Open Letter X: Why Hospitals Should Support Comparative Effectiveness

The Association for Healthcare Resource & Materials Management (AHRMM) should become more vocal in support of the comparative effectiveness proposal, a key plank in the current administration's healthcare reform platform. It's not often that hospital supply chain executives find a policy issue so worthy of our support, and I urge AHRMM – as the nearest thing we have to a public policy voice – to begin educating its membership about it.

Allow me to explain my thoughts, and I'll be eager to know whether you agree.

The costs of physician preference items (PPIs) continue to inflate more quickly than our ability to get fair reimbursement from payors. It's eating away at our margins, and in some cases threatening the viability of our hospitals. (See Open Letter III: These Aching Joints.)

Even though our hospitals foot the bill, the physicians decide which supplies we purchase for a given procedure. Supply chain managers can be diplomats, trying to persuade surgeons to consider cost implications when selecting PPIs. But the doctors hold the trump card. Physicians make the final determination about which item is best suited – medically speaking – for a procedure or a specific patient. No matter how convincing our argument for saving hospital dollars, the clinical decision rules the day.

And I agree that clinical decisions should prevail. We and the physicians share the same goal of achieving superior patient outcomes. But after that, our goals hit a disconnect: we are charged with doing it in the most cost effective manner possible while surgeons rarely share the responsibility of getting the best price.

As supply chain managers, it's not often our role to bring clinical information to the value analysis process. When we do, we know it must be bulletproof or our data-minded surgeons will be quick on the trigger and shoot it full of holes.

So…what if we had a clearinghouse of treatment guidelines based on cost, quality, and clinical outcomes? What would happen if a panel of well-respected physicians (with no financial ties to medical device manufacturers!), RNs, research scientists, and administrators were to conduct comparison studies of which items are most effectively used in specific procedures?

This, in a nutshell, is comparative effectiveness. The Federal Coordinating Council for Comparative Effectiveness (catchy name) guides federal research dollars to the Agency for Healthcare Research & Quality (AHRQ), the National Institutes of Health (NIH), and the Department of Health & Human Services (DHHS). These agencies are responsible for conducting the research and reporting on the results.

The administration is trying to make this part of its reform agenda, and you better believe the device manufacturers are fighting it tooth-and-nail. (See this WSJ article). As part of February's economic stimulus legislation, the initiative was funded with $1.1 billion. But Congress stripped it of any real teeth by taking the "comparative" piece out. In other words, AHRQ, NIH, and DHHS are allowed to conduct research, but they cannot say whether a device from manufacturer A demonstrates a clinical and cost advantage over its counterpart at manufacturer B.

This should be revised in the next legislative proposal, and it's on this point that AHRMM and supply chain executives should make our voices heard.

Ultimately, each agency should be responsible for studying which treatments and medical technologies are best in providing patient care for various disease states. They should compare devices against their competitors to help determine equivalency and effectiveness. They should make recommendations about which devices deserve reimbursement for producing the best outcomes versus those that come to market with higher costs but scant additional benefit.

Comparative effectiveness will be subject to all sorts of political attacks, calling it an attempt to limit physician decisions and ration healthcare. But I don't see it that way. In my mind, it's about creating an unbiased assessment of the most cost effective ways to achieve superior patient outcomes. That's our ultimate job!

Why am I urging AHRMM and hospital supply chain executives to support it? Comparative effectiveness holds the promise of leveling a playing field tilted too far away from cost considerations. It will allow us to approach our value analysis team meetings with a framework for fair discussions using neutral clinical data. And it might just help us toss a lasso around the runaway costs of PPIs.

I invite your input. What are your thoughts?

Open Letter IX: Bermuda Quadrangle Revisited

I got my first real job in 1978, with IBM. Guess what the company's marketing mantra was, almost 30 years ago? "Turn data into information." It was very cool, the stuff of lively cocktail party conversation, and it helped us sell a lot of monstrous mainframes.

But what was an innovative sales strategy for Big Blue 30 years ago is today a matter of business survival. Case in point: Dell Computer came out of nowhere building computers to order by leveraging unprecedented information transparency among customer, manufacturer, supplier, assembler, shipper, etc. And Dell led the way in forcing my former employer to second tier status and ultimately out of the PC business.

Hospitals epitomize both the value of information and the consequences of not having it. Unfortunately, in the healthcare supply chain the latter case rules too often. I don't think that the GPO's, manufacturers, and distributors actually conspire to keep the hospitals informationally challenged, but the intermixing of their disparate, often conflicting business priorities has the same result.

Dell's affordable, made to order PC delivered to your doorstep was achieved through intense collaboration on a common goal, relentless evaluation and elimination of unnecessary components and steps, and acknowledgement that all participants deserved a fair profit.

Are the same seeds of common cause germinating among healthcare supply chain participants? Here's a sample list of evidence that the answer is "no."

