About HCSB Consulting Education Facilities Planning & Design Interim Mgmt Contact us Clients

Reining in the Cost of Physician Preference Items


(Published in May 2010 as a special section to hfm, a publication of the Healthcare Financial Management Association/Written by Lauren Phillips)


Even for hospitals that have a good handle on costs for general supplies, physician preference items (PPIs) such as implants, stents, and pacemakers can be a challenge. Such devices can account for as much as 60 percent of total supply expenditures, and acquisition frequently bypasses the organization’s usual purchasing process.


One reason that hospitals often encounter difficulty in bringing PPI costs under control is that the issue isn’t normally found in simple supply chain improvements. Instead, hospitals are often dealing with something far more significant: a failure to form good working relationships with their physicians.


Empowering Physicians as Partners


What does it take for a successful supply chain executive-physician relationship? The Health Sector Supply Chain Research Consortium has found that an effective PPI collaboration is the outgrowth of a long-term rather than an episodic relationship--one that is respectful and professional that features regular meetings in which physicians engage with each other and with the supply chain leader to talk about the realities of running the hospital.


“You need to empower physicians to be a participant in the selection process, especially when they are most interested--when they come back from a meeting with a product or idea they're excited about," says Eugene S. Schneller, PhD, professor, School of Health Management and Policy at Arizona State's W.P. Carey School of Business, who is founder and co-director of the Health Sector Supply Chain Research Consortium.


“Physicians need to understand that, while there may be a process, in the end they will be the choosers,” says Schneller. “The best systems are committed to never giving a physician a product he or she doesn't want to work with.”


Hospitals that don't even try to engage their physicians or that have tried to engage them in the past and failed have a tendency to force things, says Michael Bohon, founding principal, Healthcare Solutions Bureau, LLC.


“Forcing things will probably bring you some short-term success in some cases, but in the long run it's doomed to failure,” says Bohon. “You have to build a good foundation--and you have to demonstrate that the hospital will support the efforts of the supply chain leaders, and not bail as soon as they start to get some pushback.”


Physicians need not only to be empowered, but also to be educated. “Physicians don't really understand the economics of the hospital,” says Curtis Rooney, president of the Health Industry Group Purchasing Association. “Given the historical misalignment of incentives, they don't see that they have a stake in the hospital's success.”


Physician Engagement Strategies

Asked how hospitals can get physicians to engage with CFOs, Eugene S. Schneller, PhD, professor, School of Health Management and Policy at Arizona State's W.P. Carey School of Business quickly turns the question around. “The real question is, How do you get CFOs to demonstrate to clinicians that they care about what matters to them? It's a matter of establishing an organizational culture of trust and understanding. If you approach it the other way around, then every time a physician sees the CFO, he or she is going to assume that the hospital wants to take away some cherished product just to reduce costs.”


The tips below are drawn from Physician Preference Item Management, an informational guide and self-assessment tool developed by the Health Sector Supply Chain Research Consortium at the W.P. Carey School of Business at Arizona State University.


To see the full document, which covers, in addition to physician engagement strategies, management within the supply chain department, the role of internal and external stakeholders, and education and communication strategies, go to www. wpcarey.asu.edu/healthcare-management/consortium/upload/PPIM_Assessment_Tool.pdf.


Express desire to understand and delineate what brings value to clinicians

    • Ability to maximize clinical capabilities
    • Ability to maximize clinical efficiencies
    • Ability to achieve excellent patient outcomes
    • Need to reduce risk
      • Maintain good relationships with patients
      • Make clinical choices that are appropriate for the patient
      • Utilize products for which the physician is well-trained and has established good outcomes
    • Respect of clinical decision making
  • Share high-level data with physicians on product usage and costs and comparisons between physicians on product usage
  • Assess physician "clinical indifference" to products (indifference to the use of one product over a similar product when the clinical outcomes with either are acceptable)
  • Provide transparency of hospital goals, costs, and margins surrounding procedures involving PPIs
  • Use formal or informal gainsharing
  • Develop an official role, duty, and payment structure for physicians involved in PPI management


Sharing Data

The best way to provide urgency around cost efficiency is through data use. Clearly, supply cost-reduction initiatives must be fueled by cost data, but clinical data are just as important and, ideally, should be presented and discussed first.


