Supply-side economics
Purchasing practices at hospitals and health systems continue to evolve, with the supply chain continuing to be a target for large non-labor cost savings
When a decades-long affiliation agreement between Ascension Health and Memorial Hospital and Health Care Center ended this year, the way the 115-bed community hospital in Jasper, Ind., bought medical supplies changed significantly.
As an affiliate of Ascension, Memorial used Ascension’s group purchasing organization, MedAssets, to buy its supplies. And it generally paid the same price as Ascension hospitals did for physician preference items such as hip and knee implants, stents and other products.
Alex Emmons, Memorial’s director of materials management, says the hospital is on track to save $1 million this year as a result of product conversions and new contract conversions with competing GPO, Irving, Texasbased VHA, although it will pay more for some
products. “Ascension had some very good contracts, and VHA had some very good contracts,” Emmons says. “We were looking at things that were more than just purchasing contracts.”
Reducing supply costs, whether it’s lowcost commodity items such as gloves or highcost implantables, is a high priority for executives at Memorial as well as at hospitals of all sizes across the country.
Modern Healthcare’s 2012 Survey of Executive Opinions on Supply Chain Issues found that nearly 80% of the 159 providers who participated in the survey said reducing medical and surgical-supply costs is a formal part of their organization’s strategic plan.
About 91% say reducing medical and surgical-supply costs is very important or important, with only 8.8% of respondents characterizing the reduction of supply costs as somewhat important or not important.
“It is a concern,” Emmons says. “We know that the reimbursement is what it’s going to be and we have to address that and still increase our clinical results.”
The manner in which hospitals seek to cut their supply costs varies. Some hospitals buy exclusively through a GPO. Some buy partially through a GPO. Some have their own GPO. For example, Ascension, the 76hospital system based in St. Louis, formed its own GPO this year, although it continues to work with MedAssets on some contracts. Meanwhile, Iowa Health, an 11-hospital system in Des Moines, began working with VHA for the first time this year after a decade of self-contracting.
Supply-chain leaders at hospitals are also looking to negotiate more aggressively with suppliers on the prices of physician preference items, better engage and educate physicians involved in the selection of those items, standardize the products that an organization purchases and hire employees focused on
data and analysis.
“In the last two years, with all of the dialogue around reform, we are seeing a change in how folks look at supply chain, and I would broaden that to include not just supplies, but supplies, drugs and purchased services,” says Paul Kreder, a principal with Deloitte Consulting.
Hospitals are expecting to reduce 20% to 30% of their operating costs in response to declining reimbursements, which has led to renewed emphasis on reducing non-labor expenses, Kreder noted. Supply costs are usually the second largest expense in a hospital after labor costs.
“They’re asking themselves: How do we make money at Medicaid rates?” Kreder says.
At NYU Langone Medical Center, a 786bed academic medical center in New York, the head of finance set a goal of reducing supply costs by $15 million in 2011.
Gerald DeSilva, the hospital’s vice president for supply-chain management, says the team was able to reduce supply-chain costs by $22.4 million that year, mainly through supply negotiations and working with physicians. The hospital, which focused this year on pricing, standardization and capital equipment negotiations, is on track to save $24 million in 2012, nearly $6 million above the administration’s target for the year.
‘Right to the bottom line’
NYU Langone spends about $475 million a year on supplies, services and equipment, meaning that even a 5% reduction in supply costs produces significant savings, DeSilva says.
“That goes right to the bottom line,” he notes. “By going to the bottom line, it helps our organization be financially secure so that we can bring on more scientists (and) bring on more high-end, high-quality academic physicians to come and practice here.”
The hospital, which has been part of UHC and Novation for five years, plans to increase use of its GPO contract even as it continues to self- contract on physician preference items.
About 53% of the respondents to Modern Healthcare’s survey say they plan to increase the use of GPO contracts. Less than 12% of respondents reported that they currently don’t belong to a GPO or are planning to decrease use of their GPO contract.
“Where it is to our advantage, we use their contract as a starting point and then go back out and renegotiate for better prices because of who we are and because of our volume,” DeSilva says.
NYU Langone’s supply-chain team also
works closely with physician leaders, such as Dr. Joseph Zuckerman and Dr. Joseph Bosco, who serve as the chairman and vice chairman of clinical affairs, respectively, for the hospital’s orthopedics department, to bring down the prices of physician preference items.
In 2011, the hospital saved nearly $2 million on hip and knee implants after presenting physicians with market data that showed there was an opportunity to reduce costs by up to 10%. It also reduced the costs of spine products by $3.6 million this year. In addi- tion, DeSilva has hired a financial analyst within the supply-chain function to pull data that can be shared with department chairs.
“If I can take out a little more than $2 million in costs, that means for a number of years we spent $2 million more than we should have,” DeSilva says. “If these manufacturers think they can continue to have these kinds of high margins as healthcare is being ratcheted down on reimbursement, they are in for a rude awakening. They’ve got to work with us.”
