Culture of Savings: Focus on the Fundamentals

John Cunningham is Corporate Vice President, Supply Chain for Universal Health Services (UHS) in King of Prussia, Pennsylvania. He started his career with the US Navy and has built an impressive 20-year track record as a healthcare supply chain executive. To say the least, John has seen a lot of the materials management world.

We asked John to share with us his thoughts on ways hospitals can create cultures of savings. In John's own words…

Not too long ago I was working with a materials director who took great pride in driving a hard bargain. He was particularly pleased with a contract in which he won deep price concessions from the supplier. I was helping the hospital run a contract pricing audit. When my team reviewed that specific agreement, we confirmed that he had negotiated a good deal. But in tracking the contract price back to his receipts, we found he was paying a price 54 percent higher than what he negotiated!

Nobody was monitoring "actual price paid", and he didn't have the information systems in place to do this automatically for him.

Throughout the healthcare supply chain, we're winning battles while losing the war. When MediClick asked me about ways we create cultures of savings in our hospitals, my thoughts kept coming back to getting the fundamentals right.

Effective management of our product and price information is one of those fundamentals. We can invest a lot of effort into standardizing a product category or negotiating better prices, but we lose any advantage we gained if we don't have the systems in place to track the progress of our projects over the ensuing months and years. We'll find that pricing creeps back up on us or that our clinicians have slipped new products into our mix. It forces us to repeat the same projects every couple years or so.

The healthcare organizations with the best cultures of savings pay attention to these details. They construct procedures to monitor invoices continually and confirm they're being charged the correct contract price. They stay on top of new products their clinicians order, knowing the impact of any change on existing market share agreements with suppliers. And they invest in the IS infrastructure to support these efforts.

I recently noticed a physician requesting a new product for a surgical procedure. I reviewed the data and – based on his case volume – calculated that adding the item to our mix would cost us an additional $100,000 over the next year. When we talked about it, the doctor highlighted that he brought in millions of dollars in revenue by conducting this surgery in our facilities. How bad would it really hurt to use the new product?

Well, as I shared with him, he would have to generate $11 million in additional revenue just to make up that $100,000 difference to our bottom line.

It might have been the path of least resistance to let this important surgeon use the new product. I know from experience that it happens all the time in hospitals around the country. In this situation, we dodged a sizable increase in our supply costs by paying attention to the data, by knowing the financial consequences of making a product change, and by discussing the impact with the doctor.

We don't need to spend a lot of time and energy chasing after small ideas. The biggest opportunities for savings sit in some pretty obvious places. We help our hospitals the most – and make the best contribution to creating cultures of savings – when we focus on getting the fundamentals right.

Creating a Culture of Savings at Your Hospital

For the next few weeks I'm taking this blog in a slightly different direction. The entries will be guided by a simple question: how do we create an enduring Culture of Savings in our hospitals?

This is not about across-the-board austerity measures (i.e. "times are tough, we're not hitting numbers, all departments must cut five percent from their operating costs by Friday."). I don't believe these types of actions create the kind of sustainable culture we need. I do believe that nurturing a mission of collaboration among your people – from bottom to top – will lead to a continuous flow of ways to reduce costs.

A Culture of Savings occurs when everyone in the hospital is motivated by a sense of ownership and community to contribute ideas to reduce costs and improve processes. A Culture of Savings takes root when good ideas are implemented promptly, the ensuing improvements are celebrated enthusiastically, and those who make the recommendations are recognized publicly for their contributions.

So, how do we create a Culture of Savings?

MediClick has posed that question to a dozen or so healthcare supply chain and financial executives. I've been blown away by what we've learned, and in the coming weeks I'll share some of these stories with you.

One very important theme has emerged from these conversations…creating a culture of savings is not an all-or-nothing equation. The efforts don't have to start with your CEO or with any sort of formal management program. Oftentimes it begins with a motivated department head or a staff member looking to make a difference. Oftentimes these individual efforts lead the way for the entire hospital.