Only when physicians have satisfied themselves about a product from a quality standpoint, and seen evidence that the hospital is concerned about clinical as well as financial outcomes, will they be ready to talk about pricing and what it means for the hospital.


What data will you need to provide quality support?


What physicians want to see, says Schneller, are data that accurately depict their work, that are adjusted for the things that matter to them (e.g., the kinds of patients they have), and that are actionable.


And if possible, says Rooney, those data should be peer-reviewed. Although there are not a lot of sources for peer-reviewed data on comparative product effectiveness, there are at least two good sources: data generated by a GPO's value analysis teams, where clinicians collectively compare and rate products, and data generated in the hospital or the system's own clinical settings.


Also useful are formal structures for reviewing these data. What often works well, says Jean Sargent, CMRP, FAHRMM, director of supply chain, University of Southern California Health Sciences, is when physicians on a value analysis committee review each other's requests for new products and technology. “We assign a physician to go through the literature and collect the data, so when the individual making the request comes to the meeting, there can be an open, honest discussion, physician to physician.”


When the time comes to talk pricing, Schneller advises focusing on meaningful comparative data. "If you rate all of your orthopedic surgeons on paper and say, ‘Here are the most expensive and least expensive surgeons,’ you can bet everyone will be interested,” he says.


Transparency in supply chain trends also is important. Physicians often are interested in learning, for example, that the hospital is paying 10 to15 percent above the national average to a particular supplier with which it does a great of business. Keep in mind, says Bohon, that the supply chain is as great a mystery to most physicians as surgery is to most supply chain leaders.


 “If you can benchmark your pricing against a national database, such as the ECRI Institute's PriceGuide, so that physicians can see the differential, and convince them that your goal is not to change the way they practice medicine but simply to get the hospital the best price available for the products they themselves want, you will often find receptive listeners,” he says.  


The most important thing is that data are complete, objective, and accurate. “Because if you're proposing something that involves change and the physicians find a hole in your data set, the whole initiative can blow up in your face.” says Bohon.


Getting Full Value from Value Analysis Committees

Many physicians distrust the whole idea of the value analysis committee (VAC), and with some reason; too often, users are left out.


“The concept is great, but it probably needs to be retooled to fit into a more interactive model,” notes Natalia Wilson, MD, MPH, founder and co-director of the Health Sector Supply Chain Research Consortium. “What you want are collaborative teams that can dig down to the essential information.”


The most effective teams bring physicians in early. As Wilson points out, the medical perspective is most valuable when comparing emerging products or technologies. “If the committee meets only when a contract is over, nobody's going to get excited about it,” she says.


Jean Sargent, CMRP, FAHRMM, director of supply chain, University of Southern California Health Sciences, has worked in organizations where there is a single VAC that examines physician preference items (PPIs) across the organization and others where each department has its own VAC. She thinks the former works best. "When you have multiple committees across an organization, there tends to be more staff than physicians, and you really need the process to be physician-driven.”


For one thing, physicians can be more forceful with each other when it's needed. As an example, Sargent describes an instance where the orthopedic surgeons were using standardized supplies but spine surgeons were coming to every meeting with multiple new requests.


"Finally the committee pushed back, and said, ‘Either standardize or get your own committee, because you're wasting our time--you haven't even gotten your new product on the shelf and you're already asking for something different.’”  And, lo, they set up a separate group to work on the problem.



Optimizing Vendor Relationships

A lot of the larger manufacturers are marketing directly to the physicians, says Rooney, and are adamant about being next to the physician at all times. “They call it trunk inventory--meaning that the vendor goes to the trunk of his car, pulls out the artificial hip, and brings it into the OR.”


But shouldn't the hospital have policies against this practice? Many organizations are requiring physicians to identify potential conflicts of interest, have imposed limits on vendor marketing—eliminating everything from free trips to pens, and have instilled a variety of controls regarding vendor access.


You need to have physicians understand the hospital's policies, says Sargent, noting that physicians should be involved in creating these policies. Buy-in is crucial for enforcement.


It's always helpful if the vendors come to the supply chain executive first, says Anand S. Joshi, MD, MBA, director, strategic sourcing, division of quality, New York-Presbyterian Hospital. “Although we certainly encourage them to do that, we're not naive; sometimes they are going to go straight to the physicians first. However, if we've built the right relationships with the physicians, they'll tell the suppliers, ‘Before you show it to me, show it to procurement.’”