Some 41.5% of respondents described the level of transparency of prices charged by suppliers and vendors as “somewhat transparent,” while a quarter of respondents say it’s “not transparent.”
Despite limitations on price transparency, hospital executives say that they are always working to reduce the prices of physician preference items, a category that is often rife with challenges.
Hospital supply-chain leaders may negotiate with a supplier or vendor on the price of the device and perhaps seek an agreement that would standardize a product to one manufacturer in return for lower prices, but they also have to ensure that the physicians, who may have a preference for a device based on a relationship with a manufacturer or a preference based on usage, will be willing to use the product.
Focusing on cost, quality
When asked about supply-chain priorities, respondents overwhelmingly reported that cost and quality were the most important. According to the survey results, 88.7% and 88.1% of respondents, respectively, said cost and quality are very important. About 43% said delivery is very important and 20% said choice is very important.
At Morristown (N.J.) Medical Center, a 592-bed hospital that’s part of Atlantic Health System, the strategic sourcing staff has targeted cardiac and orthopedic service lines in recent years for cost reductions, as well as evaluated medical reprocessing for the facility.
Although the hospital’s supply-chain staff support reprocessing and see the financial gain, it’s been challenging to convince the clinical leadership that a reprocessed device is of the same quality, says Deborah Visconi, director of operations for Morristown Med-
ical Center.
“The physicians are concerned it’s not the same quality,” she says.
However, others say that accountable care may bring the views of physicians and supplychain executives more in line with each other.
“If they get together and they’re working together in accountable care organization-type settings, where your incentives are aligned, then some of those barriers about preference and choice start to break down,” Deloitte’s Kreder says.
Nearly 40% of respondents say participation in an ACO has or will increase collaborative efforts with suppliers and vendors.
Rising concern about supply costs has also carried over to how providers view and use their GPOs.
“I think GPOs work hard at getting the best pricing they can,” Emmons says. “They can do better, though. We all want better pricing.”
About 84% of respondents say that controlling the price paid for medical and surgical supplies is very important when selecting a GPO. However, 25.8% of respondents say they are very satisfied with their GPO’s ability to control the prices of medical and surgi- cal supplies and about 25% say GPOs are very effective in controlling or reducing medical and surgical-supply costs.
Mike Alkire, chief operating officer at Premier healthcare alliance, attributes the difference in providers’ views on the importance and satisfaction with their GPO to a lack of price transparency, including the confidentiality clauses, or “gag clauses,” that some manufacturers have in place to prevent price disclosures.
“Some of these gag clauses have been limited and will continue to be limited,” Alkire says. “I think people are then seeing where there are opportunities for price savings and they want to get these savings as quickly as they can.”
Kreder says there has been a significant shift away from the typical purchasing model in recent years as what he calls “progressive health systems” have started to bring certain supply-chain activities practices in-house.
“The majority of folks are still locked into a historical, traditional view of supply chain and the GPO,” he adds. “The vast majority of health systems like to outsource the strategy and directional component of the supply chain. They’re worried about patient care, they’re worried about keeping docs happy and they’re worried about reimbursement.”
However, he notes that there is still a role in the market for GPOs, which will be more likely to buy lower-value items for the larger systems and will continue to serve standalone facilities.
“The innovators are going to be part of larger systems and the smaller standalone facilities are going to lean heavily on the GPOs,” Kreder says. “The GPOs are going to have a role. I just think the role is going to transition a little bit.”
Pam Sparks, a materials manager at Regional Hospital for Respiratory and Complex Care in Seattle, says that before she joined the 31-bed long-term acute-care facility in 2010, the materials management function was outsourced to the hospital that Regional resides in.
Executives at Regional Hospital made the decision to bring purchasing in-house, she says, because they saw an opportunity to save money.
“I’ve been able to demonstrate a number of times cost-savings initiatives that ended up saving significant amounts of money,” Sparks say. “They’ve been very supportive of my position and very trusting I’m doing the right thing.”
During the past three years, the hospital has reduced its supply budget by about 15%, some of which came from simple steps such as ensuring that distributors gave the hospital the correct GPO pricing and more complex initiatives such as ensuring the hospital received the best prices when it purchased patient monitors.
Sparks has also started taking on specific cost-cutting initiatives. The hospital is expected to save $100,000 a year on wound vacuum assisted-closure devices that it purchased after she negotiated with multiple vendors and distributors.
She notes that because Regional Hospital is a small facility that employs one physician, she has not had to work as aggressively to court and educate physicians about the cost of products.
“We don’t have a lot of the issues that larger hospitals have,” Sparks says. “I’ve worked for much larger hospitals and provider preference is always an issue. We have one provider here, one doc, and his attitude about this stuff is that he gets it. He understands why we should be looking for the best quality for the best price.” TAKEAWAY: Under pressure to reduce supply-chain expenses, hospitals and health systems are re-evaluating their GPO relationships and working more closely with clinicians to cut costs.