MediClick is eager to hear about your experiences. What have you done (or what have you seen others do) to encourage a Culture of Savings to take hold?

If you are interested in sharing your successes with us, so we can in turn share with others, simply respond to this email and we will get in touch with you.

Sincerely,

Mike

Open Letter XII: Motorcycle Daydreams & the Evolution of Cooperation

Spring is the most fleeting of North Carolina's seasons. It's not uncommon for winter to morph directly into the brutal 90/90 days of summer (that's 90 degrees Fahrenheit and 90 percent humidity). So, when nice, temperate weekends present themselves, I take full advantage by getting on my motorcycle and touring the countryside.

I logged over 1,000 miles in the latest trip, winding through the back roads from Raleigh to western North Carolina and down into the mountains of north Georgia. All that time in the saddle means a lot of time to think…a potential hazard to the committed readers of my blog.

I was reminiscing on a recent conversation with the supply chain executive of a large IDN. He spoke of changing the culture of his contracting teams in their approach to suppliers. All too often, he said, it's easy to slip into an antagonistic mindset where you make negotiations a zero-sum game. Your gain is my loss, and my loss is your gain. He sees merit in creating true partnerships with key vendors, and so he spends a lot of time with his contract specialists talking about the kinds of collaboration that produce wins for both sides.

More and more hospitals are talking about the advantages of cooperation. The trend is a good one, and I'm confident we all benefit from investing in partnerships rather than looking to gain an edge from each transaction. But cooperation only works as a two-way street, and it's most effective when, to paraphrase Teddy Roosevelt, the hospital can speak softly but carry a big stick. This is especially true when it comes to relationships involving expensive physician preference items (PPIs).

Let me explain.

Robert Axelrod, a professor at the University of Michigan, wrote The Evolution of Cooperation in 1984. It's a fascinating study of why cooperation makes sense in almost any setting. His argument starts with a simple game (think Rock, Paper, Scissors) in which there are two players, each of which has two choices in each round: cooperate or defect. If both players cooperate, both get three points. If both defect, both lose one point. If one cooperates and the other defects, the defecting player wins a big five points and the naïve, cooperating player gets zero.

The game was played out in computer simulations with various academics submitting strategies in an attempt to get the most points.

Given the scoring system, defectors stand to win big, right? In a one-time transaction, yes, both parties are motivated by a "winner-gets-all" strategy…I can win a major five points if I defect and make a sucker out of my opponent.

But the game was played in multiple rounds where participants engaged each other over and over again. And in the iterations, a player who defected would get punished by his opponent who would also begin to defect. Soon, both sides would figure out it's in their best interest to start cooperating with each other. In Axelrod's experiments, the most stable approach was continual cooperation.

But there was one catch. Cooperation only works in the long run if players are willing to punish their opponent if he defects. So, if the other player defects, you show him you won't tolerate being taken advantage of and you defect right back. It's the stick you must wield in order to keep everything in its proper check and balance.

Okay, at this point I've probably been on my motorcycle far too long. Let's bring this back to the real world and see if there's anything practical to learn from it.

Hospitals can find a lot of benefit from cooperating with key suppliers. Over time, it tends to reduce overhead costs (e.g., you're managing fewer vendors) and minimize administrative burden (e.g., you have less vendor turnover and get longer term pricing locked in). But it has to be mutual. You can't afford to cooperate only to find your supplier is defecting.

This is where hospitals run into problems, especially when dealing with PPIs. All too often, we enter into agreements based on complicated market share assumptions. When it's time to demonstrate that we're living up to our side of the bargain, we find ourselves unable to produce data that proves our position. The supplier has the data, but he's not sharing with you.

That puts you at a real disadvantage. You may think you're cooperating, but in reality the supplier has defected and you don't even know it. You need to invest in the tools to keep your data capabilities at least as good as theirs.

