A Case Inquiry:Can RFID Help Reduce Costs in Medical Imaging?
An exploration of the use of RFID technology to manage contrast inventory in the hospital setting identified potential cost savings, as well as implications for patient safety, inventory management, and billing
Our research aimed to identify and quantify the impact of radiofrequency identification (RFID) technology on inventory management and was conducted in a typical radiology practice of the medical imaging department at a large tertiary-care center in the Southeastern United States from April 2007 to December 2008. The radiology practice had two 1.5T MRI units and served an average of 220 patients per week, 132 (60%) of whom required contrast media. The practice used 100-mL bulk contrast vials, each of which could be used for seven images. There was a loss of an average of one vial per week from storage due to expiration of partially used vials. The department reordered contrast weekly and waited three days for delivery.
Inventory Problems
The inventory-related work in a radiology practice requires considerable human involvement. For instance, a technologist may check patient records, scan the bar codes of contrast vials before use, and count the stored vials to determine replenishment needs. This much involvement creates operational problems in patient care and safety, missed reimbursement opportunities, expiration-date compliance, and inventory management.
A mismatch can occur when an exam order for one patient is applied to another, possibly leading to adverse reactions to contrast. The need to repeat such exams also decreases overall efficiency. Scanning a vial can be difficult if the bar code is worn or peeling. These problems waste technologists’ time, and scanning problems can create inaccuracies in billing and inventory records that could lead to lower reimbursement for contrast (where it is billable separately), missing or undesignated stock, and excessive inventory. According to one simulation study¹ in a surgical setting, half of participants failed to scan a bar code on at least one occasion, implying that bar-code readings are unreliable.
RFID and Bar-code Technologies
Adoption of RFID technology in medical environments is growing rapidly. Implementation of the technology in interventional cardiology and pharmaceuticals has already increased reimbursement for expensive supplies, reduced inventory, and improved patient safety. 2-8 For this case inquiry, we identified several differences between RFID and bar-code technologies.
Line of sight: A technologist should scan the bar code of each contrast vial, resulting in higher-than-normal labor time and a high error rate.1 RFID does not require a line of sight.
Automatic logging: With RFID, critical data about patients and drugs are automatically logged.
Multiple reading: RFID technology can read multiple vials at the same time, decreasing the time once allocated to bar-code scanning.
Information updates: RFID tags are rewritable, allowing information about partially used vials to be updated. This increases the accuracy of inventory records and eliminates shrinkage resulting from expiration.9 Bar codes have only static entries; once the information is written, it cannot be changed.
Security, tracking, and product recalls: Bar codes can be duplicated easily, whereas RFID tags have encrypted information that is more difficult to imitate. There are state and federal laws requiring that drugs have information about dosage, lot numbers, and complete shipping history. These can be confirmed by RFID tags, which also make product recalls more efficient because they can update product information within the distribution network. This tracking information helps in the identification of product-related problems in particular locations.
Data capacity: RFID has a high data-storage capacity, which permits coding each item uniquely and recording more information about it. More storage means that information on the exact time, date, and production line of manufacturing; the expiration date and complete shipping information; and the dose, assigned staff member, and patient can be captured using only one RFID tag.
Durability: Because RFID tags can be encased in vial caps, they are likely to be more durable and free of reading errors than bar-code labels.
Real-time item tracking: RFID can gather information about vials in storage in real time, allowing a practice to switch from periodic to continuous inventory review.
Automatic reordering: Because RFID increases the accuracy of inventory records, items can be reordered without human involvement, eliminating most of the administrative costs of ordering.
The cost of RFID implementation is also declining. For certain systems, RFID implementation prices are comparable to those for bar codes. Some tag prices had declined to $0.15 each by 2007, and one developer expects them to reach $0.05. The cost of some RFID readers had decreased to $28 in 2009.10 Concerns about RFID implementation costs will continue to decrease, easing the adoption of RFID technology.
A New Technology
Our inquiry used a recently introduced system for contrast management. This RFID-enabled, locked storage cabinet used tagged vials and interfaced with the electronic medical record (EMR), the job list, and the charge description master. The EMR interface ensured that the patient’s allergies, weight, and kidney function were taken into consideration before a vial was dispensed. It captured, stored, and managed product-utilization data, along with information about technologists’ contrast-administration behavior, utilization trends, and automated due-date compliance.
