An Open Letter to Hospital CEOs: Make Your Supply Chain Strategic

Dear CEOs:

It’s only fitting that our attention turns to evolution during this month when Charles Darwin would celebrate his 200^th birthday. But I’m not writing about finches on the Galapagos Islands. Instead I want to focus on the evolution of the hospital business model and the reasons we need to make the supply chain a key piece of our overall strategy.

This is an open letter to hospital CEOs. I’ve worked with hospitals for more than 25 years, and so – like you – I’ve experienced the days when clinical decisions ruled and payments covered expenses and provided us modest margins.  Throughout the 90’s I watched the advent of managed care and capitation, the alarming decline of our bottom lines, and the resulting mergers and acquisitions to align with physicians and capture market share. Reimbursement descended into a complex maze of payer contract negotiation, coding optimization, even congressional lobbying.

It was an era of consolidation, fueled by the realization that only the biggest among us could negotiate sustainable payer contracts and achieve economies of scale in overhead and supply expense.  The age of the integrated delivery network (IDN) emerged.

The IDN concept was indeed well adapted to its new environment, but we all see that conditions have begun changing again. We now find ourselves caught in a vise between declining reimbursement and increasing supply costs.  The squeeze is on, and our industry is being forced to reevaluate our current business models to determine a strategy to evolve and survive. 

Over the past two years, I’ve watched as many IDNs have gone into survival mode.  They have begun spinning off unprofitable facilities, recognizing the need to insulate themselves from losses, even if it means giving up hard won market share.  This may be necessary, but it certainly doesn’t constitute a long-term strategy. 

Today’s healthcare environment requires hospital CEOs to balance expansion with smart cost containment.  To accomplish this, we must make the supply chain strategic.  It’s no secret that supply costs represent the largest operating expense after personnel, and in some IDN’s the two have reached parity.  When supply costs are combined with “services contracts” (by this I mean everything from lawn maintenance to physician contracts), the total expense typically doubles.

It’s no longer acceptable to limit the materials managers’ role to ordering and delivering product.  Their position must evolve along with our pressing need to control expenses. Supply chain executives belong at the table when the hospital makes its most important strategy decisions.

Over the next few weeks I'll explore with you what our hospitals can do to evolve and adapt to this new world by focusing on cost controls. We will discuss what it means to elevate supply chain executives to key roles. We will explore why you should invest in your supply chain to gain long-lasting benefits. We will look at the value analysis process and what senior executives can do to support materials management as they work to rein in the ever-inflating costs of clinical preference items.

I’m eager to host this learning series, and I hope you’ll participate in it with me.  I look forward to sharing my thoughts with you and hearing about yours in return. At any point, please give me your ideas on making the supply chain and cost reduction a strategic priority in healthcare. Also, if you have any stories about ways you’ve accomplished this in your organization, I would love to hear them.

Sincerely,

Mike Merwarth

Round One of the Great Healthcare Reform Debate

(or, I May Be a Daydream Believer)

 

The bell has rung. Round one of the great healthcare reform debate is over. But I get the sense this fight was more like a preliminary heat where the boxers dance around the ring, practicing their footwork, and probing their foes with light jabs to the jaw. My gut tells me we're suiting up for a battle royale where device manufacturers, big pharma, payers, AMA, AHA, trial lawyers, and the U.S. Chamber of Commerce all duck under the ropes to land their best haymaker on healthcare reform.

EHR came out a winner with some $19 billion allotted to encourage its adoption. For the healthcare supply chain, that will become interesting if there is ever some overarching set of technology standards that glue together – from hospitals all across the U.S. – procedure information plus supplies used plus clinical outcomes from hospitals all across the U.S.

Can you imagine? I would love to arm MediClick users with this data when they walk into their value analysis team meetings. I would love to see them put medical device sales reps on notice that manufacturer-sponsored clinical trials and outcome data isn't enough to get their expensive new product in the door. I would love to finally get information parity when negotiating with supply vendors.

I may be a daydream believer – this won't happen anytime soon – but I can see why the device manufacturers get their dander up when they hear talk of "comparative cost-effective analysis" enter the great healthcare reform debate. Until we get there, let's just make sure we're making the best use possible of contracting and price analysis tools available now when negotiating agreements with our suppliers.

The Great Healthcare Reform Debate Begins!

(or, What You Might Find Hiding In a Pile of Legislative Rocks)

 

The ghost of Tom Daschle wasted no time insinuating its reform agenda into the national healthcare debate. Last week I wondered aloud what sort of impact his policy recommendations (from his book, Critical) would have after he was forced to withdraw his nomination for Secretary of the Department of Health and Human Services.

