Making self-contracting work in a contracting world

with Nick Toscano

Nick Toscano is vice president of strategic supply services at Virtua Health, an integrated delivery network based in Marlton, NJ.

HPN: What is it that prompted you to consider and ultimately implement a self-contracting strategy at Virtua?

Toscano: In early 1999, Virtua Health was developed from the integration of two successful, 100-plus-year-old community healthcare organizations. Each organization had affiliations with different GPOs. As most people are aware, merging health networks are required to submit to the federal government a “Community Benefit Report” outlining how the merged organization will be better for the community it serves. A good portion of the report addressed supply chain cost reduction opportunities through integration, consolidation and shared services.

As Virtua began developing its strategic supply chain direction, we determined that there were no significant differences between the two affiliated GPOs that would produce significant performance improvement and cost reduction opportunities. We then presented to the Virtua board what we described as the Virtua strategic shared services model, with a strategy focused on supply chain advancement and cost reduction opportunities. At the core of the plan was a direct contracting process enhanced by a direct distribution model wholly owned by Virtua Health. The board approved the plan in mid-1999.

HPN: How is the self-contracting strategy doing so far, and are you satisfied with its progress?

Toscano: The self-contracting model has produced significant cost reduction outcomes. In fact, we exceeded our three-year projections in about two years and continue to make progress. Therefore, we are very satisfied with the results.

HPN: Do you feel that your system is saving money, and how do you quantify those savings against previous GPO strategy?

Toscano: Virtua continues to document cost reductions via direct contracting and distribution. We use independent price benchmarking tools to measure our effectiveness against industry standards.

HPN: How much involvement do clinicians have in your self-contracting model?

Toscano: They have a leadership position in supporting what we call our “clinical resource management initiatives.” We actually have a pharmacist (the assistant vice president for support services) and two masters-prepared nurse/clinicians who work full-time within the supply chain process. It’s a critical success factor for the direct contracting model. They have developed “ownership” by the physicians and clinicians to objectively prequalify product as “clinically acceptable” for use at Virtua. This, I believe, is where all the real work is done. When we have a committed volume approach, the direct contracting process becomes easier and much more effective. I would not attempt to develop a direct-contracting strategy without clinical support.

HPN: You previously worked for institutions that made use of GPO contracts. What is your impression of the GPO system and how it works for hospitals?

Toscano: As healthcare networks evolve, the one-size-fits-all approach to supply contracting is changing. Many networks like Virtua are working hard to develop critical mass, integrate their supply chain information systems and are investing skills and resources required for their supply chain teams. Because of all the opportunities networks are realizing, it is most likely that they will continue to perceive less value from the traditional GPO model. This is where we are beginning to see an industry trend towards self-contracting at the integrated delivery network level.

I also believe there is another significant factor driving IDNs toward developing new contracting models. There are many IDN supply chain leaders who believe that their GPOs have lost touch with them. Over time, some GPOs made huge dollar investments in areas that many believe were not mission-critical. In addition, their primary focus turned to continued revenue growth through increasing administrative fees, longer term contracting and advanced administrative fee payments by contracted suppliers. It became apparent to many supply chain executives that developing the best contracts became secondary. Furthermore, recent reports about conflicts of interest by some GPO executives and other questionable business practices have only exacerbated the negative perceptions towards GPOs.

Will Sen. Herb Kohl (D-WI) and his subcommittee’s work help produce a better GPO model? I believe only time will tell whether the GPO code of conduct translates into meaningful change and improvement in their overall business practices. 

That being said, providers will continue to look toward better supply chain models to support their organizations’ strategic direction. For some, it may come in the form of an improved GPO model and for others it will come from a self-contracting model.

HPN: How have Six Sigma Principles helped your system function?

Toscano: Six Sigma outcomes have made a positive impact on Virtua’s business model. Six Sigma is not simply a business process improvement tool. It really is a way of life at Virtua. It allows everyone at Virtua to share a common mission and vision around customer service. It allows all of us to develop a common language for communicating our objectives. It really helps create a new culture.

We are experiencing positive results in all aspects of our care delivery model. It allows the supply chain to see and support what we describe as our “pathway to the patient.” We are currently working on a number of Six Sigma supply chain projects. The Six Sigma team also includes our suppliers. There is a direct relationship between self-contracting and Six Sigma. In developing supplier relationships, we focused on price as one component but we also objectively develop criteria for measuring overall value. This process allows our suppliers, clinicians and other team members to collaborate on shared objectives with our patients in mind. Here, the supply chain offers a significant contribution to positive patient outcomes.

HPN: What would it take for other systems to successfully adopt a self-contracting model similar to yours?

Toscano: I will preface my remarks by saying that I believe healthcare in general is a local product with specific needs centered on an organization’s individual strategy and direction. With that being said, there are some similarities I would like to share with you, 10 critical success factors.

1. You need to begin with a solid, well-thought-out plan aligned with your organization’s strategic direction.
2. You need to obtain full support from the very top of the health system. By that, I mean the CEO and board.
3. You need to assemble a great team, fully skilled and committed to supply chain excellence.
4. You need effective management tools:

•  Integration of e-supply chain information system.
• Single item master.
• Integrated RFP/contracting technology.
• Process improvement/change management tools (like Six Sigma).

5. You need fully engaged suppliers who are willing to be creative, think outside the “business as usual” box and deliver on their promises. Most importantly, suppliers must understand that they have a role in the delivery of quality patient care.
6. You need to be capable of measuring your effectiveness. Fully document your outcomes against your goals and objectives. It is important that goals are balanced to include patient satisfaction, employee satisfaction, quality and performance, strategic growth and financial performance.
7. You must build trust and credibility with your physician/clinician community. They must feel ownership of the process.
8. Supply chain leaders must be positioned much closer to the boardroom than the basement in their organization.
9. You must build what I would describe as your “vision community,” with all stakeholders working on shared objectives. Collaborating and facilitating throughout the entire organization is critical.
10. Stay focused. Take it a step at a time. Don’t try to “boil the ocean.” Build on each successful outcome and continue to raise the bar. It is like a race without a finish line for us.

HPN

January