1. Many hospitals rely on their distributor's EDI 832, 855 transactions, even invoices for price updates.
2. Distributors rely on manufacturers to provide timely pricing information for each of their thousands of customers.
3. GPO's negotiate hundreds of multi-source contracts, many with multiple tiers, with hundreds of manufacturers.
4. To take advantage of their GPO membership hospitals must load GPO contract prices into their item file. Rulers and highlighters are standard procedure. Excel's v-lookup is "state-of-the-art."
5. Manufacturers often negotiate their best prices directly with the hospitals based on market share.

Now try to connect the 5 points into a cohesive system. You can't do it.

For example, take #2: Distributors obviously must maintain unique pricing files for each of their customers. Last year, for one of the industry's largest distributors, this meant making some 90 million price updates in their customer order entry system! Now add the fact that manufacturers transmit less than half of these price changes to the distributors using EDI (called an "845" transaction). The rest are sent using CSV / Excel files, or they are faxed! The distributors' workload is staggering and resource intensive.

Now go back to #1: customers rely on the distributor to have their correct prices, at the right time, and they concede any discrepancies that do occur to the distributor. To use a southern phrase, "say what?"

Hospitals must have information and they must have the fortitude to use it. With the right information a hospital can chart its own course to achieve optimal supply chain pricing and fair business partnerships.

President Ronald Reagan's favorite quote was, "trust but verify." Pretty good advice.

Open Letter VIII: Beware of Triangles & Quadrangles

I grew up hearing so many tales about the Bermuda Triangle that I wonder why I never had nightmares about it. For those of you who haven't heard its siren song, the Bermuda Triangle is an area of the Atlantic Ocean roughly defined by the apexes of Miami, Puerto Rico, and—you guessed it—Bermuda.

Inside its borders, hundreds of boats and planes have reported sudden instrument failure and freakish weather phenomena. Many have simply vanished without a trace. Incidents have been documented as recently as 2001, but perhaps the most well-known one occurred nearly two hundred years ago. On December 30, 1812, Theodosia Burr Alston, daughter of Aaron Burr—the man who was Thomas Jefferson's vice president and who shot Alexander Hamilton dead in a duel with pistols—set sail from Charleston, South Carolina, aboard the Patriot, bound for New York City. The Patriot was never heard from again. Nor was poor Theodosia.

The healthcare supply chain has created its own environment of mystery and peril. I call it the Bermuda Quadrangle, because it has four sides instead of three. The axis points are not places on a map but institutions in our midst: 1) the Provider, 2) the GPO, 3) the Manufacturer, and 4) the Distributor. Each bears some responsibility for the creation and perpetuation of this perilous—and in many ways dysfunctional—environment.

The Providers, hospitals, are more victim than perpetrator, but as I said in my previous post (What Happens When You Spend a Semester on the 6^th Floor?), they act as an enabler if they accept the existing supply chain system as immutable. It is time to banish that thinking, and you have the power to do so for one simple reason: you are the CUSTOMER! A customer that is fair, welcoming of reciprocal transparency and trust, empathetic to financial realities, and understanding that the path from product to patient to P&L is very complex.

But even though each has an important core competency, your partners in the supply chain aren't playing well together. In fact, some are competing with one another for your attention and dollars, often with new "value-adds" that diminish their core competencies. As a result, you, the customer are being ill-served. And you, the customer, must say "unacceptable."

So, what to do? Well, first recognize that even with some divine intervention (probably in the guise of the federal government) it will be years before the healthcare supply chain becomes a well-oiled machine. And since "the industry" is unable or unwilling to treat you as the customer by providing the highest quality product at the lowest possible price, then resolve to do what is necessary to take control.

Pick a key set of partners based upon what they do best. And to keep your properly focused partners on task, take ownership of the analysis of your data, integrate the results of your analysis with your daily operations to effect improvement, and measure your effectiveness. If you can do that, the advent of improvements like GS1 and clinical comparative guidelines will make your good system even better.

Open Letter VII: Psychology & Preference Items: What Happens When You Spend a Semester on the 6th Floor

Long, long ago I was a psychology major. It was a compromise (as many of my life decisions are) in that it gave me a flavor of biology, philosophy, statistics, english, religion, and my personal favorite – abnormal behavior – all packaged into one legitimate degree.

My senior year project involved sitting in on group therapy sessions on The 6th Floor, i.e. the psych ward, of a Charlotte hospital. (Remember, this was over 30 years ago, before the advent of SSRI's, SSNRI's, etc., and group therapy was a core treatment strategy.) I had many memorable experiences that semester. Some were good, like the time I snuck two women out of the hospital and took them to Baskin Robbins. Some were very bad, like when a first-time group member – a delightful, gregarious, middle-aged woman – killed herself that night.