Operational and Economic Impacts
To quantify the operational and economic impact of RFID on contrast-inventory management, we mainly used the real-time item-tracking ability of RFID, which enabled us to switch to a continuous review of inventory. We also used other features of RFID, such as information updates for partially used vials and automatic reordering.
The practice’s bar-code system for inventory management used a weekly count followed by an order that brought stock up to the desired level. Inventory management was required to satisfy a service level of 99%, allowing out-of-stock problems 1% of the time. The cost of a vial of contrast was $240. With a shelf life of up to two years, a vial had an annual inventory holding cost of 52%. This arose from the legal requirement that contrast media be held in locked storage cabinets and the limited space that the cabinets hold.
When the radiology practice ran out of stock, it incurred a shortage cost of $1,000 per vial demanded per week. This cost represented the managerial effort of expediting a shipment and a potential loss of income from an unused imaging slot. The total cost of reordering, shipping, and replenishment was about $500 per order (including ordering, counting, shipping, receiving, paying the invoice, and all the transportation from the receiving dock to the pharmacy to the hospital floor).
Comparison of the bar-code and RFID systems was based on total annual expected inventory-management costs, with the same service level (99%) set for both systems. The bar-code system’s total expected annual cost of managing inventory consisted of inventory holding, shortage, ordering, and shrinkage costs (Figure 1). 
Figure 1. A comparison of operational metrics used to measure the cost of bar codes versus RFID systems used to manage contrast inventory. The total demand for contrast media included both patient and shrinkage demand, for an average daily demand of four vials per day (with imaging conducted five days per week). The average on-hand inventory was 24 vials, and the average shortage per year was one vial. The number of orders per year was 52, the optimal order-up-to level was 46 vials, and the average replenishment quantity was 20 vials. At all times, a buffer inventory of 14 vials was maintained. Per year, the holding cost was $2,995, the shortage cost was $1,062, the ordering cost was $26,000, and the shrinkage cost was $12,480, for a total of $42,538 (Figure 2).
Figure 2. Comparison of ordering, shrinkage, inventory holding, and shortage costs between the current system and the system after RFID implementation. RFID Implementation After RFID was implemented, the system switched to a continuous-review policy. The total expected annual cost of managing the inventory consisted of inventory holding, shortage, and ordering costs. Because shrinkage due to expiration was eliminated, the average daily demand decreased to 3.8 vials. The average on-hand inventory was 49.1 vials, and the shortage level was 0.2 vials per year. The threshold level for reordering was 20 vials, and there were 12.2 orders per year. For cost optimization, the system ordered 81 vials whenever inventory dropped to less than 20 vials. The average buffer level at all times was 8.6 vials. Per year, the holding cost was $6,128, the shortage cost was $159, the ordering cost was $4,879, and the shrinkage cost was eliminated, for a total of $11,165. Financial Criteria The RFID installation’s cost included a one-time $35,000 expense for the computerized storage cabinet and additional $15,000 for the software system’s integration with the hospital’s EMR and RIS. Ongoing maintenance and software cost approximately $10,000 annually. Typically, the vendor absorbs the additional cost of labeling the vials with RFID tags. The potential annual savings from the RFID system are $31,370. We calculated the net present value (NPV), the payback period in years, the discounted payback, and the internal rate of return (IRR). We looked at discount rates of 5%, 10%, and 15% and assumed a life expectancy of 10 years for the RFID technology; we excluded any technology costs incurred in support of the older bar-coding system. The inventory savings resulting from the RFID system have a positive NPV over a broad range of discount rates. According to conventional financial theory, whenever the NPV of a proposed project is greater than zero, it would be better to invest in it than to do nothing. In such terms, this project would add value to the hospital. An impressive 41% IRR ensures that any hurdle rate up to that percentage would have a positive NPV for this project. Apparently, there are also other quantitative and qualitative savings to be gained through installing an RFID system, including improved care and safety of patients, enhanced MRI utilization, overall personnel efficiency, and a higher level of billing/reimbursement accuracy. To some degree, the cost of the RFID cabinet can be borne by the radiology department or by the pharmacy department. In this case, management is taking a holistic view of this effort and helps to subsidize the RFID cabinet’s installation, in light of the major savings in operation costs, improved billing, and a higher level of safety. An inventory-management system with RFID technology can collect and report real-time information. Medical imaging processes can flow uninterruptedly. Departments have access to accurate inventory and use information; this allows staff to optimize inventory levels, to restock procedure areas efficiently, to manage expiring products easily, and to react to product recalls effectively. All of these factors should permit the practice to increase MRI utilization and focus more on patient care. Overall personnel efficiency and data accuracy may thus increase. We found that using RFID for contrast tracking addresses some of the most pressing concerns confronting radiology departments today: patient care and safety; the requirements of accrediting bodies for the storage, handling, and use of contrast media; regulations; inventory management; and billing and reimbursement.
