Wasting Millions by Making Purchases Based Solely on Physician Preference? Not in My Hospital! MS

Transcription

1 Wasting Millions by Making Purchases Based Solely on Physician Preference? Not in My Hospital! MS

2 Wasting Millions by Making Purchases Based Solely on Physician Preference? Not in My Hospital! In every occupational setting since time immemorial, practitioners of various professions have had tools they have preferred above all others for practicing their trade: ZZThe famed golfer Bobby Jones named his favored putter Calamity Jane and would use no other implement for the task. ZZRoy Hobbs, The Natural, clubbed his prodigious blasts using his magical bat Wonderboy. ZZAnd who can forget legendary blues singer B.B. King and his beloved guitar Lucille. So it is with medicine. Somewhere between graduating from medical school and taking on patients in private practice, physicians develop a preference for many of the supplies they need to ply their trade. While the term Physician Preference Items (PPI) most often refers to such things as orthopedic implants or cardiovascular devices on the supply side and specific vendor preference on the capital side, the span of physician influence can range as far down the mundane route as bandages. Throw in the technology manufacturers inducements and managing PPI has become a significant challenge for healthcare leaders. CEOs, COOs, and CFOs are being forced to take an alternative path With operating costs increasing and margins from both operations and pooled investments on the decline, many C-LEVEL healthcare administrators once willing to quietly overlook the inefficiencies and costs associated with allowing their medical staff to use whatever products they preferred are forced to take an alternative path. Many need help in formulating an effective plan of action. What can be done to establish effective processes regarding the management of PPI? What would such a process look like? Who can help put such a process in place? 1

3 IT DIDN T HAPPEN OVERNIGHT Like our national debt, the problems we are seeing in today s healthcare supply chain and capital acquisition processes didn t happen overnight. They were largely set in motion during the pre-1983 golden days of healthcare when hospitals were reimbursed retrospectively on a basis of identified costs plus a reasonable and customary mark-up. Those times ended in 1983 with the passage of the Tax Equity and Fiscal Responsibility Act, ushering in prospective reimbursement based more on average cost for treatment. First introduced by Medicare and Medicaid and then commercial payers, it made it tougher for hospitals to operate in the black. Consequently, healthcare administrators looked for ways to lower operating costs, and in doing so, they turned their attention to the supply chain. The mid-80s witnessed the growth of the Group Purchasing Organizations voluntary associations such as VHA, AmHS, Premier, UHC, Amerinet, and others who turned their attention toward aggregating volume across their huge membership bases to bring down the cost of supplies. Their strategies worked regarding commodity items and even in some service contract realms, but GPOs were considerably less successful when dealing with PPI and Capital Equipment acquisition. There were many reasons for this: ZZWhen hospitals recruited orthopedic surgeons and cardiology specialists, they generally recruited the vendors those MDs favored. Exacerbating the situation are device manufacturers sales representatives inside the surgical suite during procedures assisting the physicians as they learn how to use new products. Physicians threaten to bolt to the competition ZZSome physicians used the leverage associated with the volume of patients they placed in a hospital to continue to get the specific items they wanted. Especially in a smaller community, where there may have been two competing hospitals, nothing works as well as the threat to bolt to the competition. ZZOn the capital equipment side, revenue real or predicted increased the influence of physicians when requesting new technology. Like their surgical brethren, many imaging specialists found themselves attached to particular vendors for particular modalities. ZZFinally, major manufacturers courted physician preference with items as mundane as sutures (which falls within the description of a commodity) to specific instruments utilized during procedures by creating new products specifically at the request of individual physicians. 2

4 a multimillion-dollar impact to the bottom line In today s milieu, the impact of PPI on the average hospital is huge. While opinions vary, it is safe to say that a range of 15-25% of a hospital s operating expenses relate directly to supply costs, while most organizations spend an amount equal to funded depreciation on yearly capital equipment replacement. 60% of supply costs are PPI On the supply side, an organization with a $500 million operating budget would expect to purchase between $75 million and $125 million in supplies. According to an article published in knowledge.wpcarey.asu.edu in August 2007, Dr. Eugene Schneller attributes 60% of supply costs as being PPI. Thus, the range of PPI in that same $500 million hospital would be $45 million to $75 million. Conservatively, the annual capital expenditures for such an organization would be in the $9 million to $18 million range. Multimillion-dollar savings run directly to your bottom line the opportunity: improved operating performance through ppi management Using the example of the $500 million hospital, let s look at the impact of a 3-14% improvement in the cost of PPI and an improvement in 4.5-9% in capital acquisition costs and see what that would mean. Assuming a Supplies as % of Operating Budget ratio of 20%, and a PPI component of 45%, the opportunity to impact the operating budget would look like this: Total Supply Expenditures PPI Component 3% Decrease in PPI 14% Decrease in PPI $100,000,000 $45,000,000 $1,350,000 $6,300,000 For Capital Expenditures (Assume $15 million in purchases): Total Capital Expenditures 4.5% Reduction due to PPI Management $15,000,000 $675,000 $1,350,000 9% Reduction due to PPI Management While the savings associated with supply costs go directly to the bottom line of the Profit and Loss Statement, those associated with Capital Acquisition are shown on the balance sheet. One set of actions lowers operating costs and improves operating margins, while the other either (1) reduces cash outflow, (2) allows for more items to be purchased within the parameters of the capital budget, or (3) provides the organization with additional contingency funds. 3

