Break­ing the chain

Hos­pi­tals set sup­ply cost-cut­ting tar­gets, push physi­cians to change be­hav­ior

Modern Healthcare - - SPECIAL FEATURE -

Pa­tients with a new car­diac pace­maker have an ad­van­tage over pa­tients who have re­ceived stan­dard pace­mak­ers: they can un­dergo MRI scans as a part of their care with­out the risk of ad­verse events. But the new de­vice costs hos­pi­tals $1,300 to $3,000 more than a tra­di­tional pace­maker and could cut into a hos­pi­tal’s mar­gin be­cause Medi­care and other in­sur­ers pay the same rate for im­plant­ing MRI-com­pat­i­ble pace­mak­ers as they pay for the stan­dard pace­mak­ers. From a clin­i­cal per­spec­tive, physi­cians are put in the po­si­tion of hav­ing to pre­dict which pa­tients are likely to need an MRI and should re­ceive the new pace­maker.

It’s one of many sup­ply-chain de­ci­sions hos­pi­tal ad­min­is­tra­tors have to make where they must weigh the ben­e­fits of a new tech­nol­ogy—such as the fact that the new pace­maker doesn’t im­prove im­me­di­ate out­comes for the pa­tient but may have ad­di­tional ben­e­fits in the long term—against its higher costs.

Th­ese ex­ec­u­tives face sim­i­larly dif­fi­cult de­ci­sions to slash mil­lions of dollars in sup­ply ex­penses each year. In the case of the MRI-com­pat­i­ble pace­maker, one ex­ec­u­tive says his sys­tem likely will pay more for the new pace­maker when ap­pro­pri­ate and seek off­set­ting cost re­duc­tions else­where in the sup­ply chain.

“It’s one of those things where to make the qual­ity of life bet­ter for our pa­tients, we’re go­ing to in­cur new costs,” says Wil­liam Mosser, vice pres­i­dent of ma­te­ri­als man­age­ment at Fran­cis­can Mis­sion­ar­ies of Our Lady Health Sys­tem in Ba­ton Rouge, La.

Fac­ing de­clin­ing rev­enue and re­im­burse­ment, hos­pi­tal sys­tems across the U.S. are mak­ing it a pri­or­ity to sharply re­duce spend­ing on sup­plies in­clud­ing gloves, sy­ringes and hip im­plants. Sup­plies typ­i­cally make up hos­pi­tals’ sec­ond-largest ex­pense, af­ter la­bor costs. Hos­pi­tals spent about $255 bil­lion on sup­plies and nonla­bor ser­vices in 2011.

Bud­get pres­sure has led to in­creased scru­tiny of the costs, clin­i­cal out­comes and uti­liza­tion of prod­ucts. Many hos­pi­tals are set­ting cost-re­duc­tion tar­gets, eval­u­at­ing the ef­fec­tive­ness of their group pur­chas­ing or­ga­ni­za­tions, and push­ing for bet­ter data and an­a­lyt­ics on prod­ucts to per­suade physi­cians to ac­cept changes to the types of de­vices or sup­plies be­ing pur­chased.

More than 60% of the hos­pi­tal sup­ply­chain ex­ec­u­tives who par­tic­i­pated in Mod­ern Health­care’s 2013 Sur­vey of Ex­ec­u­tive Opin­ions on Pur­chas­ing said they were very sat­is­fied or sat­is­fied with their pri­mary GPO. About 40% were some­what sat­is­fied or not sat­is­fied. Mean­while, 59% of re­spon­dents said their pri­mary GPO was very ef­fec­tive or ef­fec­tive in con­trol­ling costs; the re­main­ing 41% said their main GPO was some­what ef­fec­tive or not ef­fec­tive.

Cost re­duc­tion, clin­i­cal in­te­gra­tion

“Ev­ery­one that we deal with at the hos­pi­tal level to­day is fo­cused on cost re­duc­tion and clin­i­cal in­te­gra­tion and man­ag­ing pa­tients to out­comes with a bent to­ward re­source re­duc­tion,” says John Bardis, chair­man, pres­i­dent and CEO of MedAs­sets, one of the na­tion’s largest GPOs.

But many hos­pi­tal ex­ec­u­tives say there are cul­tural and op­er­a­tional chal­lenges that can slow th­ese kinds of cost-cut­ting ini­tia­tives.

One ma­jor fac­tor is that physi­cians of­ten have re­la­tion­ships with par­tic­u­lar med­i­cal de­vice man­u­fac­tur­ers or have used cer­tain

de­vices for a long time and are re­sis­tant to chang­ing to other de­vices. An­other is that the higher costs of new tech­nolo­gies touted as im­prov­ing qual­ity of care can set back sav­ings ef­forts. And in many cases, there is a lack of val­i­dated clin­i­cal data that can defini­tively prove whether a par­tic­u­lar prod­uct yields bet­ter re­sults for pa­tients.

