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.
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