It's now clear that the Obama administration grabbed as much of Daschle's playbook as possible before sending him into the shadows. Exhibit A: the American Recovery and Reinvestment Act of 2009. This is House Resolution 1, better known as the economic stimulus package. The 680 page tome contains the fabled $800+ billion of stimulating funds for every project a congress-person could dream up. As tends to happen with legislation set on the fast-track, enterprising politicians shove in pet-project after pet-project.

It's a sleight of hand trick. While we're frantic to approve funds that get the economy moving again, we don't pay attention to footnotes that create organizations such as the "Federal Coordinating Council for Comparative Effectiveness Research". Should policy making of this magnitude go in as a piece of legislative afterthought? Or should it be aired in the open? I'm somewhat split on this specific example because I believe we need significant change and the political process to achieve it is sure leave much scorched earth behind it. At the same time, no one ever said the democratic-republic form of government is pretty.

Back to the supply chain: I referred to this in a post last week. It's the federal version of our value analysis teams. This Council for Comparative Effectiveness Research would do as its title suggests: compare new products/procedures against what they're meant to replace and decide – based on clinical and cost data – whether the new one is a better clinical and economic fit.

I'm no political guy, but I've become engrossed in the process since reading Daschle's book. I know from my time in the healthcare industry that we must find a balance between introducing new technology and accepting the price hikes that inevitably follow. But I'm undecided on how much of this should be the purview of the feds.

Does the iPill Threaten Our Supply Chain?

(or, Not Exactly Your Mother's Aspirin)

 

I'm no slave to consistency, but I couldn't hold back a sympathetic sigh when I saw these stories juxtaposed on a single page of the New York Times. Let's call it a harbinger of what's ahead as we prepare to cross the Rubicon of national healthcare reform.

First is this story of our broken healthcare system, described as "on life support". According to the reporter, "it costs too much and saps economic vitality, achieves far too little return on investment and isn't distributed equitably." The article then highlights that litany of challenges with which we've all become familiar: limited insurance coverage, runaway inflation, malpractice insurance rates, and so on and so on.

I become amused reading the next story, directly below it: "'Fantastic Voyage,' Revisited: The Pill That Navigates". The writer chronicles the amazing iPill being engineered by Philips Research in the Netherlands. Medicine goes into one side of the capsule, and in the other is a miniaturized cluster of microprocessors, sensors, batteries, pumps, and motors. This is the real sci-fi stuff we all get excited to read about. Rather than waiting for an old fashioned tablet to dissolve as it works its way through your digestive tract, the iPill can be targeted to the specific part of your body that ensures maximum absorption in precise dosages. "It could be the next step in therapy," says a researcher on the project.

I have no bones to pick here, neither with the iPill nor the journalism behind the stories. But these articles, wedged up against each other, encapsulate (excuse the pun) one of the hairiest challenges in healthcare.

Intellectually, we know the system has to be reformed and that it will involve tough decisions by all of us. As hospital supply chain professionals, we recognize that the costs of expensive new technologies threaten our very solvency. When a manufacturer launches exciting devices like the iPill (not the best example here, so think pacemakers or spinal implants if that helps) and their sales force gets the clinicians all excited, we know we're going to have a situation on our hands. The old technology might have cost us $100, allowing us a modest profit at current reimbursement rates. If the cost of the new technology jumps to $1,000, it's rare we get to bump up the payer's bill. No, our hospitals are now eating the difference between cost and reimbursement.

Again, we know this intellectually. I would venture to say most clinicians know this on a rational level and perhaps even quite a few patients. But we are suckers for stories about the latest, greatest medical technologies. Manufacturers know this weakness. They see how emotions override our rational decisions when any new technology holds even the slightest possibility of a better clinical outcome.

Hypothetically speaking, the iPill may only produce better outcomes in one percent of all cases. But what if that one percent gives your patient or your child a chance at getting better? Well, we've all seen the rational lose out to emotional decision making.

We manage elements of this every day in our hospital value analysis processes. We've tried to create systems where the emotional gets subordinated to the cold, hard facts. But how does the rational (e.g. we know we need to contain costs in order to preserve a viable healthcare system) play out against the emotional (e.g. but that new, expensive medical device might help me, my child, my patient!) when the reform debates hit the political stage?

I think a storm is brewing.

Value Analysis Under the Federal Health Board

(or, The Devil You Know versus the Devil You Don't Know)

 

I don't know if the Obama administration comes out swinging on healthcare reform or if they save that fight for another day. They seem to have their hands full with the economic recovery package, but much of the scuttlebutt in Washington says the new president wants to take advantage of this honeymoon reserve of political capital. We'll see soon enough when he submits his first budget proposal to Congress.