“The big­gest hur­dle we have is there is not a con­sis­tent and large enough base of val­i­dated ev­i­dence,” Mosser says.

Like many other hos­pi­tals, Fran­cis­can is un­der­tak­ing an ini­tia­tive to cut mil­lions of dollars in an­nual sup­ply ex­penses as it faces the prospect of sig­nif­i­cantly lower re­im­burse­ment rates in the com­ing years. The pro­gram, which it calls Healthy 2016, aims to cut $165 mil­lion in op­er­at­ing ex­penses, in­clud­ing $31 mil­lion in med­i­cal and sur­gi­cal sup­plies and pur­chased ser­vices, over the next three years.

Other hos­pi­tal sys­tems have im­ple­mented cost-cut­ting ini­tia­tives sim­i­lar to the one at Fran­cis­can. Over five years, Lahey Health, based in Burlington, Mass., plans to cut $40 mil­lion out of the $300 mil­lion it spends each year on med­i­cal and sur­gi­cal sup­plies. BJC Health­Care, a 12-hos­pi­tal sys­tem based in St. Louis, plans to re­duce its $850 mil­lion in an­nual sup­ply spend­ing by $54 mil­lion this year, and it’s seek­ing to cut out an ad­di­tional $150 mil­lion over the next three years.

“This is a pri­mary fo­cus across the sys­tem, from the CEO down,” says Nancy LeMaster, BJC’s vice pres­i­dent of sup­ply chain. “In the last three years, as the re­im­burse­ment pres­sures have been get­ting tighter and tighter, peo­ple have re­ally started to see how this could im­pact us. We call (sup­ply chain) a sus­tain­able ad­van­tage rather than just a back-of­fice func­tion.”

Hos­pi­tals are un­der­tak­ing a num­ber of strate­gies, in­clud­ing stan­dard­iz­ing the types of prod­ucts clin­i­cians use, op­ti­miz­ing ap­pro­pri­ate uti­liza­tion by physi­cians, nurses and other staff, and con­tin­u­ing to ne­go­ti­ate lower prices for sup­plies. Many but not all hos­pi­tals have value-anal­y­sis teams in place.

Fo­cus on physi­cian pref­er­ence

A big area of fo­cus is usu­ally physi­cian pref­er­ence items, such as hip or knee im­plants as well as stents and other car­diac rhythm man­age­ment de­vices. Th­ese are some of the costli­est pur­chases hos­pi­tals make.

BJC is fo­cused this year on re­duc­ing costs as­so­ci­ated with spine im­plants. “This is an area of fo­cus where the pric­ing does not ap­pear cor­re­lated to the cost to man­u­fac­ture and sell the prod­uct, but rather has his­tor­i­cally been based on what the mar­ket would bear,” LeMaster says in an e-mail. “The mar­ket can no longer bear this level of pric­ing.”

The sys­tem’s strat­egy fo­cuses on first achiev­ing mar­ket-com­pet­i­tive pric­ing with the spine ven­dors, and then tak­ing on uti­liza­tion man­age­ment and pos­si­bly stan­dard­iza­tion.

Fran­cis­can is sup­port­ing a clin­i­cal variation pro­ject led by chief med­i­cal of­fi­cers at its five hos­pi­tals in Louisiana that seeks to bet­ter align the clin­i­cal pro­to­cols of spine sur­geons. That could re­duce the num­ber of ven­dors of spine surgery prod­ucts the sys­tem works with, from about 20 now.

“Spine sur­geons across our health sys­tem do things dif­fer­ently,” Mosser says. “Some might overuti­lize. Some might un­der­uti­lize. Some might use generic prod­ucts, and oth­ers are us­ing dif­fer­ent types of tech­niques. Our chief med­i­cal of­fi­cers are work­ing down a path of align­ing both the pro­to­cols and the prac­tices from a clin­i­cal per­spec­tive that will al­low us to min­i­mize (the) num­ber of those ven­dors.”

GPOs say their core busi­ness is still sup­ply con­tracts, but the other ser­vices and tech­nolo­gies they of­fer to hos­pi­tals to help ad­dress a num­ber of fi­nan­cial pres­sures are in­creas­ingly be­com­ing of in­ter­est to their mem­bers.

“You’ve got to look at best demon­strated prac­tices,” says Ed Jones, pres­i­dent and CEO of HealthTrust, a Brent­wood, Tenn.-based GPO that is part of HCA’s Par­al­lon Busi­ness So­lu­tions. “You’ve got to look at re­duc­ing clin­i­cal vari­abil­ity. You’ve got to look at stream­lin­ing your sourc­ing de­ci­sions.”

