Cover Story

For real savings, physician preference items are the holy grail

by Karin Lillis

Materials managers sit atop a pressure cooker fueled by the constant need to cut expenses amid rising healthcare costs, tight reimbursements and the everyday demands of providing quality care. The lid stays tightly on the pot when a hospital is cooking up an agreement with a GPO for lower-priced, high-volume commodity items. But consider high-tech, high-price, lower-volume products – such as cardiac devices and orthopedic implants — and the delicate soup can quickly boil over. 

Typically known as physician preference items, this product group continually challenges hospitals to winnow down the vendors it uses and standardize both prices and devices. This is far from a simple task. “I’ve noticed a curious market phenomenon,” says Patrick Carroll, a Cypress, CA-based consultant. “Suppliers are telling us that prices for, say, a pacemaker in Saratoga Springs, NY, are different than in Dallas, TX.” 

Carroll echoes frustration voiced by his peers over disparate prices paid for the same high-dollar products, sometimes even within the same healthcare system. Carroll suspects that fees paid for the pacemaker or other medical devices depend on the relationship the doctor performing the procedure has with the manufacturer. Sales representatives may tell a doctor that she’s receiving the “best price” for an item – a statement Carroll and his colleagues greet with a skeptically raised eyebrow.

“I have had sales representatives outright lie and tell a doctor that he or she is getting the best price in the country, when I have paperwork that says otherwise,” Carroll says. “The rep gets whatever price the market will bear. There are some instances where the sales rep gets more than the doctor who performs the surgery.”

Veteran materials manager Robert Simpson, who now serves as president of a southwest Florida buying co-op, agrees. “A lot of times the rep is making more money than the surgeon putting the implant in. The doctors hear that, and they’re not happy,” notes the top executive at Fort Myers, FL-based LeeSar Cooperative Services of Florida Inc.

So how does a hospital try to bring the boiling mix to a simmer? 

“You work with the physicians and get commitment where you can,” Carroll says. “The doctors seem more receptive because they’re hurting. They realize that if a hospital fails, they don’t benefit, either. If a hospital continues to throw out red ink on the bottom line, it will likely cut services that the doctors want.”

“Something that has really helped us was doing a lot of research up front,” adds Rodney Hochman, MD, senior vice president and chief medical officer for Sentara Health. The Norfolk, VA-based system includes six hospitals with more than 1,800 total beds and serves some 2 million residents in southeastern Virginia and northeastern North Carolina.

“The doctors want to see the data, so we’ve done our homework,” Hochman says. “We’ve found that one of our hospitals that does a lot of hip and knee implants is losing money every time we do a joint replacement. Our doctors seeing that has really helped us. They’re starting to say that it’s not acceptable.”

Keeping it local

AmeriNet, the big St. Louis-based group purchasing organization, found that negotiating contracts on regional rather than national levels helps keep prices in check, says Mark Moyer, the group’s vice president of marketing. Certain medical devices may cost more in one area of the country than another, so it’s important to keep negotiations on the local level, Moyer explains. Typically, AmeriNet enlists the support of one or two integrated delivery networks in the area to standardize products and develop commitments to purchase. Those two factors are what typically drive price reduction, Moyer says. “Without narrowing the product grouping and without member commitment, you won’t have much opportunity to impact the price,” he explains.

“You get more movement when you negotiate on the local level,” explains Karen Barrow, director of AmeriNet’s physician preferred services. “If the local representative feels he will lose business and position, he’s much more aggressive.”

Says Moyer, “We’re a facilitator. We don’t recommend practice changes. Our role is to come in as a third party that has experience in clinical, product and marketing areas and present data from the individual facility and others like it for comparison. We can show the hospital what we see based on the problem it brought to us, how we can manage that problem and what we can do on the cost side of it.”

The product decision needs to be made as close to the patient as possible, and in every category AmeriNet’s contracting policy gives members a choice of at least two different product lines, Moyer says, noting that such flexibility is critical in terms of curbing physician preference. “If there are eight suppliers for hips, you can’t realistically narrow that down to one supplier, but you could cut it to three or five,” he says. “A hospital can standardize somewhat but still allow its doctors some choice, and the savings are still significant.”

AmeriNet’s contracting, multisource policies appear to be paying off. Barrow estimates on average such contracts save a hospital between 10 percent and 15 percent.

Marking the bench

Barrow and her staff craft benchmark reports for hospitals based on what the client requests – such as comparing cost by physician, vendor or facility. AmeriNet also researches vendor relationships with the facility in question.

Once AmeriNet gets support from corporate executives, materials management and the director of the applicable hospital department, Barrow finds a doctor to champion the hospital’s efforts to streamline and standardize. “He might not be the committee chairman, but he is a peer everyone respects,” Barrow says. “We try to engage him in the process from the very beginning – that’s a key component to the whole process. He has to have full confidence that the data we present to the hospital is pure.”