My experience on The 6th Floor led me to a lifelong belief, one reinforced by my own shortcomings as well as my observation of others. It was the theme of my semester term paper: "The difference between a normal person and one with a clinically certified neurosis is not a solid line; it is merely a matter of degree." Anyway, there's your thought-to-ponder for the day.

Why this psychological reminiscing? Well, to transition to a story about the supply chain, of course!

Sitting at lunch last week at the IDN Summit meeting in Orlando, I overheard a conversation between two materials folks about what workshop to attend that afternoon: One remarked, "How to Manage Physician Preference Items is a waste of time; every time I try something either administration or the surgeons cut my legs off." The feelings of frustration and defeat were palpable. The comment conjured memories of a behavioral psychology concept (yes, this is my transition and yes, it's a stretch) known as "learned helplessness," a term coined by Dr. Martin Seligman in the late-1960s.

Dr. Seligman ran a research lab at Cornell University and spent much of his time experimenting with lab rats. In one particular and somewhat cruel study, he placed a lab rat in a specially constructed box, repeatedly rang a bell, and followed the sound with a mild electric shock. The rat quickly learned to anticipate the shock when he heard the bell. As you can imagine, the rat would become frantic at the sound, running around his box in a futile attempt to avoid the discomfort.

It took very few rounds of this "bell-plus-shock" routine before the rat's behavior changed. The bell still evoked agitation, but once he resigned himself that he had no control to stop the shock, the rat basically gave up and took it.

This observation led Dr. Seligman to his theory of learned helplessness, a phenomenon that he believed was observable in other species as well, including us humans. Makes sense – I don't know about you, but when I'm faced with a stressor and perceive that I lack any control to resolve or avoid it, I usually suck it up and go with the flow.

Going back to the supply chain managers at my lunch table last week, I suspect they had experienced their own version of the "bell-plus-shock" routine. Like many others in their position, they have been charged with taking control of supply costs in their hospitals but then are met by a barrage of stressors when they try to tackle the high dollar preference items. You work long hours to gather case specific cost data, you work with VA teams to verify clinical equivalency, you present results to the docs and admin, and you get... nowhere. A stressor scenario on steroids and no authority to do a damn thing about it! So you pick yourself up and confine your efforts to the commodity end of the supply spectrum.

I see two lessons here. The first is basically a repeat of my mantra: there are millions of dollars of savings to be realized in the supply chain if CEOs empower the supply chain executives and actively (and publicly) support them with the clinical community.

The second lesson is broader in scope: too many of us accept the existing operational characteristics of the supply chain – business relationships and their pre-defined "balances of power," pricing practices, transparency or lack thereof, software system limitations, timeworn workflow patterns, etc. – as immutable. They are entrenched, but they are not immutable.

We in the provider community need to realize this. Changing these characteristics and asserting control over them is our right, our obligation, and a critical piece of the savings equation. I'd like to discuss some specific cases-in-point in my next several blogs.

Open Letter VI: Supply Chain Executives as Hospital Diplomats

Last week I watched a presentation by one of the largest IDNs in the southeast. Its vice president of supply chain was answering questions from the audience, and I was intrigued by one response. When asked what he considered his most important role in the hospital, he replied without hesitation: "Diplomat. I spend most of my time convincing others to follow my lead."

Actually, this VP's answer makes a lot of sense to me, and it highlights an opportunity that is being missed by too many health organizations. With physician preference items representing as much as 60% of a hospital's supply expense, supply chain executives have tenuous (at best) control over the majority of spend going through their purchasing departments. High visibility involvement with value analysis teams and physicians, concurrent with the support of the executive team, is key. Ultimately, if they can't persuade clinicians to cooperate with them to control costs, their influence becomes limited to commodity items.

Unfortunately, not everyone agrees. According to a poll published in the December 2008 issue of Materials Management in Health Care, when supply chain executives were asked to rank the importance of developing cooperative relationships with physicians to optimize product selection, they rated it number one. However, when CEOs were asked the same question, they rated the diplomat role for their supply chain staff as a relatively low priority.

The divergence over this point is telling. We see supply inflation outpacing reimbursement and tell our supply chain executives to take control of it. But when it comes to preference items we send the message that that isn't really their turf. This thinking is expensive and it's wrong. The job of supply chain executive is all about negotiating productive relationships with suppliers and providing excellent service to their hospital customers. These same skills are ideally and uniquely suited to working with value analysis teams and physicians.

I want you to invest in your supply chain leaders. Delegate roles to them for which they are, in fact, ideally suited. Make them full partners in protecting the financial viability of your healthcare organizations. Make it clear to the rest of the organization that they have your support. Once "credentialed" by you, insist that they keep you closely attuned to their ongoing contribution to the hospital's profitability. As has been my theme in these CEO letters, I am convinced your trust and active support of your supply chain leaders will be rewarded.