic, urology, spine robots.

Um these are huge assets, these are huge capital investments, and they absolutely need to be considered in all spaces. Uh, you know, the the the biggest player in the robot space has uh changed their model uh faster than we can depreciate it. So um, you know, if you can't depreciate it or you know uh that your primary uh physician group is going to want the newest, greatest, and latest, um, it doesn't do you any good to own uh these old cars. If they constantly want the newest technology, if that's part of the physician recruitment strategy, um maintaining lease structures that gives you the flexibility to get out and maintain the newest makes you attractive as an organization if that's part of your strategy.

Um so when the technology curve is steep, as in you know, an iPhone comes out every year. That's what I mean by technology curve is steep. Uh, you typically want to lease that stuff. If the technology curve is long and the product doesn't change, uh that's the stuff you kind of want to own.

So in between there, again, cash position of the organization, what's the cash flow? Um, we can explore placement deals. If I use so many supplies, you'll give me the robot, you'll give me the product. Um, it's a way to grow market share for some of these vendors.

Um, we guarantee that we're going to use so many catheters in the cath lab, and you're going to give us these uh generators uh in exchange for that. Um there's a risk, obviously, um, but if you're confident in your analytics, which is again working with your internal customers, um, it's a great way to expand your capital uh portfolio without necessarily using that cash on hand. So yeah, you you know, the the longer the further we go in this discussion, the more complicated things become when you think of it, you know.

Um and I was thinking you brought the iPhone. They come out with one every year, whether you need it or not, right? And you look at me, I'm an old guy. And I can't be sitting there going, well, geez, I I have a what do I have?

I have a 16. And I think I got to 16 about uh two weeks after it came out. I had like a I had like a 12 before that, okay? And and and uh I'm still doing the same functions with it that I was doing with the 12.

I have not I am not I am not taking advantage of all the possible utilization capabilities of the tools I'm I'm uh I've acquired. And I would ask you, do you ever do any follow-up to see how well these folks are actually using the totality of the new technology they've acquired? Because I would I would bet that much of much of what they get they use transactionally to get done what they wanted to get done, and they're missing out on the opportunity for optimization. Is that fair or not?

100%. It's absolutely fair. One of the things that we do is look backs and we track uh through dashboards utilization. Thank you for coming and proposing the new again.

I'm not gonna poke holes because there's enough, there's several spine robots out there, so I'm not gonna poke holes at any particular one, but you know, we brought this you know two and a half million dollar case, um, and we might not be utilizing it as much as we thought we were going to. Um, so how can we uh either relocate the asset, how can we better use block scheduling, how can we free up more time, how can we educate uh the physicians that we have? Um there's a lot of different uh sort of mechanisms uh in that capacity to to look back.

But yes, um without question, something that we do for the larger capital purchases was this and then to to to purchase as far as making that capital decision. We go through finance and you know what are the what are our best guessed estimated cases? What's the contribution? What's the contribution mix?

What's the payer mix? What are we likely to see? Um inpatient, acute setting, um, could be outpatient. Um just depends what we're talking about.

But yeah, we definitely definitely do analytics on the front end and on the back end, um particularly if we're talking about buying new stuff. But if I were to characterize your um role uh in uh in terms that a barmaid could understand, I would say that your job is to uh simplify uh complexity. 100% is that fair and if I were if I were just a kid coming out of uh Eugene Schneller's ASU program, the WP Kerry School, uh, and I showed up at your door and said, Hey, Matthew, you know, I've heard about this capital equipment stuff.

I'm interested uh in getting involved. What would you tell me? You know, it's a great opportunity. Uh I I would solicit Arizona State.

I'm partial, I'm a Sun Devil, as I said earlier, nine years of my life as a Sun Devil. So uh you're not gonna you're not gonna find me talking bad about Dr. Schneller or or or the business program. With that being said, yeah, it's again, I I do think, at least for me, and I can't I can't speak to anybody else, but for me, I saw this as uh an opportunity, a landscape that wasn't gonna change, um, and an opportunity to add value um to some organization.

Um, capital is um in a healthcare setting, it is an easy uh priority to move to help the overall finances of the organization. Um, if you go back in my work history, uh perhaps uh it is more important in other industries, um, and they look at other opportunities to save the money. So um, you know, in hospitality, if it's not a new shiny hotel, I'm I'm just slowly driving my product into the ground, and I'd be better to manage the people that didn't clock out for lunches. Um when I worked at wow, when I worked at when I worked at one of the hotels here in in Phoenix, one of the Waldorfs here, uh, one week of missed lunches of the uh housekeeping department uh was over $30,000 of payroll.

Wow. Um and that's substantial. That's that's tangible, that's tangible dollars. And so um again, adding that value is no different um than doing a bulk deal on uh microscopes, for example.

If I'm buying three of these Kinevo 900S million dollar microscopes, I can save some money, and those are tangible dollars. Um now in the space of capital, and this one's really important, and we certainly talk about this um or have talked about it, better stated at the conference. It's not savings, it's cost avoidance. If you've allocated a budget for capital and I save half a million dollars, that just means I have half a million dollars to go spend on something else.

That doesn't mean I'm putting it in my back pocket. So um that that's a very important point because every year you have to you have to spend the capital budgets completely. So and the the better you can utilize that, the more things you can bring into reality that may not have made the cut. Is that fair?

It is a hundred percent fair. Last year, last year my Santa's wish list was over $300 million, and uh one out of five kids got Christmas presents. Yeah. And and the reality is if the doctors were writing the checks, uh maybe one out of eight kids would have got Christmas presents.

So the ability to to to manage that capital pool um stretches the dollar, uh, serves more purposes, serves more priorities. Excuse me. Well, Matthew, thanks for thanks for uh giving us your insights. Any uh any parting shot you want to leave us with?

No, I'm I'm I'm enjoying the cold rainy day here in Phoenix, Arizona, uh despite uh despite the weather. Uh this has been great. So thank you. Love it.

Thank you, Fred. Take care. Well, that's all for today. Thanks so much for joining us.

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