Keeping the Players Straight

Book Review: Muddy Waters
Making Sense of the Healthcare Supply Chain in the Era of Reform

Muddy Waters was the name of the great bluesman, born in Rolling Fork, Miss., who moved to Chicago and pioneered modern blues music. Muddy Waters is also the name of a new book by Journal of Healthcare Contracting Publisher John Pritchard. Both tell stories of challenging times ahead, particularly for those who fail to adapt to new realities.
“We are on the brink of a major revolution in the healthcare supply chain,” writes Pritchard, in his introduction to Muddy Waters: Making Sense of the Healthcare Supply Chain in the Era of Reform. “Today at every turn, our nation’s supply chain leaders are grading their performance, their supplier’s performance and their clinician’s performance in demonstrated savings. These leaders wear as a badge of honor how they are contributing to the well-being of their organization with the savings they have and are achieving.
“This single-faceted pursuit of managing how healthcare systems procure goods, supplies and services is not sustainable and has just about run its course. Whether you love or hate reform, the basic principles of it – decreasing cost, increasing quality and enhancing patient experience – are appropriate and necessary for improving the state of the U.S. healthcare system.”
In other words, cutting costs – while a laudable, even necessary goal – isn’t enough for providers or suppliers, says Pritchard. Rather, cutting costs, improving quality and enhancing patient experience are the new rules of engagement. Contracting executives, suppliers and, increasingly, clinicians have to get onboard. Pritchard believes his book can serve as a guide to those who are willing and able to do just that.

Understanding the players
The healthcare industry is a jumbled – muddy – scene, says Pritchard. It’s imperative that suppliers and providers work to make sense of it all.
“For suppliers, being unclear about the difference between an IDN and GPO, or between a distributor and a GPO, also means lacking key knowledge about their customers, what factors motivate them to buy and what makes buying easier,” he says. “Each of these – IDNs, GPOs, distributors – has its own organizational structure, its own reasons for and ways of buying. Not understanding where your buyer lives means being at a disadvantage in the marketplace. Being unable to talk with them about their challenges represents significant lost sales opportunity.”
The lesson extends to contracting executives as well. “The stakes are higher than ever for understanding the supply chain and where … dollars go,” says Pritchard. “Navigating the complexity of the supply chain with over 1,200 IDNs operating in this fragmented market, buyers need all the ideas they can get.
“For both buyers and suppliers, the ability to be conversational about these trends, with the C-suite for example, is a skill that pays off for their organizations – and their careers.”

The linchpin
Muddy Waters begins with a history of the healthcare supply chain, from the simple days of a single sales rep calling on a single hospital, to the introduction and evolution of group purchasing organizations, for-profit hospital systems, integrated delivery networks and pricing tiers. Pritchard zeroes in on what he calls the linchpin of today’s supply chain – IDNs.
“In terms of infrastructure, and in terms of who holds the most purchasing power, the IDN is the keystone of the healthcare supply chain structure,” he says. “Without IDN infrastructure, the vast majority of product can’t flow from supplier to end user. A common misconception is that GPOs have the most power in the supply chain. And it’s true that if you measure influence purely in terms of contract throughput, it appears GPOs are controlling the spend. Ultimately, however, it’s the IDNs who are calling the shots.” GPOs may be committee-driven, but IDN executives are the people who run those committees.
Not all IDNs are built alike. One way to classify them is by the extent to which they have integrated all their facilities and components, both from a clinical and supply-chain point of view. A System I IDN would be barely integrated, while a System IV IDN would be highly integrated. Data from The MAX, a business intelligence tool owned by MDSI, publisher of the Journal of Healthcare Contracting, shows that about 60 percent of today’s IDNs are either System I or II, while the remaining 40 percent are either System III or IV, that is, vertically integrated.

The continuum of care
In their infancy, IDNs may have focused on integrating acute-care hospitals. But they are expanding that focus today, says Pritchard. “IDNs are trending toward a structure that keeps them in a patient’s life from cradle to grave.” Due to a number of factors, not the least of which are the changing rules of reimbursement, IDNs are working to develop the full continuum of care. That’s why they’re buying physician practices, surgery centers, nursing centers, home care agencies, etc.
The trend has supply chain repercussions. “Bringing more offerings under the IDN umbrella…means being able to cast a wider net to capture useful data about product efficacy,” says Pritchard. “For IDN purchasing executives, the clinical trend toward comparative effectiveness has put new emphasis on the value of linking patient outcomes with product cost data.”
Needless to say, that’s changing the rules of the game for suppliers too. “Increasingly, the onus is on suppliers to provide answers to these questions too – to provide evidence-based data that their product is contributing to positive patient outcomes at lowest possible cost,” says Pritchard.

