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Supply-chain spending is typically the second-highest cost for hospitals
Supply-chain spending is typically the second-highest cost for hospitals, behind labor. One estimate shows hospitals spent at least $255 billion on supplies and nonlabor services in 2011.
Photo credit: Courtesy Cardinal Health

Breaking the chain

Hospitals set supply cost-cutting targets, push physicians to change behavior


By Jaimy Lee
Posted: August 17, 2013 - 12:01 am ET
Tags:

Patients with a new cardiac pacemaker have an advantage over patients who have received standard pacemakers: they can undergo MRI scans as a part of their care without the risk of adverse events.

But the new device costs hospitals $1,300 to $3,000 more than a traditional pacemaker and could cut into a hospital's margin because Medicare and other insurers pay the same rate for implanting MRI-compatible pacemakers as they pay for the standard pacemakers. From a clinical perspective, physicians are put in the position of having to predict which patients are likely to need an MRI and should receive the new pacemaker.

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It's one of many supply-chain decisions hospital administrators have to make where they must weigh the benefits of a new technology—such as the fact that the new pacemaker doesn't improve immediate outcomes for the patient but may have additional benefits in the long term—against its higher costs.

These executives face similarly difficult decisions to slash millions of dollars in supply expenses each year. In the case of the MRI-compatible pacemaker, one executive says his system likely will pay more for the new pacemaker when appropriate and seek offsetting cost reductions elsewhere in the supply chain.

“It's one of those things where to make the quality of life better for our patients, we're going to incur new costs,” says William Mosser, vice president of materials management at Franciscan Missionaries of Our Lady Health System in Baton Rouge, La.

Facing declining revenue and reimbursement, hospital systems across the U.S. are making it a priority to sharply reduce spending on supplies including gloves, syringes and hip implants. Supplies typically make up hospitals' second-largest expense, after labor costs. Hospitals spent about $255 billion on supplies and nonlabor services in 2011.

Budget pressure has led to increased scrutiny of the costs, clinical outcomes and utilization of products. Many hospitals are setting cost-reduction targets, evaluating the effectiveness of their group purchasing organizations, and pushing for better data and analytics on products to persuade physicians to accept changes to the types of devices or supplies being purchased.

More than 60% of the hospital supply-chain executives who participated in Modern Healthcare's 2013 Survey of Executive Opinions on Purchasing said they were very satisfied or satisfied with their primary GPO. About 40% were somewhat satisfied or not satisfied. Meanwhile, 59% of respondents said their primary GPO was very effective or effective in controlling costs; the remaining 41% said their main GPO was somewhat effective or not effective.

Cost reduction, clinical integration

Overall satisfaction with outside contractors
“Everyone that we deal with at the hospital level today is focused on cost reduction and clinical integration and managing patients to outcomes with a bent toward resource reduction,” says John Bardis, chairman, president and CEO of MedAssets, one of the nation's largest GPOs.

But many hospital executives say there are cultural and operational challenges that can slow these kinds of cost-cutting initiatives.

One major factor is that physicians often have relationships with particular medical device manufacturers or have used certain devices for a long time and are resistant to changing to other devices. Another is that the higher costs of new technologies touted as improving quality of care can set back savings efforts. And in many cases, there is a lack of validated clinical data that can definitively prove whether a particular product yields better results for patients.

“The biggest hurdle we have is there is not a consistent and large enough base of validated evidence,” Mosser says.

Like many other hospitals, Franciscan is undertaking an initiative to cut millions of dollars in annual supply expenses as it faces the prospect of significantly lower reimbursement rates in the coming years. The program, which it calls Healthy 2016, aims to cut $165 million in operating expenses, including $31 million in medical and surgical supplies and purchased services, over the next three years.

Other hospital systems have implemented cost-cutting initiatives similar to the one at Franciscan. Over five years, Lahey Health, based in Burlington, Mass., plans to cut

$40 million out of the $300 million it spends each year on medical and surgical supplies. BJC HealthCare, a 12-hospital system based in St. Louis, plans to reduce its $850 million in annual supply spending by $54 million this year, and it's seeking to cut out an additional $150 million over the next three years.

“This is a primary focus across the system, from the CEO down,” says Nancy LeMaster, BJC's vice president of supply chain. “In the last three years, as the reimbursement pressures have been getting tighter and tighter, people have really started to see how this could impact us. We call (supply chain) a sustainable advantage rather than just a back-office function.”

