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High-end medical devices are particularly illustrative of the challenges that hospitals face. More surgery cases than ever before involve a device, yet the greater per-case costs of these interventions are eroding the margins of the surgery business. In the last year alone, hospitals experienced an 8.4 percent increase in average supply expense per adjusted discharge and a 14.3 percent increase in average supply expense per patient day, stemming largely from increased utilization and sky rocketing costs of medical devices1.

Given these increases, many hospitals are appropriately focused on reducing the expense associated with high-end physician preference items, like medical devices. Unfortunately, this category of spend often represents the most difficult area to control, as realizing savings requires an inordinate amount of physician cooperation. Many materials managers report their experiences in this arena as among the most difficult professional challenge of their careers to date.

The Advisory Board Company has spent the better part of the last three years working with its network of 2,500 member hospitals and health systems to isolate the critical success factors for enfranchising physicians in controlling preference item costs. Through a combination of best practice research, on-site consulting and spend data analysis, our organization has identified five key imperatives to successfully enfranchise physicians in supply cost reduction initiatives. Organizations employing these strategies effectively are achieving upwards of 10-15 percent reductions in physician preference item spend.

Ensure credible cost savings data. First and foremost, the key to driving reform in preference item spend is getting to clean, robust and accurate data. Physicians are often inherently skeptical of cost savings initiatives and inaccurate or non-specific data can derail efforts right from the start. The list below offers recommended analyses to assist physicians in understanding cost pressures and the need for change:

• Service line profitability, volume and costs over time

• Cost breakdown among supplies, labor, and related expenses

• High, average, and low cost per case by physician

• Implant/supply cost by manufacturer

• Potential cost savings through product standardization

• Differences in clinical efficacy between competing preference items

• Contract and off-contract suppliers

Completing "bullet proof" analyses such as these is often a highly manual effort, as required information is typically spread across multiple systems and sources. Given the importance of good, reliable data, many organizations are now investing in data management and business intelligence systems as a key pillar of their physician partnership strategy. These software tools aggregate data sources across the hospital and automate data processing, allowing organizations to confidently monitor performance in real-time and quickly educate and engage physicians.

Demonstrate that potential savings won’t jeopardize quality. Much of physicians’ initial reluctance to participate in cost savings initiatives stems from a belief that doing so may compromise the quality of care provided to patients. Successful institutions often look to a physician champion to act as liaison between materials management and the medical staff, serving a "checks and balances" function for each – validating the savings opportunities to physicians, and relaying quality concerns to administration. This physician leader needs to be a strong communicator, well regarded among the medical staff, supportive of process improvements and in possession of strong mediation skills. Communications should provide a rationale for pursuing savings (often earmarking a percentage of savings for reinvestment) and an overview of the cost reduction opportunities, as well as set out a process for assuring that clinical quality will not be compromised.

Use price variation to engender broader physician support. It is far easier to enfranchise physicians in price negotiations than in across-the board standardization. The majority of physicians respond well to the argument that like hospitals should pay the same price for the same items. Meaningful savings can be achieved via price negotiations at a fraction of the "political" capital cost. An 870-bed health system in the Mid-Atlantic was able to generate $3.5 million in physician-supported price savings for spinal systems by identifying price variations using item-level price benchmarking analysis. After educating key members of the medical staff on existing discrepancies, administration involved key physicians in the negotiations and scripted them on appropriate talking points, leading to significant price reductions.

Don’t jump the gun on standardization.
Shifting manufacturer market share is often a much harder sell to physicians, as it forces a subset of doctors to switch from devices that are, in their experience, proven to be clinically effective. As such, successful organizations often stage their initiatives, tackling pricing discrepancies first in order to build sufficient physician goodwill prior to having medical staff entertain thoughts of standardization. Investing time here can have a significant payoff — a 300-bed facility in the Southeast that had a strong physician leader and good physician relations captured more than $2 million on CRM devices by creating a data-rich case, gaining physician support and moving from four to two manufacturers. Many other organizations are capturing substantial savings by maximizing tier performance and reducing the number of manufacturers across spend categories in follow up to historical capitated or shelf-pricing initiatives.

Hardwire physician involvement to create accountability. Device technology has been changing so fast that hospitals without disciplined and continuous reform efforts are seeing projected savings completely wiped out with the introduction of new medical devices. In order to ensure cost containment initiatives have a bottom line impact, many organizations are building processes to constantly evaluate physician preference item spend. Scorecards for physicians, departments and manufacturers are a powerful tool in creating accountability for all parties involved. Recommended scorecard analyses include:

• Manufacturer market share trends

• Direct supply cost per case

• Direct profit per encounter

• New products introduced

• Item price benchmarks

By ensuring ongoing evaluation of savings opportunities, routine collaboration with medical staff and accountability to spend performance, organizations can successfully hardwire best practice spend management across physician preference items.