5 Process acceptable to all Physicians respect evidence the challenge: how do you do it? In order to attain the savings associated with the successful management of the acquisition of PPI supplies and capital equipment, hospitals have to be willing to commit to the implementation of rigorous methodologies that are: ZZProcess-Driven i.e., invoking a formal process for the review and approval of ALL prospective purchases, including PPI ZZEvidence-Based i.e., making decisions using information provided by an evidence-based review of alternatives by an unbiased, objective party ZZValue-Focused i.e., making decisions based on the measurable value they return to the organization as opposed to their acquisition costs In order to overcome resistance and drive success in the PPI realm, hospitals often require the assistance of an impartial third party to both help establish the disciplined processes and provide the evidence-based research and analysis that is acceptable to all. Over decades of experience in working with hospitals, ECRI Institute, an independent nonprofit, has developed 4 critical services underpinned by objective, scientific methodologies to help hospitals with the daunting task of sorting out the needs of their organizations and separating them from their wishes and wants. Physicians, in general, respect a coherent administrative process that includes clinicians. Most are likely to value objective, scientific research. Administrators can use these processes to forge productive outcomes. And they can then use price benchmarking to help arrive at decisions based on selecting the most appropriate technology at a fair price. In response to hospital requests for help in productively managing these challenges, ECRI Institute, over a number of years, created the services listed below: I. A consulting service that can (a) assess the current environment, (b) design the effective Technology Assessment and Value Analysis components and, as needed, (c) oversee and coordinate the startup of those processes until the hospital reaches a point where it can be self-sustaining. See Applied Solutions Group consulting at II. III. IV. An independent health technology assessment service that does unbiased reviews of the most current scientific evidence on new and emerging technologies and provides this information to Senior Management Teams, Value Analysis Teams, and clinicians for strategic technology planning. Scientific information on planned, new, and emerging technologies including supplies, capital, and drugs can provide additional inputs and contribute to making evidence-based decisions. See Health Technology Assessment Information Service at A medical-surgical supplies and implants price benchmarking tool that (a) compares organization s current purchase prices to those of more than 1,000 other hospitals, (b) identifies a range of savings opportunities from the lowest price among the participating organizations to the average price among those same organizations, and (c) provides custom technology analyses for commodity and PPI. This focuses attention on the consumables with the highest potential for savings. See PriceGuide Advisory Service at A capital equipment planning and benchmarking service that allows organizations to compare pricing proposals to a price-paid database of 7,000 products from more than 2,000 hospitals. The service also provides life-cycle costing, safety, and technical information for all capital items and prepares and/or reviews RFPs Request for Proposals all resulting in selecting the right technology at the lowest negotiated price. See SELECTplus Healthcare Technology Advisory Service at 4

6 the reward: the evidence-driven organization The introduction of scientific evidence and data-based methodologies to the basic processes of the organization creates a template that fosters neutral and objective approaches to emotional issues. At a time in history when all resources are fast becoming scarce and dear, utilization of scientific methodology is not only fiscally and operationally prudent, but morally necessary as well. Healthcare, as with other industries, is in a period of transition. The time has come when transparent decisions based on the evidence is imperative. Many administrators now ask themselves: ZZWhat process was invoked to reach our decision? ZZWhat evidence was studied, and what elements of the evidence led to our decision? ZZWhat is the ROI associated with our decision? When an organization finds itself answering these questions regarding EVERY decision with major operational impact, it will know that it has transitioned from the influence-based organization of bygone days to the evidencebased organization of the future. Call (610) , ext. 5118, and ask about PPI strategies Contact ECRI Institute at PriceGuide@ecri.org, or call (610) , ext Wasting Millions by Making Purchases Based Solely on Physician Preference? We can help you end what needs to be ended. About ECRI Institute ECRI Institute ( a nonprofit organization, dedicates itself to bringing the discipline of applied scientific research to healthcare to uncover the best approaches to improving patient care. As a pioneer in this science for nearly 40 years, ECRI Institute marries experience and independence with the objectivity of evidence-based research. To maintain objectivity in its reporting, ECRI Institute has one of the strictest conflict of interest guidelines for all employees in the healthcare industry. ECRI Institute is designated a Collaborating Center of the World Health Organization and an Evidence-based Practice Center by the U.S. Agency for Healthcare Research and Quality. ECRI Institute PSO is listed as a Patient Safety Organization by the U.S. Department for Health and Human Services under the Patient Safety and Quality Improvement Act of