Controlling preference products a key element of a standardization strategy

But in an era where cost pressures are as relentless as ever and cost-containment is a stark reality, pressures anew have been placed on doctors to embrace more economic considerations along with clinical views as they weigh their selections of devices such as coronary catheters, orthopedic implants, suture and many other items loosely known as "physician preference products."

The subject is of particular interest because it can go to the heart of physicians’ choice of the hospitals in which they practice and to the surgical procedures themselves. For most, if not all hospitals, the operating room department represents far and away their most significant source of revenue. And since doctors are paid by the number of surgeries they perform, and receive little "extra credit" for cutting supply costs, they have limited monetary incentive for severing long-standing relationships with vendors or learning techniques using different products that might help lower their hospital’s expenses.

Group purchasing organizations, on the other hand, have over the years become masters at using their leverage to keep a rein on product prices, but their influence has generally been limited to contracts for commodity items. Incursions into high-physician preference areas have been tried, and have met with only limited success, having been repelled in most cases by savvy suppliers.

"There is always a lot more activity on the sales side and more people on the sales side than there are people in hospitals who are there to control or reduce costs," says Dan McDow, chief operating officer for IHS Contracting systems LLC, a self-contracting arm that negotiates agreements on behalf of seven health systems that make up the far-flung Iowa Health System in Des Moines. But more than simply being overwhelmed by sheer numbers of skilled, determined sales representatives, McDow says a more basic impediment to effective cost-cutting measures involving physician preference items is a lack of aligned incentives between hospitals and suppliers. "Hospital people are interested in keeping their jobs," he says. "Sales people are interested in bonuses."

But McDow’s self-contracting unit, which left the group purchasing arena a few years ago and now negotiates supply contracts for those seven health systems to the tune of $250 million (pharmaceuticals included) annually has enjoyed bona fide success in making inroads into corners of a purchasing domain where only clinicians had once tread. In 2003, IHS Contracting trimmed a cool $5 million from a $45 million purchasing budget in areas such as pulse oximetry, suture and wound closure, contrast media, orthopedic implants, cardiac and respiratory products, sequential compression devices and endoscopy products. His team isn’t stopping there either. This year, with the help of clinicians and some staunch backing from administration, IHS Contracting plans to tackle interventional radiology, trauma products, spinal implants, and urology, bariatric and biliary products. Heart valves and vascular grafts are also on the docket for 2004.

Few can accuse McDow and IHS Contracting of taking on low-hanging fruit. Big ticket items appear to be their specialty, but that often rough terrain is where real savings lie. It’s just a mile or two from the street known as product utilization.

"We look at a decision tree, check the pain factor and examine the financial rewards," he explains. "We look at what has worked for us with physicians, as well as what’s not working. It’s nothing new to say that we pick our battles, but our successes are greater than our failures."

McDow says that physicians are scientists, and as such can often be persuaded with facts. But perhaps more important is this fact: McDow and his contracting group enjoy solid support from above. "We have strong leadership in our organization and a high level of engagement with our CEOs. The CEO needs to be a champion. Without leadership you are at risk."

Iowa Health System is organized into seven health systems (as far as 350 miles apart in the Corn Belt) and each is led by a separate chief executive. All seven CEOs sit on a board that possesses voting power. Influence from CEOs has given McDow a stick to wield and is chief among reasons why McDow’s group has achieved such an impressive savings record. "Our CEOs understand the value of managing contracts," he says. Flatly.

When dealing with physicians, however, the job takes far less coercion, button-holing and power-plays. Appeals to clinicians are much more rational than that. "Physicians understand that we are under pressure from low reimbursements," says McDow. "They know that’s the reason why we are reacting as strongly as we are. They know that we are dealing with shrinking revenues and having to balance our budgets. They also understand that we want to use the money we are saving from product conversions and standardization for things like new technology and building new hospitals. They want us to stay in business. We always try to be consistent and fair, but it’s mostly a matter of aligning our incentives."

Naturally, even the best-conceived plans go awry at times. But in a rational process there is even a rationale for disappointment. According to McDow, the prime reasons why clinicians decide to maintain their grip on product allegiances are unacceptable quality of the alternative product, disbelief in the cost savings presented, misinformation about the alternative product and lack of time to prepare for a conversion, in addition to one other ubiquitous fact-of-life: hospital politics.

Collaboration and aligned incentives often do the trick, but the road can still be steep and scaled only gradually. One example of this at Iowa Health System is orthopedic implants, an area of high physician preference that many IDNs, hospitals and GPOs have taken a swipe at in recent years and come away with only modest success at best. In its initial try at reducing the number of implant vendors, IHS Contracting managed to pare the field only slightly, to six suppliers at the seven IHS systems. But McDow has plans to push the process ahead. One IHS system that represents approximately 30 percent of the orthopedic implant spending will reduce its suppliers to just three, a big victory in itself.

"The key is to monitor, monitor, monitor," he says, "but this process can be a difficult pill to swallow for the vendor community, especially if there are long-term relationships with the doctors."

On the other side of the table are suppliers of preference items, where companies are happy to be separated from the pack of commodity producers, but often find themselves in deep water competing with vendors with long histories that are difficult to unseat, regardless of the worth of a new product. Among those are companies like Sempermed USA, a Florida-based manufacturer of surgeon’s gloves that despite holding only a single major GPO agreement (a three-year contract signed in the fall with New York-based Joint Purchasing Corp.) has worked hard to carve out a niche in the U.S. surgical glove market.

"We try and get in and influence someone on a hospital’s evaluation committee," says Paul Girouard, the company’s director of marketing. "But we have found that people are always looking for good gloves, so we take our appeals to the surgeons and to their staff. We show them clinical data as well as information on comfort and safety. The bottom line is that we have to show them we are offering something that is above and beyond what they are already using. Materials managers are very aware of the need to get clinician buy-in to bring in a new product and there can be no force-feeding of product by materials managers, but at the same time if a product is clinically acceptable it’s easy to get around things like GPOs and product formularies. On the other hand, people are reluctant to change, especially for things like gloves ,and it’s difficult to get people to change behavior."

Echoing the feeling of others, Girouard says that surprisingly price is only a small factor with preference items like surgeon’s gloves sold into the acute care market. That feeling seems less true in non-acute care markets, however. "Physicians rarely ask about price," he says. "They don’t have to know a lot about price, but they do have to know about whether a product meets their needs."