Clearly, while bringing the physicians around is definitely the biggest challenge in reducing the cost of PPIs, getting the suppliers to cooperate takes work as well. Here, too, it's a matter of creating a relationship of respect.


A good starting place for these relationships, according to Thomas Nash, MBA, CPM, CPIM, corporate vice president for supply chain, Ministry Health, is to set a goal that can benefit both parties. He argues that standardization is not necessarily that goal.


“Everybody in health care, unlike any other industry, wants to get to one supplier,” he says. “And it just doesn't make sense, at least initially. If you have 15 suppliers, aim for a reasonable number, maybe four or five.”


Joshi concurs. "A limitation on the number of suppliers is not an end in and of itself.” He says. “Once we're sure that products meet the threshold of delivering quality care, it's all about getting better pricing, and promoting the concept of clinical indifference.” The hospital should commit to sharing the relative pricing of similar technology with its clinicians, and encourage them to use the better device when one is clearly more appropriate for a certain patient or situation. But in that subset of situations where they believe either of two or more devices could do the job equally well, then the goal should be getting clinicians to use the least expensive one.


This approach resonates with physicians. “It makes complete sense to them from a care standpoint and from a business standpoint,” says Joshi. “Physicians know there are financial issues at stake. And they appreciate when hospital leadership doesn't try to force them to consensus over the merits of the individual products. Because the reality is that two physicians may treat different types of patients and have different levels of comfort with the devices.”


This approach also allows room for physicians and vendors to continue what can be close, meaningful relationships. Bohon points to research from the Wharton School of the University of Pennsylvania that examined orthopedic surgeon preference regarding suppliers. The primary factor in determining which company to work with wasn't price or even necessarily the product.


“It was the likeability of the sales rep,” says Bohon. “The physicians felt they could count on that person to be there with what they needed and when they needed it. They also appreciated someone able to keep them up to date with new technology. I saw this myself at one hospital where the physicians had such a good working relationship with a sales rep that when he moved to another, smaller company, they all went with him.”


In some instances, vendors can actually be allies in an organization’s PPI strategy. Bohon points to a cost negotiation at one hospital where there was a new orthopedic surgeon coming on board who had the potential to significantly raise a supplier's volume. The surgeon actually preferred a competitor's product but only because he was more familiar with it, having acknowledged that both products were equally effective. 


“I noted that if the supplier worked with the hospital, together we might be able to swing the new physician. But, I said, the hospital is competing with a number of larger hospitals and needs to get its cost base down to succeed. And the supplier came back and offered a 15 percent reduction in price.”


This is an example of what Bohon calls a principled rather than a positional negotiation. “You sit next to the supplier, not across the table, and you put the supplier’s goals and objectives in one circle on a flip chart and the hospital's goals and objectives in a second circle. You say, 'We're not adversaries anymore, we're collaborators. What we need to do is find some common ground between these two circles to build on, because frankly, if there isn't any common ground, we probably shouldn't be meeting. We're in this together, and we're going to find a way to solve our joint problems that satisfies both of us.”


Success in Action: Ministry Health

The following set of experiences demonstrates how Ministry Health has put the practices empowering physicians as partners, sharing data, and optimizing vendor relationships to real-life success.


When Thomas Nash came on board as corporate vice president for supply chain in 2008, Ministry Health had been trying without success to tackle total joints for 12 years. In an innovative move, the system had appointed a practicing orthopedic surgeon, Thomas Faciszewski, MD, as medical director of supply chain at the biggest of its 15 hospitals, but it was still using a “command-and-control model” that, according to Nash, isn't used in any other industry.


Since then, Faciszewski has been moved up to the corporate level and Ministry is using an “influence model,” in which the supply chain leaders work together with the physicians as colleagues to build a business case for making change. 


Nash and Faciszewski pulled together a clinical/administrative total joint team consisting of five pairs of key orthopedic surgeons and either their CEOs or COOs. What ensued for the surgeons over the next nine months was a series of revelations, starting with Nash's explaining that, contrary to the physicians’ worst fears, he wasn't going to tell them to do anything, because he had no idea where this process was going to come out. They were going to make the decisions themselves.