Even worse, we might spend months negotiating a price with a PPI supplier. When we're ready to sign the contract, it's filled with all sorts of confidentiality restrictions that threaten hefty punishment if we share our special pricing with any of our colleagues. The supplier probably used the term "partnership" all through the sales process and promised us we were getting a great deal. But how can we trust that we're not getting the sucker's end of the bargain if they won't even let us benchmark against our peers? There's something about that practice that just doesn't add up for me.

In the end, if we're to achieve true cooperation and true partnership with our PPI suppliers, we must wield our big sticks. We must make sure we can hold them accountable by tracking on our own whether we're meeting the market share requirements. We must not let them keep important benchmarking information from us and stop doing business with them if they do.

Only then can we enter into a truly stable, cooperative relationship with our suppliers.

Open Letter XI: Comparative Effectiveness and…Porsche Makes Knives?!

Supply chain and finance executives are so attuned to the bottom-line that I wasn't sure what kind of response to expect when injecting a policy issue into this email/blog series. But last week's entry on comparative effectiveness generated some good discussion.

The key theme was this: we care about price, but our greatest responsibility is providing high quality patient care. How will comparative effectiveness balance the need for quality outcomes against our need to hold down costs?

Consumer Reports comes to mind. I'm a subscriber and a much more informed buyer because I take seriously its recommendations on a wide range of products. Why? Because in its 70+ years, Consumer Reports has established itself as an honest broker of information that balances quality and price. Subscribers know that it conducts thorough tests that are not influenced by manufacturers.

The June issue arrived at my home last week. One article evaluates kitchen knife sets, comparing 49 separate products from a variety of companies. Nine of the products made the cut (should I take credit for this pun?) for the "Select Ratings" list because they demonstrated the best combination of quality and price. The seal I look for, "CR Best Buy," is reserved for the lowest cost products that don't sacrifice quality. The best values.

One element of the knife evaluation caught my eye and got me thinking about comparative effectiveness and physician preference items. Consumer Reports tested a set from Porsche (who would have thought they made knives?) and found that it was among the best. Its price tag, however, was nearly twice that of any other set of comparable quality. So, Porsche wasn't a good value. It didn't make the Select Ratings list.

A similar evaluation process is part of the vision for the Agency for Healthcare Research & Quality (AHRQ). Develop it into a trusted resource for comparing clinical data on competing products to: 1. Determine quality of patient outcomes when the products are used, and 2. Rank the products' value based on its cost versus its effectiveness. The research must be unassailable both for its scientific integrity and its freedom from influence by medical device and pharmaceutical manufacturers.

So, for a hypothetical situation, say Porsche were to enter the arena of hip implants, introducing its own "new and improved" product; building an army of smart, smooth, Carrera-driving reps that knew how to curry favor with surgeons; and underwriting expensive research praising the clinical value of this implant.

In today's world these efforts and its powerful brand identity might enable Porsche to charge a premium over the competition and still make it onto physician preference lists and your purchase orders. If the docs want it, many of us would have little choice but to procure it for them.

In a different world, AHRQ would present comparative effectiveness research to you and the physicians. It would establish quality rankings by measuring patient outcomes from hip implant procedures. It would collect data on the costs of hips used in those procedures. And it would matrix the highest-quality/lowest-price hips as "Best Buy" in its own version of Consumer Reports Select Rankings.

If Porsche's "new and improved" implant demonstrates a real improvement in clinical outcomes, AHRQ gives it a gold star recommendation and we all buy it feeling confident we're getting value for the price. If, however, it turns out the improvements are more marketing gimmick than clinical reality, then AHRQ's research and ratings educates the physician, the hospital buyer, and the patient by showing that the outcomes don't justify the cost.

I don't see AHRQ and comparative effectiveness taking decisions away from the physicians. Nor do I see it sacrificing quality for lower costs. What I do see is a much needed counterbalance to the existing system.

Rather than relying on manufacturers' own research about the virtues of their products, let's develop AHRQ as a trusted broker of this information. Let's make an investment so it can be the Consumer Reports that guides our value analysis purchasing decisions.