In my last post, I wrote about Tom Daschle's blueprint for changing American healthcare. Driving costs out of the system is a critical component of reform, but it's hard to get there without making major structural changes to health insurance, technology infrastructure, and the political bodies that decide what procedures (and expensive preference items) get reimbursed. Then and only then does Daschle think we're ready to attack the inflated costs of providing healthcare.

The simplest changes frighten people. The best laid plans can bring with them so many unintended consequences that we're conditioned to stick with the devil we know over the one we don't. The Federal Health Board will be charged with taming the runaway inflation of healthcare costs. Daschle suggests this entity be politically insulated (like the Federal Reserve System) and so able to make the difficult choices about which new procedures demonstrate enough value to justify their expense.

Many hospitals have created value analysis processes to accomplish similar objectives. That's the devil we know. We bring together clinicians with department heads with contract specialists with finance staff and we tell them to choose the best products at the right prices. We think it works, and we pat ourselves on the back for the successes we see, but preference items costs keep inflating at more than 10% each year. It's not just threatening our bottom lines; it's threatening our solvency.

I'm interested to hear what you might expect from a Federal Health Board that takes on elements of this responsibility. Do we benefit from a centralized authority – with far more control over payers than CMS has today – deciding what procedures get reimbursed and which don't? Or which new devices show enough clinical promise to be covered? Does it do too much to reduce choice? Does it do enough to reduce costs? Share your thoughts on this devil we don't know.

How Does the Supply Chain Fit Into Healthcare Reform?

(Or, Daschle, We Hardly Knew Ye)

Like everyone else in healthcare, I'm eager (or is it anxious) to learn what the new president has in mind when he talks about sweeping reform in our industry. I grabbed Tom Daschle's book, Critical, last month hoping for a glimpse of what's to come. I'll confess to fleeting flashbacks to Patton, the brilliant George C. Scott movie from 1970. Upon taking down Erwin Rommel's tanks in a North Africa battle, George Patton exclaimed, "Rommel, you magnificent bastard, I read your book!"

Daschle, I read your book! But after a few tax-deferred chauffeured rides about Washington, the former Senator finds himself an outsider looking in on the debate. So, did I glean any insights from those pages that give hint of what's to come? If so, what's the impact on the healthcare supply chain?

Suffice it to say, supply chain reform is pretty low in the pecking order. As I read it, the priorities play out like this:

First, scatter federal funds at "shovel-ready" hospital building and electronic medical records projects. At last reading, Congress is preparing somewhere around $20 billion to distribute among hospitals to keep capital investment from grinding to a halt. Healthcare will benefit from the infusion of cash, but this is economic stimulation, pure and simple. Don't expect it to line up too closely with a coordinated reform strategy. (If the price tag makes you blush, don't worry. It's a "measly" two percent of the overall package!)

Second, invest in the payer side of healthcare by expanding health insurance coverage. This was a major plank in Obama's campaign platform, and it would seem he was serious. Just this week he expanded funding for SCHIP, the State Children's Health Insurance Program. If Daschle's book prefaces what's more to come, we may see the administration opening the Federal Employees Health Benefits Program to all Americans in an attempt to create universal umbrella coverage. Expect big fights on Capitol Hill when this portion of the debate begins.

Third, promote full adoption of electronic health records, or EHR, among hospitals and physician practices. EHR has become the great rallying cry. By implementing a national system (or somehow getting all the different systems to integrate with each other), the talking heads tell us there are $80 billion in cost saving opportunities along with countless lives to be saved through reducing medical errors. Whenever the promises are so lofty, I become hyper-suspicious.

Daschle seemed to have some ulterior motives for EHR. According to his book, a unifying EHR creates a rich data trove for tracking quality outcomes and the clinical efficacy of procedures and medical devices.

And here, finally, we begin to find some impact on the supply chain!

Fourth, use the data from EHR to pick bones over what deserves reimbursement and what does not. This discussion will get its own blog entry (or many) soon enough, but I'll touch on one of the bigger points. Imagine this like a nationalized version of the value analysis processes used by most healthcare systems. Hospitals have demonstrated limited success in preventing supply costs from outpacing their reimbursement for any given procedure. In this battle, they suffer from a distinct disadvantage in resources. The medical device companies employ armies of talented (and persuasive) salespeople and deep marketing budgets all aimed at convincing clinicians to use their expensive products.

Daschle recommends a Federal Health Board modeled after the Federal Reserve System. Part of its job will be studying the clinical outcomes data and determining which devices merit reimbursement and at what rate. Devices that don't pass muster (irrespective of their slick sales and marketing support), will not be reimbursed. The process is meant to work much like your value analysis process, but it may take some of the control from you.

As with all big changes, there is some good that goes along with it and there is some bad. If the Obama administration pursues Daschle's recommendations, we may find ourselves stuck on the horns of this dilemma: are you better off with the devil you know or the devil you don't know?