David Chaudier
By David Chaudier
Providing transactional support isn’t enough for today’s supply chain departments
Gone are the days of buying and providing everything to everyone and letting operations run their own supply chain. In most cases, supply chain has been centralized with a system structure to support the needs of operations.
Successful supply chain departments will realize they no longer merely provide transactional support to the rest of the organization, but rather, they are leaders of change. How they portray this role will be the difference between a department that partners with clinicians and leaders versus one that is forced to take radical steps to continue savings.
The three product types
Just as in other industries, there are different levels of product types in healthcare, based upon quality and cost. Not everyone purchases or can afford the highest quality or most expensive products. This creates a dilemma within healthcare, since healthcare cannot be delivered based upon the patient’s ability to pay. In most industries, the consumer selects products by balancing quality and cost. In healthcare, the patient does not have this ability; it is left up to the physician, clinical staff or management.
Supply chain leaders know that not all products and services are determined by and used solely by physicians and clinicians. There are basically three supply types – commodities, clinical items and physician preference items, or PPI:
- Commodity items are those that are used by many. Usage is high, costs are low, and they usually can be purchased from several vendors.
- Clinical items are those that are used by clinicians in the patient setting, and procedural and surgical areas, and can vary in costs.
- Physician preference items are generally the highest-cost items, with lower usage. Typically manufactured by a smaller group of vendors, they generally are used on high-level cases and may be implanted into the patient. As the name suggests, physicians have a high level of preference for these items.
Each category of supply has a different level of commitment by the organization, communication plan, and role for supply chain. It is up to supply chain to understand each category and its role, in order to achieve savings correctly.
In the commodity category, leadership and supply chain can and should decide products based upon price, standardization and negotiation, and then implement these changes system-wide. They must understand the risks involved in communication and implementation of their decision, even more than its clinical ramifications. Headaches may accompany change, but if the financial benefits are clearly communicated system-wide, implementation should be fast and savings achieved quickly.
Clinical item selection calls for supply chain to take a step back from a strictly directive role, and to work more closely with clinicians to understand the benefits and costs of items. Since these items are more directly correlated to the care of the patient, supply chain can expedite any decisions made by involving a physician group or clinical or administrative champion. Once the products have been decided upon, supply chain can negotiate the best price.
Backwards
Many supply chain departments and leaders have gotten the strategy backwards. They try to force usage based upon what they feel they can negotiate the best pricing on. They negotiate a contract based upon usage, then tell operations or clinicians that they are failing to achieve savings because they are not following the contract and using the products that they negotiated for. Leadership may or may not have budgeted these savings based upon supply chain’s negotiation, and may not understand why their departments are not hitting the savings. This creates distrust between supply chain and operations, forcing supply chain to take an even more directive approach to savings, and taking those decisions out of the hands of the clinicians and operations.
Physician preference items are the main focus for savings – and the most controversial. They begin with a category – such as ortho, neuro, spine, stents, pacemakers – in which a number of vendors provide competing products. Typically, supply chain analyzes data on usage and pricing, including benchmark data, and then negotiates to reduce the number of vendors and increase share for some, thus reducing invoice price. This can and does create savings initially; but failing to understand the impact and risk of such a decision can create turmoil between supply chain, operational leaders and physicians. When these contracts become due again, the cycle is repeated. Sometimes contracts are signed with a new vendor or one that was “kicked out” during the last contract cycle.
Many may argue that this process is not made without a physician leader or team. This may be true even in most cases, but depending on which physicians supply chain has partnered with, and the physician structure of the organization, the cost of implementation and physician relationship reduces overall savings.
Organizations taking this approach for the first time should expect some hostility and even mistrust. They may not understand all of the products that are available or that will be in the future. And they may face resistance when communicating the impact to the physicians, and understanding the clinical and operational impact to patient care both short-term and long-term.
Supply chain should take an active role, that is, one in which they lead the conversation and support the decisions of others – but not make the decisions for others. This is where value analysis teams can help. These teams should consist of a supply chain facilitator, physicians and a physician champion, clinicians, and operational leaders. Depending on the products up for negotiation or discussion, the members of the group can change.
The goal for supply chain is to facilitate a group decision by providing all of the information needed to make the best decision.
The contracting life cycle
Contracting has a life cycle. Everyone understands and believes that in order to get a lower price, the provider must commit to greater volume from fewer vendors. This is a valuable strategy, but one that will create savings only for a limited time. It also reduces the power of negotiation and does not take the market fully into account. Eventually, the organization will have to open up to all vendors of a certain product and let the market drive the pricing down.
Once the ceiling price has been reset, the organization can then begin to pursue lower prices by committing volume, or they can choose to allow physicians to use multiple vendors at a lower price. This creates competition and allows the market place to continue lowering price, and buys the organization time to adjust its strategy as volumes and shares change. It also reduces the high artificial pricing that many organizations have been paying for years. Combining ceiling prices with market data, benchmarking data, usage data, and clinical data forces vendors to choose whether they want to be a selected provider of products or not.
How does reimbursement figure in?
Understanding reimbursement gives supply chain another point of reference when negotiating. Sharing this information educates those within the process and builds alignment when it comes time to negotiate with the vendor. A good rule of thumb as a starting point: Supply costs should be a third or less of the total payment for the Medicare DRG in question. It should be noted that most vendors understand hospital reimbursement very well, and will set their pricing based upon a hospital reimbursement payment and payer mix. This helps maximize the vendor’s profit margin.
The organization must put a process in place for new items and new vendors, so that existing contracts do not limit the usage of items that may be clinically superior to current ones. Of course, Journal of Healthcare Contracting readers know that vendors often try to enter an organization and grow their sales by bringing in higher-priced items. This process of new technology, pricing and usage mirrors the life cycle and marketing of other industries, the difference being that within healthcare, these technologies can save lives and may be wanted by everyone. But this will also create a large budget variance and greatly affect the operating margin of the organization.
Can you imagine if we gave each patient a menu to inform them of the cost, coverage, readmissions rate, mortality rate, infection rate, etc., of a certain product as it relates to a certain procedure or surgery?
In all other industries, the customer is aware of the price and quality of an item prior to purchase. As patients begin to educate themselves on the price and quality of healthcare, they will demand more say as to what supplies are used in their care, and certainly into those that are implanted in their bodies. As this process gains more traction, healthcare organizations, their supply chain departments and their vendors will change the way they market to patients, which in turn will create a new dilemma for supply chain and how they will negotiate.
David Chaudier has extensive experience and leadership in hospital finance, operations, administration and supply chain. He has provided executive consulting and supply chain assessments for health care systems and GPOs and is currently the chief executive officer and hospital administrator for LifeCare Hospitals of Wisconsin.