The M.D. factor
Hiring doctors and acquiring practices is increasingly seen as a way to help stop the bleeding of red ink in large health systems, says Pritchard. In 2011, the MDSI “Physician Alignment Survey” reported that 85 percent of hospital and IDN supply chain executives surveyed said their hospital or IDN was actively acquiring or hiring physicians or physician practices. An even higher number – 95 percent – said they expected their organization to have more employed physicians by 2014 than they did in 2011.
Like all other purchasers, physicians are being called to respond to the demand for evidence-based data, notes Pritchard. “Physicians are the largest purchasers or influencers of highly sophisticated and costly devices – and they don’t actually pay for them,” he points out. That may be news to non-healthcare types, but not to those in the supply chain. “Like any market where the payer and chooser are different parties, this dynamic has made it difficult for supply and demand to reach a natural equilibrium, and has been a barrier to hospital profitability.
“That’s been changing in recent years however. IDNs have been slowly but surely dismantling this barrier, and many have created (or are creating) value analysis committees that include doctors charged with establishing a balance between cost-efficiencies and clinical outcomes in the selection of equipment and supplies.”
IDN administrators and supply chain executives must create environments in which clinicians will opt into the decision-making process, points out Pritchard. “That means giving doctors the peer-reviewed and evidence-based information they need, and collaborating with them to determine which are the right supplies and devices for producing the best outcomes at the best price.”
Suppliers have to get onboard. “Suppliers who understand what new strategies will best support providers’ efforts to opt in the clinicians are going to have the most success,” says Pritchard. He quotes former Amerinet CEO Bud Bowen, who tells him, “The docs won’t fall on their swords for the supplier anymore like perhaps they did at one time.” What’s more, says Bowen, the government continues to clamp down on financial arrangements between physicians and suppliers. As those relationships become more transparent, buying patterns may shift.

The aggregators – GPOs and RPCs
Group purchasing organizations aren’t immune to the challenges facing the players in the healthcare supply chain. One such challenge is the proliferation of non-hospital sites within IDNs.
“GPOs have had a huge influence over purchasing in the IDN market because they are able to aggregate demand,” says Pritchard. “But this aggregation has so far proven almost impossible to do in a cost-effective fashion in the alternate care market. With purchasers spread among hundreds of thousands of independent doctors’ offices, dialysis clinics, surgery centers, small or rural hospitals and the like, this market is a much easier place for distributors to have a strong influence.”
No longer can GPOs rely on the core of their traditional model – saving money by aggregating volume, Dave Edwards of Premier healthcare alliance is quoted as saying. That’s true for two reasons, he says. First, some large IDNs can garner the same pricing as the national GPO. Second, and even more important, IDNs need even bigger savings than lower contract prices alone can yield.
But that spells opportunity for GPOs, says Edwards. Every patient record contains hundreds of variables that influence the outcome of a particular patient, he says. What pharmaceuticals were used? What kind of implant? How long was the patient on the ventilator? Analyzing utilization allows providers to begin to answer questions about how much something costs and what kind of outcome it produced, points out Edwards. GPOs can help hospitals and IDNs with these types of analyses.

Self-distribution
A decade or longer ago, some observers thought the rise of IDNs would sound the death knell of GPOs. It didn’t. In fact, most IDNs supply chain executives remain loyal to their primary GPO, says Pritchard. Now arises another player – the regional purchasing coalition, which Pritchard defines as a group of healthcare providers that have voluntarily combined purchasing volume to access higher tier pricing through their GPO or directly with suppliers.
RPCs can have tremendous clout, but in most cases, they too remain loyal to their GPO. In fact, Novation, Premier and MedAssets have worked hard to demonstrate their commitment to support RPCs, says Pritchard. Still, the potential for regional purchasing coalitions to “do their own thing,” that is, to self-contract, remains a threat to national GPOs.
IDNs and RPCs represent a potential threat to another player in the supply chain – the medical/surgical distributor. “Will IDNs expect their acute-care distributors to handle the doctors’ offices that are becoming part of their system?” asks Pritchard. “Or will they leave the practices to continue with their old distributor? IDNs are considering a third question too: ‘Should we just self-distribute?’”
Some IDNs are, in fact, moving toward self-distribution. One is Intermountain Healthcare in Salt Lake City, Utah. According to Chief Purchasing Officer Brent Johnson, Intermountain figured it could recoup its $40 million investment in a central warehouse and office building in four and a half years, through self-distribution. “And that’s a very conservative estimate,” he tells Pritchard. “There’s just that much waste in the system. There’s so many hands touching the supply chain, and everyone makes money off of it.” By saving money in distribution costs, Intermountain can spend more on patient care, he adds.
The question remains, how many IDNs will do what Intermountain has done? The answer? Perhaps not many. Institutions that are smaller or don’t have the necessary geographic density will see pretty quickly that self-distribution won’t deliver much, if any, savings, Johnson tells Pritchard.

Buy less stuff
As accountable care organizations – or some form of them – take hold, providers will work that much harder to hammer costs and inefficiencies out of the system, says Pritchard. That could lead to more regionalization of contracting. It will also lead to new behavior on the part of buyers. Again, Pritchard draws on conversations with Bud Bowen to illustrate the point.
Bowen shares with Pritchard a conversation he had years ago with someone in the industry. “He noticed that the supply chain focus in healthcare is ‘sell more stuff, buy more stuff,’” Bowen tells Pritchard. “And he said, ‘That’s just the opposite of what it should be.’ You certainly have to buy the right stuff for the right job, and buy it at the best price possible, but ultimately, your best cost-savings is from not buying stuff at all if you don’t have to.” It’s a counter-intuitive notion, particularly to suppliers. But, says Bowen, suppliers and buyers alike will have to consider that this will become the new paradigm. But the conversion won’t be swift or easy.
Says Bowen, “You don’t go in, flip the switch one day and say, ‘OK, from here on out, we’re going to try to sell less stuff.’ You can’t do it that way. But you have to get prepared to sell less stuff.
“Follow your traditional business models, the way they’ve always worked for you, but you darn well better have a plan B for those clients and customers that are going to push you in this direction.”

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Editor’s Note: To purchase Muddy Waters: Supply Chain in the Era of Reform, go to the Journal of Healthcare Contracting website at www.jhconline.com and click on “Books.”