Hospitals in the U.S. are in trouble. Costs are rising faster than our ability to pay. One of the major cost drivers is medical supplies. There are 80,000 medical devices in use, and 4,000 new devices are approved each year. Many of these devices are referred to as physician preference items, or PPI, because the manufacturers/vendors market these directly to physicians. The physicians order the items and the hospitals pay the bills. This is a major disconnect, and the vendors have taken advantage of the gap. Physicians often have no idea what the devices cost or if the hospital is being paid enough to cover the cost. According to a survey by Bear Stearns & Co., only two in 20 hospitals make a profit on orthopedic joint replacement procedures.
It is imperative that hospitals and physicians work together to manage costs while having access to new devices to improve patient care and outcomes. Physician preference items account for 40% of an average hospitals total medical supply spending. These PPI devices also account for the majority of supply cost increases. When hospitals attempt to contract for these items, they have little, if any, leverage because physicians have not been impacted by the cost issues, or so they think. Across the country, programs that depend on high cost PPI items are being discontinued as hospitals lose money on the average case. Physicians need to be part of the solution.
In the old paradigm, the vendors insist the only way they can reduce the cost of the supplies is if the healthcare organization commits to increased volumes or market share. Physicians justifiably resist hospitals telling them what vendors they can use. It is the classic Catch-22. In reality, market-share agreements are a diversion aimed at maintaining high pricing.
Wheaton Franciscan Healthcare, a 10-hospital integrated delivery network in Wisconsin and Iowa, has tried a novel approach. We have shown the physicians the data on our costs relative to other hospitals and how much we are losing on high supply-cost procedures. We ask if they will agree to use only the vendors who will sign a reasonable contract with reasonable pricing, one fair to all. Rather than restricting the physicians access to a small group of vendors, we give access to all the vendors who will agree to reasonable terms.
Physicians have been much more responsive to this approach. In most cases, we set a limit or cap on what we will pay and will work with any vendor willing to sign the contract. To date, no vendors have walked away from our business. This approach puts all vendors on a level playing field in regard to contract terms and pricing. Quality of products and services become the differentiators. If vendors want to increase market share, they need to earn it.
This model also greatly changes the focus of the staff and physicians. Now, the focus is on what is best for the individual patient and what products yield the best outcomes.