"We began Phase 1 with a ‘card of entry,’ meaning that to be at the table, every supplier had to be competitive and have a high-quality product. All of the system's seven total joint suppliers were deemed clinically acceptable, but none turned out to be competitive in terms of the market rate--Ministry Health was paying 30 to 40 percent more than anybody else. In fact, the organization was losing money on its joint service, which was a stunning revelation to the surgeons.


“With these data in hand, we gave three options: We could settle for the little bit that a couple of the suppliers offered us to go away, and continue to lose money; we could use just a bit of elbow grease and get to something close to break even, but still be leaving multimillions of dollars on the table; or we could set a mid-market cost target (X) and ask the suppliers to meet it. The consensus was to go for the third option, but only the two smallest suppliers met the target.”


Nash and Faciszewski then asked the surgeons whether the organization should stay with just those two suppliers--which meant many surgeons would have to make a change--or move the bar a bit lower. The team opted for the latter, settling on X plus 5 percent. At the same time, they acknowledged that they couldn't cut out the more expensive suppliers entirely because of revisions and second-site surgeries--circumstances in which patient preference and clinical judgment would dictate use of their products.


“So we borrowed another technique from outside industries and set up two tiers,” Nash explains. “Tier 1 suppliers would meet all of our targets and anyone could use them. Tier 2 suppliers would not meet the target cost threshold, and we would not stock their products; attending surgeons would use them only if they felt it was clinically necessary.”


In the end, six suppliers came in at Tier 1, and the last finally came around when Ministry Health began talking with its Tier 1 companies about ways to better serve patients through improving clinical outcomes, length of stay, and other performance measures. “I told them that we wanted their help and were willing to pay for it, as long as we realized at least twice the return on our investment,” Nash says.


The majority of people in health care look at the supplier as an enemy, says Nash. Ministry approaches them as friends. “Only two groups of people who really know a product--the people who make it and the people who use it. If we don't get those two groups of people working closely together, we will never get to the clinical and financial outcomes we want.”


Before You Sign That Contract...

There are two clauses of special significance in contracts with suppliers of PPIs, one that should be in and one that should be out:

·    Without good price information, hospitals are in no position to negotiate. Suppliers typically try to insert nondisclosure clauses that forbid the hospital to share price information -- and have sued to enforce them. “My best advice: Don't sign,” says Curtis Rooney, president of the Health Industry Group Purchasing Association.

·    One thing physicians fear is not being able to use the latest technology as it emerges, notes Michael Bohon, founding principal, Healthcare Solutions Bureau, LLC. “Hospitals need to assure physicians that they'll have access to any products that truly provide an advantage to the physician and patient, but they also need to make sure those products aren't just brought in and used automatically,” he says. The solution: a new technology clause that ensures the hospital access to whatever is coming down the pike--with very tight management of new product introductions.


The CFOs Role in PPI Cost Reduction

Where does the CFO fit into cost- reduction efforts with physicians?

As noted by Jean Sargent, CMRP, FAHRMM, director of supply chain, University of Southern California Health Sciences experience, CFOs are usually very involved with PPI cost reduction efforts, just not at the front end. “They don't come to the VAC meetings,” she says, “but the value analysis coordinator or facilitator reports to them every month on how much the committee is saving or adding to the bottom line. The analysis itself is usually done by someone in the decision support department in finance, which has access to a standard data set--the cost of the product, the DRG code, the reimbursement."


Michael Bohon, founding principal, Healthcare Solutions Bureau, LLC, believes it's important for CFOs to bring their long-range perspective to bear on the negotiation process. Some of the bigger successes he's had--in the million dollar range--were the result of shifting market share away from a company.


“But I always wonder, if I went back in two our four years, would the hospital still be saving money. Because making dramatic changes in the product mix is not a good long-term solution; you only want to do that if a company absolutely refuses to cooperate.”


Thomas Nash, MBA, CPM, CPIM, corporate vice president for supply chain, Ministry Health, sees it this way: "There's only one version of the truth, and it's the role of the CFO to produce it. At my organization, we give our CFOs the data and they make sure there's a positive P&L benefit for the system--because it's their money, and their budget.”

Other articles