If your CFO were to ask for the price you’re paying for latex exam gloves, you could tell him, along with how many you used last year, why you’re using a specific vendor to provide them, and you’d also be able to hand him a list of everything else you’re getting from that vendor that has implications about the price you receive on gloves.

For the 60 percent of your supply spend that is so-called commodity items this information is part and parcel of how you run your materials management department. But if your CFO then asked you for the same data on, say, the pacemakers your facility uses, could you give him the same complete answer?

Chances are you can’t. And it has to do with the fact that a full 40 percent of a facility’s supply spend – physician preference items (PPI) – is made in a "shadow market" of sorts, one that bypasses the checks and balances of your disciplined purchasing process.

To get PPI costs under control, you need a vendor negotiation process that creates transparency AND results in the implementation of significant cost reduction opportunities. At the same time, your process should strive to preserve physician choice.

Here are three things that, if done well, can help you save between 5 percent and 18 percent of your facility’s PPI spend.

• Objectively and clinically speaking, which products are comparable among vendors, and which (if any) are unique and provided only by one vendor. Materials managers need good clinical resources to obtain this data, and should reach out to hospital clinicians whose technical and clinical knowledge can help identify (and validate) this information. In many cases, an OR or cath lab nurse or tech can be very helpful in this role.

• What accounts for different pricing among vendors for comparable products. If the clinical value is comparable, pricing should be within a narrow range. If it’s not, you need to know why.• Whether your physicians use multiple vendors in a given category. This indicates an attitude of interchangeability or product comparability; that is, according to local practice, no one product is the clear "gold standard" for your program. These items give you an excellent place to start in implementing your PPI improvement program, because you can demonstrate clearly your commitment to choice in product, and at the same time demonstrate the validity of standardization in pricing.

• Whether preference for a particular manufacturer is due to relationships and/or a superior level of service by the rep. (Conversely you may also discover that a particular vendor has been shut out because of poor service.) It is not unheard of for physicians to switch brands when their favored rep moves to a different manufacturer. This knowledge can help your case with both the old and new vendors, making sure the hospital is provided a similar superior level of physician support.

Other useful information includes knowledge about:

• Recent shifts in physician preference for vendors or products.

• How rebates and off-contract buying, including bulk buys, impact the final price paid.

• Current reimbursement rates that drive what price the hospital can afford to pay for products in a given category.

• Start by explaining the rationale to top administration and support it with your data. Is the clinical program profitable? What portion of per-case reimbursement is consumed by the implant alone? Is new technology blowing the budget? Why do this now - are current contracts about to expire? Then provide the same analysis to the physicians. In all likelihood, your physicians don’t know there is a problem, and believe it is the hospital’s responsibility to accommodate their needs and control costs.

• In the event physicians have very strong vendor alignment, prospectively develop a strategy with top administration to manage this within the hospital’s cost management process. Plan to treat all vendors the same, but anticipate and plan for the fallout that can result from this. Making exceptions for one preferred vendor generally undermines administrative credibility and causes ill will among physicians.

• If you plan to open vendor negotiations with an RFP, inform physicians about the process. Note that the RFP prohibits participating vendors diminishing their current levels of service. Explain the RFP includes requirements noting how you will prospectively handle new technology, i.e., allowed as it is introduced, but on the hospital’s terms. By explaining the why behind the various issues addressed in the RFP, physicians can appreciate your drive for transparency and clarity around the acquisition of PPI.

• If you plan to skip the RFP process and go directly to vendor negotiations, explain how this will work.

• Ask for the physicians’ help in keeping the process controlled going forward. Ask them to direct vendor inquiries to you, not for final decision, but so decisions can be made adhering to a process that everyone understands and has agreed to. Their time is best spent in caring for their patients.

• Let them know what the process timeline will be and at what milestones you will get back to the physicians with status reports.

• Vendors who perceive the process to be a threat to their livelihood will disrupt the process. Disruptions may include failure to submit an RFP timely or at all, failure to attend a negotiation meeting, directly approaching physicians to negotiate or discuss the process, placing special restrictions on confidentiality of the proposal terms or objecting to the involvement of outside consultants to assist in the process.

• To keep the process on track:

– Make your expectations clear from the start. This is your playing field and you can set the terms.

– Determine in advance what behaviors will be tolerated and for how long, and which will not be tolerated at all.

– Keep restrictions (or lack thereof) consistent with hospital purchasing practices for all other categories – med/surg supplies, capital equipment, etc.

– Involve hospital legal counsel as needed in final contract terms.

Above all, maintain a united front with top administration in following through on your planned strategies. How you conduct the process today will determine your credibility – with the medical staff and the vendor community – the next time you undertake this effort. And given the explosion in technology, risk management implications, and the financial stakes involved for both the hospital and the vendors, this process, in fact, should become the platform on which you build the strategic cost management system your facility – and your patients – deserve. HPN