Hospitals are undertaking a number of strategies, including standardizing the types of products clinicians use, optimizing appropriate utilization by physicians, nurses and other staff, and continuing to negotiate lower prices for supplies. Many but not all hospitals have value-analysis teams in place.

Focus on physician preference

A big area of focus is usually physician preference items, such as hip or knee implants as well as stents and other cardiac rhythm management devices. These are some of the costliest purchases hospitals make.

BJC is focused this year on reducing costs associated with spine implants. “This is an area of focus where the pricing does not appear correlated to the cost to manufacture and sell the product, but rather has historically been based on what the market would bear,” LeMaster says in an e-mail. “The market can no longer bear this level of pricing.”

The system's strategy focuses on first achieving market-competitive pricing with the spine vendors, and then taking on utilization management and possibly standardization.

Franciscan is supporting a clinical variation project led by chief medical officers at its five hospitals in Louisiana that seeks to better align the clinical protocols of spine surgeons. That could reduce the number of vendors of spine surgery products the system works with, from about 20 now.

“Spine surgeons across our health system do things differently,” Mosser says. “Some might overutilize. Some might underutilize. Some might use generic products, and others are using different types of techniques. Our chief medical officers are working down a path of aligning both the protocols and the practices from a clinical perspective that will allow us to minimize (the) number of those vendors.”

GPOs say their core business is still supply contracts, but the other services and technologies they offer to hospitals to help address a number of financial pressures are increasingly becoming of interest to their members.

“You've got to look at best demonstrated practices,” says Ed Jones, president and CEO of HealthTrust, a Brentwood, Tenn.-based GPO that is part of HCA's Parallon Business Solutions. “You've got to look at reducing clinical variability. You've got to look at streamlining your sourcing decisions.”

Nearly half of the hospital supply-chain executives who participated in Modern Healthcare's purchasing survey said they planned to increase their use of GPO contracts in 2013. Only 7.6% said they planned to decrease their use of GPO contracts.

“If a big system feels like their GPO can give them access to scale and aligns that scale to drive better value than they can do on their own, they will tend to work more with the GPO,” Jones says. “If the larger systems are in a position where their GPO is not as effective in that regard, they're probably going to do it on their own.”

Smaller health systems and hospitals are generally more inclined to work with GPOs and increase their spending with them to gain the scale and volume that they provide, Jones says. In other instances, contracts with higher commitment levels also are generating more interest because they often deliver better pricing, he adds.

Lahey Health says it plans to review its current GPO relationships with Novation, a GPO based in Irving, Texas, and MedAssets and then sign a contract in October with a single GPO that will handle at least $180 million of spending.

“It's a partner to help us meet our margin targets as we worry about declining reimbursements,” says Eric Berger, Lahey's vice president of supply chain. “We really need to look at expenses, so having a GPO partner will help us do that.”

Looking at the data

As hospitals dive deeper into the supply chain searching for ways to reduce spending, new areas of focus are emerging. Not only are some hospital systems bringing distribution in-house, but they are also hiring new talent, investing further in data and analytics tools, and some are even forming their own GPOs.

While many hospitals report that they have met cost-reduction targets ahead of schedule, the cost of high-priced implants remains a big barrier. Hospital and GPO executives bemoan that the implantables market has not become more like the markets for other commodities.

“These innovations in total knee and total hip have been around a long time but they've had a strong hold on high prices compared to the rest of the world, in large part because of physician relationships,” MedAssets' Bardis says.

On the other hand, teaching hospitals and physician-owned hospitals are more likely to continue to allow preference among physicians. “We will tend to give them what they want, regardless of what the cost is, in order for them to want to practice there,” says Bruce Kizzier, director of materials management at seven-bed Lincoln (Neb.) Surgical Hospital, a physician-owned hospital.

He believes his hospital has gotten the best prices, noting that the hospital's physicians have participated in meetings with vendors to ensure that the hospital was receiving competitive pricing.

“More organizations are having these conversations with surgeons,” says Dr. Peggy Naas, an orthopedic surgeon and vice president of physician strategies for VHA, the parent organization of Novation. “More surgeons, seeing the pressure to add value, are asking questions.”

Other supply-chain executives say that while hospitals have done a poor job in the past in educating their physicians about the costs of preference items and keeping supply costs under control, that's changing and doctors increasingly are facing up to the problem.

“They've seen the impact of the sequestration, the federal law changes and reimbursement drops have been very dramatic across the country for every system,” BJC's LeMaster says. “They're really seeing that if we don't get it out of supplies, then we've got to look at labor.”


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