July 24, 2014

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Calculating the Value of Health Care Sustainability

We're in a "new era" of hospital purchasing, as well as sustainable product development – one where every health care decision maker is counting on the value of sustainability.

Joe-wolk

By Joe Wolk, VP of Finance, Johnson & Johnson Medical Devices & Diagnostics, Global Supply Chain

What do roof shingles, intravenous tubing, floor cleaners and heart catheters have in common? They’re all necessary to run a hospital.

The wide array of products needed in the health care setting, coupled with pressure on health care systems to meet the demands of an aging population and increases in chronic disease, have driven hospital purchasing to more than $200 billion annually on medical and non-medical products.

Hospitals are expensive to operate – and just as taxing on the environment: Because they operate 24/7 and follow strict lighting, air circulation and heating codes, hospitals use more than twice the energy as commercial buildings the same size and emit more than twice as much CO2 into the atmosphere.

Hospitals also generate a daily average of 26 pounds of waste per staffed bed, much of which can be difficult and costly to dispose of.

The numbers speak for themselves and sustainability-focused investments can help reduce green-recycling-binthese expenses, yet many health care professionals wonder: what is the true value of sustainability?

This past December, Johnson & Johnson partnered with The Wharton School of the University of Pennsylvania, through its Initiative for Global Environmental Leadership (IGEL), to host a one-day conference on this very subject. As a follow up to the event, Knowledge@Wharton recently issued a report recapping the discussion, and exploring whether sustainability is a worthwhile investment when it comes to hospital purchasing, when so many other factors – patient safety, performance, price, etc. – are at play in the decision-making process.

Creating a Sustainability Valuation Model

In my role as Vice President of Finance for Johnson & Johnson’s Medical Devices & Diagnostics (MD&D) segment, I’m tasked with ensuring investments deliver appropriate returns. I know our customers want more sustainable products, but I also understand the business drivers behind their purchasing decisions and the costs we incur to improve a product’s impacts.

To make an informed decision, it was important to reasonably estimate the true value of sustainability for Johnson & Johnson, and more specifically, create a method to quantify the potential revenue opportunities and risks of developing more sustainable products.

To achieve this, we worked with Deloitte to develop a Sustainability Valuation model, which helped us determine how much sustainability can be worth and how Johnson & Johnson should prioritize it. The model looks at the following three factors:

  • Customer segmentation: what percentage of our customers cares about sustainability, and what weight does sustainability carry in our customers’ decision- making process?
  • Product differentiation: can sustainability be the differentiator for a product in the procurement process?
  • Sustainability differentiation: who is the sustainability leader in our sector, and how big is the gap between that competitor and us? Do we have the opportunity to differentiate ourselves with a more sustainable product?

Developing and testing this Sustainability Valuation model confirmed for us that the value of sustainability couldn't be ignored. While we may not know exactly how much market share we can gain from sustainability in any given instance, with data, we could make educated assumptions. Similarly, we began to ask what might be at risk if we don’t make more sustainable products – for example, if a Earthwardscompetitor’s sustainability offering were to take market share away from Johnson & Johnson.

An $8 Billion Win

Using the Valuation model, we have also been able to identify where to make investments in product sustainability. Our internal product stewardship process, Earthwards®, helps us assess the whole lifecycle of a product – from chemicals of concern and energy consumption to waste and lifecycle management. To date, 55 of our products have been Earthwards recognized, and, in 2013, the total revenue generation for the Earthwards portfolio was more than $8 billion.

You don’t need to be in finance to realize that $8 billion is no small amount. What is particularly exciting and consistent with the Johnson & Johnson Credo is that the value of our Earthwards portfolio is actually much higher to the health care system. The benefits of these products don’t begin and end with Johnson & Johnson; by improving the sustainable attributes of our products, we provide tangible, financial value to our customers.

A great example of this value can be seen through the Sterilmed® Trocar, a small instrument used in surgical procedures that is collected, reprocessed and sold as a reprocessed device. The Sterilmed Trocar received Earthwards recognition because it represents a 50 percent improvement in product waste versus an original single-use trocar device: Where an original trocar begins its life using raw materials and ends its life in a landfill, the Sterilmed Trocar is collected, reprocessed, reused and then ends its life at a facility that creates energy out of waste.

Through the reprocessing of single-use devices, like the Sterilmed Trocar, Hospital Corporation of America (HCA) was able to reduce its waste stream by 296 tons in 2010 and by 364 tons in 2011. HCA also saved $17.6 million in 2010 and $21.7 million in 2011 – clearly demonstrating how investments in sustainability can bring tremendous value to an organization’s bottom line.

JandJ-Wharton-hospitals-sustainability-purchasing

Predictably, more and more hospitals and Group Purchasing Organizations (GPOs) are making this connection and adopting Environmentally Preferable Purchasing (EPP) programs.

We're in a “new era” of hospital purchasing, as well as sustainable product development – one where every health care decision maker is counting on the value of sustainability. We look forward to helping create a more sustainable health care system and continuing this important conversation.

We’ll be hosting another one-day conference in partnership with Wharton IGEL this October 8th in San Francisco. For those looking to advance their organization’s commitment to and investment in sustainability, we hope you can join us.

About the Author:

Joe Wolk is currently the Vice President, Finance, Johnson & Johnson Supply Chain, Medical Devices & Diagnostics (MD&D), which produces a broad range of innovative products used primarily by health care professionals in the fields of orthopaedics, neurovascular, surgery, vision care, diabetes care, infection prevention, diagnostics, cardiovascular disease, sports medicine and aesthetics. In his role, Joe is responsible for setting strategic direction and leading finance processes for the supply chain organization across MD&D worldwide. Joe began his career at Johnson & Johnson in 1998 and progressed through various finance manager and director roles throughout the health care and pharmaceutical industries.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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