Suppose a hospital wants to know the cost of a total hip implant procedure a mythical Dr. Smith performs and which products she uses, then compare those results to the equally mythical Drs. Washington and Martinez. “You may have four hospitals using the same product from the same vendor and find a 60 percent price variance,” Barrow notes. When the implants, for instance, are sold independently to each facility “the vendor has the right to charge whatever it wants.”

Barrow and her staff might then break the data down farther. “There is a huge cost variation among the different types of implants, and the appropriateness of the implant needs to be considered,” Barrow says. “We recently worked with a hospital on the West Coast where a surgeon used high-demand hips across the board – including on a 90-year-old woman with terminal cancer. You’re talking about three different grades of implants,” Barrow explains. “There is low-impact for Grandma in the nursing home. Medium-impact is geared for the 65-year-old who wants to maintain normal activities like going for walks around the mall. A high-impact implant would be for the younger, more active person who might play golf every day.” This is, of course, the classic scenario describing patient-demand matching, a cost-saving technique that has been in existence for a number of years.

Involving surgeons up front is critical to the success of any hospital seeking to standardize supplies, Sentara’s Hochman says. At Sentara, he identified key leaders in various units throughout the hospital system and provided them information about the IDN as a whole, along with the financial impact of product choices.

“We found out that our doctors really want to help us work on these projects,” Hochman says. “We have a concept of full disclosure – we’re honest with the physicians about what our costs are. You have to be honest about how the health system is doing as a whole.”

He considers history the best teacher. When the IDN first attempted to standardize products, decision makers failed to involve surgeons in a decision to change suture vendors. “We didn’t engage the doctors or leaders, and it didn’t go well at all,” Hochman admits.

“Having a close relationship with the materials management person is key to success in our structure,” he adds. “Our materials management guy has gotten to know the clinicians and their needs, and in turn the doctors understand where he is coming from.”

As added incentive for doctors to help the hospital cut product expenses, Sentara shares 50 percent of the savings with department that helps achieve the savings. “The money is applied toward capital funding for equipment, human resources issues like the department which needs a nurse practitioner, and educational and research opportunities,” Hochman says. 

AmeriNet offers similar incentives to its clients, Barrow says. “Say we save $1 million in a certain facility’s orthopedic department, we will give up to 50 percent back to the department,” Barrow says. “The hospital might use that to market the orthopedic program and increase referrals.”

Eliminating preferences using ‘clinically acceptable’ products

“We’ve virtually eliminated the phrase ‘physician preference’ among our members,” says LeeSar’s Simpson. LeeSar is owned jointly by Sarasota Memorial Hospital and Lee Memorial Hospital in Fort Myers and represents four acute care facilities in southwest Florida. 

“The buying co-op works backward from a normal buying group,” Simpson explains. “Buying groups negotiate a contract, and the hospital has the challenge of negotiating that contract to the end-users who have a variety of preferences and ways. We do just the opposite.”

For example, Simpson needs to negotiate a contract for pacemakers and leads. He and his staff first approach an established cardiologist committee and get a list of what products are “medically acceptable.” Based on that information, Simpson negotiates the contract for the devices the doctors are willing to use. The buying group has similar standing committees for more than a dozen areas including surgery, engineering and pharmacy.

“Prior to executing the contract, we go back to the head of that specific area and he signs a paper that commits him to the contract before we execute the agreement. When you put that in place, you have compliance,” Simpson notes. Virtually all of the 100-plus contracts the buying group holds boast a 90 percent compliance rate, he says, a number few GPOs can approach.

Standardization among the orthopedic surgeons remains a daunting challenge, yet it’s one Simpson says LeeSar’s hospital-owners are meeting well. Hospital CEOs meet with surgeons and break down the cost of each procedure, the labor and the implant and explain to the doctors how much the sales representatives make on each case, according to Simpson. 

“We supply the OR for the surgeons and the staffing, and we want to supply them with the latest technology,” Simpson says. “But we need to get cooperation from the medical staff. The only way to do that is through a lot of communication.”

Cutting through the middle

Simpson counts standardization among several challenges hospitals face from orthopedic manufacturers. “There is also the operational cost of getting the implant in. Instruments used to conduct the procedure are traditionally kept by the manufacturer and sent to the hospital at the last minute,” Simpson says. “We want the instruments kept at our facility, and we want to establish a central [supply] of a lot of the components like screws. Our challenge is, how can we centralize equipment and instrumentation to increase turnover time?”

Simpson says cutting out the distributor can help the hospital slash costs. The majority of orthopedic product manufacturers don’t deliver directly to the hospital, instead paying salespeople “well” to do that, Simpson notes. “As much as possible, we’re trying to cut out the distributor,” Simpson says, a move that has not made Simpson or LeeSar popular among distributors. 

He acknowledges that the sales representatives in the orthopedic product market are usually highly trained people who work alongside the surgeon in the OR, showing the doctor how to best install the implant. “There are surgeons who aren’t comfortable going into surgery without that sales rep in the room. We’re not saying we won’t pay for education. If the [equipment manufacturer or distributor] wants to come in and offer education in the OR, we’ll pay for that separately,” Simpson says. “We want the supplies delivered directly to our 50,000-square-foot distribution facility.”

HPN

February