Managing the cost of physician preference items

You can’t pick up a healthcare trade journal, a business magazine or even a daily newspaper today without being assaulted by headlines and horror stories about the rising cost of healthcare. The doctors point at the lawyers. The lawyers point at the hospitals. The hospitals point at the suppliers. The suppliers point at the insurance companies. The insurance companies point at the government. And the patients? Well the poor patients just want quality healthcare they can afford.

And you, Mr. and Ms. Materials Manager, are caught square in the middle, because everyone is pointing at you. You’re supposed to be the person who can, overnight, fix a problem that has been years in the making and held tightly in place because of complex policy, convoluted regulatory authority, misaligned loyalties and good old-fashioned human nature.

I’m one hundred percent confident that there’s not a materials manager in America who doesn’t wrestle on a daily basis with some facet of this multi-headed beast. Like the arcade "gopher game" you’ve managed to beat down "commodity" medical supply costs, yet physician preference items (PPI) go up. And up. And up.

And this is my point: When it comes to PPI, if you keep doing what you’re doing, you’ll keep getting what you’re getting: PPI costs that continue to increase in the face of reimbursements that continue to decrease, all in an environment of market-driven demand that’s growing exponentially because of better technology, manufacturers’ sales and marketing resources focused on building physician loyalty, along with the recent introduction of consumer mass marketing to an Internet-savvy and knowledge-hungry consumer. It’s time for a different approach.

We all know that about 60 percent of your supply spend comes from the commodity items that keep the hospital running – gowns, gloves, tubes, IV solutions, drapes, food, generic drugs and the like. The rise of the GPO, facility consolidation into IDNs and keen competition have pushed the bulk of these supply prices down so far that the manufacturers of those products now have margins that are nearly as razor-thin as yours. In short, there’s not much more you can do with this category save to be diligent and responsible, and continue to drive price, standardization and utilization.

But the other 40 percent — PPI – well, that’s another story. You may have been successful keeping those costs down for a time, but what’s happened lately? Vendor dynamics have changed once again, and your suppliers may now view your hospital as a captive audience; cost creep has become cost hysteria; and your specialty physicians, skeptical to begin with, are now cynical and hostile.

The challenges to controlling these costs – costs for stents, total joint implants and the like – are mired in murky waters, but appear to fall into five buckets:

• Difficulty meeting local medical staff needs through national contracts for PPI

• Local competitive dynamics

•Increasing utilization of hi-tech implantables an d devices

• Multiple suppliers because of each physician’s "favorite"

•"Political," non-clinical issues that drive some selection

To overcome these challenges, you need a process – the key word here is process – that creates transparency AND results in implementation of significant cost reduction opportunities, while going out of the way to preserve physician choice. And you need laser-like focus on the top procedural areas that stand to offer the greatest opportunity for savings. Finally, you need to be successful the first time, because second chances are difficult to come by where physicians are concerned.

Here are the Top 10 elements of a successful PPI project:

1. Know how your PPI costs compare. What should you be paying, given your program volume or prestige, or physician practice patterns, or other considerations? Your physicians hear every day that their program gets "the best price" anywhere. Is that true? Credible benchmark data will tell the tale.

2. Put PPI into a larger context of "best practices." Benchmark how other aspects, such as patient throughput, intraoperative case management, ancillary utilization and clinical outcomes, compare to national or regional "best practice" programs your physicians know and respect. Demonstrate that the hospital isn’t afraid to look at everything, even if the examination reveals flaws in the hospital operation that need to be fixed.

3. Analyze program profitability. Most physicians honestly believe that the procedures they do make money for the hospital. When you can quantify for them, for instance, that the hip implant alone consumes two-thirds of the hospital reimbursement – leaving precious little for nursing care, pharmaceuticals or therapy – transparency can begin to take root. Remember, physicians are scientists by nature, so it’s a good idea to provide credible and complete data for fact-based discussion.

4. Find out what motivates your physicians. Is there a quid pro quo that can be introduced to gain their support? It may be improved access to the OR schedule, reduced down time between cases or a commitment to reinvest savings they achieve back into their particular clinical program. Identify what will engage them, and then prepare to make them an offer in return for their support.

5. With this data and information in hand, meet with your physicians in specialty groups. Present the analysis, rationale and opportunities that are applicable to that specialty. (Don’t fall into the trap that what’s good for the orthopods is equally good for the cardiac guys.)

• Candidly discuss the issues faced by that group of physicians and the rationale. Make sure the presentation is data driven on how each program’s practice, utilization and costs compare to other leading programs. Acknowledge that they are under pressure, too.

• Present all cost/quality outcomes – including program profitability – for review and discussion. This is an important step because it helps put the supply costs in context with all cost drivers associated with a procedure. This kind of real data achieves important credibility with the physicians. In the process you may identify other potential system opportunities and deficiencies in the hospital. Some of these, like fixing OR turnaround time, can be the currency of physician engagement.

• Involve the physicians in developing the priority list of what to tackle first. Good data helps everyone understand where the bang for the buck is.

• Be prepared to respond to the physician who asks, "What’s in it for me?"

6. Once priorities are determined, agree on the strategy you’re going to pursue. In general, standardizing product isn’t successful, but standardizing price across multiple vendors is. Everybody gets to play, but only on the hospital’s terms. Physicians are more likely to support a process that focuses on vendor inclusion rather than exclusion.

7. Conduct vendor negotiations. Let a third party facilitate this process, and provide the analysis and benchmarking, Keep physicians informed and in charge of strategy review at key points along the negotiation process. They remain in the loop and in control, but their time is used sparingly. Ultimately choice is up to them, but pricing should be up to you.

8.Implement new pricing in contracts that include clear provisions for new technology and specify undiminished levels of service to the clinical program.

9. Audit pricing compliance in real time for the duration of the contract. This is the best way to track changes in physician practices, keep an eye on technology upselling, and monitor price creep. And hold vendors accountable.

10. Do this on a fast track. When the process drags on, physicians lose interest and opportunities for mis- or dis-information proliferate. Keep it moving toward the goal, finish the job and move on to the next specialty.

Remember, the most important key to success in controlling PPI prices is physician alignment. The trick is to specifically define the real needs of the physicians and match those to the needs of the hospital to maximize the common ground. Find meaningful ways to engage physicians in the process. The final combination will differ by facility, but don’t be afraid to be creative. The end result is worth it.

And to start the engagement process, show them the data. Show them how Medicare hospital reimbursements have trended down by about 8 percent over the past five years, and how physician reimbursement has trended down more than 15 percent in the same period. Then show them how price increases have trended up 38 percent compounded over the past five years, and that as much as 50 percent of the selling price of these clinical "must haves" is spent on "selling and administration."

That will get physicians’ attention, and asking help from them to address those inequities will encourage their engagement in the process and win their support. And you’ll finally begin making real headway on controlling the 40 percent of your total supply spend that is in PPI costs. HPN

HPN