Figure 1. A comparison of operational metrics used to measure the cost of bar codes versus RFID systems used to manage contrast inventory. The total demand for contrast media included both patient and shrinkage demand, for an average daily demand of four vials per day (with imaging conducted five days per week). The average on-hand inventory was 24 vials, and the average shortage per year was one vial. The number of orders per year was 52, the optimal order-up-to level was 46 vials, and the average replenishment quantity was 20 vials. At all times, a buffer inventory of 14 vials was maintained. Per year, the holding cost was $2,995, the shortage cost was $1,062, the ordering cost was $26,000, and the shrinkage cost was $12,480, for a total of $42,538 (Figure 2).
Figure 2. Comparison of ordering, shrinkage, inventory holding, and shortage costs between the current system and the system after RFID implementation. RFID Implementation After RFID was implemented, the system switched to a continuous-review policy. The total expected annual cost of managing the inventory consisted of inventory holding, shortage, and ordering costs. Because shrinkage due to expiration was eliminated, the average daily demand decreased to 3.8 vials. The average on-hand inventory was 49.1 vials, and the shortage level was 0.2 vials per year. The threshold level for reordering was 20 vials, and there were 12.2 orders per year. For cost optimization, the system ordered 81 vials whenever inventory dropped to less than 20 vials. The average buffer level at all times was 8.6 vials. Per year, the holding cost was $6,128, the shortage cost was $159, the ordering cost was $4,879, and the shrinkage cost was eliminated, for a total of $11,165. Financial Criteria The RFID installation’s cost included a one-time $35,000 expense for the computerized storage cabinet and additional $15,000 for the software system’s integration with the hospital’s EMR and RIS. Ongoing maintenance and software cost approximately $10,000 annually. Typically, the vendor absorbs the additional cost of labeling the vials with RFID tags. The potential annual savings from the RFID system are $31,370. We calculated the net present value (NPV), the payback period in years, the discounted payback, and the internal rate of return (IRR). We looked at discount rates of 5%, 10%, and 15% and assumed a life expectancy of 10 years for the RFID technology; we excluded any technology costs incurred in support of the older bar-coding system. The inventory savings resulting from the RFID system have a positive NPV over a broad range of discount rates. According to conventional financial theory, whenever the NPV of a proposed project is greater than zero, it would be better to invest in it than to do nothing. In such terms, this project would add value to the hospital. An impressive 41% IRR ensures that any hurdle rate up to that percentage would have a positive NPV for this project. Apparently, there are also other quantitative and qualitative savings to be gained through installing an RFID system, including improved care and safety of patients, enhanced MRI utilization, overall personnel efficiency, and a higher level of billing/reimbursement accuracy. To some degree, the cost of the RFID cabinet can be borne by the radiology department or by the pharmacy department. In this case, management is taking a holistic view of this effort and helps to subsidize the RFID cabinet’s installation, in light of the major savings in operation costs, improved billing, and a higher level of safety. An inventory-management system with RFID technology can collect and report real-time information. Medical imaging processes can flow uninterruptedly. Departments have access to accurate inventory and use information; this allows staff to optimize inventory levels, to restock procedure areas efficiently, to manage expiring products easily, and to react to product recalls effectively. All of these factors should permit the practice to increase MRI utilization and focus more on patient care. Overall personnel efficiency and data accuracy may thus increase. We found that using RFID for contrast tracking addresses some of the most pressing concerns confronting radiology departments today: patient care and safety; the requirements of accrediting bodies for the storage, handling, and use of contrast media; regulations; inventory management; and billing and reimbursement.