Nearly half of the hos­pi­tal sup­ply-chain ex­ec­u­tives who par­tic­i­pated in Mod­ern Health­care’s pur­chas­ing sur­vey said they planned to in­crease their use of GPO con­tracts

in 2013. Only 7.6% said they planned to de­crease their use of GPO con­tracts.

“If a big sys­tem feels like their GPO can give them ac­cess to scale and aligns that scale to drive bet­ter value than they can do on their own, they will tend to work more with the GPO,” Jones says. “If the larger sys­tems are in a po­si­tion where their GPO is not as ef­fec­tive in that re­gard, they’re prob­a­bly go­ing to do it on their own.”

Smaller health sys­tems and hos­pi­tals are gen­er­ally more in­clined to work with GPOs and in­crease their spend­ing with them to gain the scale and vol­ume that they pro­vide, Jones says. In other in­stances, con­tracts with higher com­mit­ment lev­els also are gen­er­at­ing more in­ter­est be­cause they of­ten de­liver bet­ter pric­ing, he adds.

Lahey Health says it plans to re­view its cur­rent GPO re­la­tion­ships with No­va­tion, a GPO based in Irv­ing, Texas, and MedAs­sets and then sign a con­tract in Oc­to­ber with a sin­gle GPO that will han­dle at least $180 mil­lion of spend­ing.

“It’s a part­ner to help us meet our mar­gin tar­gets as we worry about de­clin­ing re­im­burse­ments,” says Eric Berger, Lahey’s vice pres­i­dent of sup­ply chain. “We re­ally need to look at ex­penses, so hav­ing a GPO part­ner will help us do that.”

Look­ing at the data

As hos­pi­tals dive deeper into the sup­ply chain search­ing for ways to re­duce spend­ing, new ar­eas of fo­cus are emerg­ing. Not only are some hos­pi­tal sys­tems bring­ing dis­tri­bu­tion in-house, but they are also hir­ing new tal­ent, in­vest­ing fur­ther in data and an­a­lyt­ics tools, and some are even form­ing their own GPOs.

While many hos­pi­tals re­port that they have met cost-re­duc­tion tar­gets ahead of sched­ule, the cost of high-priced im­plants re­mains a big bar­rier. Hos­pi­tal and GPO ex­ec­u­tives be­moan that the im­planta­bles mar­ket has not be­come more like the mar­kets for other com­modi­ties.

“Th­ese in­no­va­tions in to­tal knee and to­tal hip have been around a long time but they’ve had a strong hold on high prices com­pared to the rest of the world, in large part be­cause of physi­cian re­la­tion­ships,” MedAs­sets’ Bardis says.

On the other hand, teach­ing hos­pi­tals and physi­cian-owned hos­pi­tals are more likely to con­tinue to al­low pref­er­ence among physi­cians. “We will tend to give them what they want, re­gard­less of what the cost is, in or­der for them to want to prac­tice there,” says Bruce Kizzier, di­rec­tor of ma­te­ri­als man­age­ment at seven-bed Lin­coln (Neb.) Sur­gi­cal Hos­pi­tal, a physi­cian-owned hos­pi­tal.

He be­lieves his hos­pi­tal has got­ten the best prices, not­ing that the hos­pi­tal’s physi­cians have par­tic­i­pated in meet­ings with ven­dors to en­sure that the hos­pi­tal was re­ceiv­ing com­pet­i­tive pric­ing.

“More or­ga­ni­za­tions are hav­ing th­ese con­ver­sa­tions with sur­geons,” says Dr. Peggy Naas, an ortho­pe­dic sur­geon and vice pres­i­dent of physi­cian strate­gies for VHA, the par­ent or­ga­ni­za­tion of No­va­tion. “More sur­geons, see­ing the pres­sure to add value, are ask­ing ques­tions.”

Other sup­ply-chain ex­ec­u­tives say that while hos­pi­tals have done a poor job in the past in ed­u­cat­ing their physi­cians about the costs of pref­er­ence items and keep­ing sup­ply costs un­der con­trol, that’s chang­ing and doc­tors in­creas­ingly are fac­ing up to the prob­lem.

“They’ve seen the im­pact of the se­ques­tra­tion, the fed­eral law changes and re­im­burse­ment drops have been very dra­matic across the coun­try for ev­ery sys­tem,” BJC’s LeMaster says. “They’re re­ally see­ing that if we don’t get it out of sup­plies, then we’ve got to look at la­bor.”


Sup­ply-chain spend­ing is typ­i­cally the sec­ond-high­est cost for hos­pi­tals, be­hind la­bor. One es­ti­mate shows hos­pi­tals spent at least $255 bil­lion on sup­plies and nonla­bor ser­vices in 2011.

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