Innovations in Health Care Supply Chain Contracting, Part II

Bob Simpson at LeeSar and Cooperative Services of Florida
– Blazing a new path

Dissatisfied with their national GPO's inability to meet the needs of both suppliers and clinicians simultaneously, Lee Memorial Hospital and Sarasota Memorial Health Care System decided to disrupt the status quo of the supply chain world in 1997.

By joining forces to form a regional contracting and distribution cooperative called Cooperative Services of Florida (CSF) and LeeSar respectively, they were able to give doctors a greater voice in contract selection and provide supply chain savings to their owners by driving high compliance to suppliers that survive a rigorous selection process.

The lynchpin, according to President and CEO Bob Simpson, is the ability to drive 90%-plus contract compliance, making suppliers eager to do business with the regional cooperative.

"Any supplier out there wants one thing, and that's to control market share," Bob says. "Based on all of our healthcare systems we represent, we can look at a manufacturer and say that we can drive compliance. Because of this, we collect pricing and terms that are second to almost no one else in the country."

All of this while meeting the clinical requirements of their physicians.

As part of our series on innovating supply chain contracting, we sat down with Bob to find out how CSF has made a success out of the complex trade of supply chain contracting.

MediClick: What makes Cooperative Services of Florida different from the national GPO?

Bob Simpson: I used to chair the committee of a national GPO in New England, so I'm familiar with the model. Their challenge today is that they've gotten so big that they can't drive compliance with their portfolios.

It's frustrating to the suppliers who've worked hard, put in a bid with a GPO, receive an award and pay the administration fee. The next thing they have to do is go out and sell themselves to the clinicians. Although they're told that 200 hospitals could buy their product, they find they have nothing until they go out and sell themselves.

We drive compliance. That's why my board and I have always discussed not letting this get any bigger. With four IDNs, we're at the max that I can manage while still driving compliance to the manufacturers and keeping my promise to them.

Some of the national GPOs have started to break off and form these regional sections around the country to let them drive smaller portfolios while supporting the national agreements. Why have they done that? Because they know they can drive compliance on a smaller level. And they've gotten too big to drive compliance across the board.

MediClick: What approach does CSF take to driving compliance?

Bob: The CEOs of both Sarasota Memorial Health Systems and Lee Memorial Health Systems originally founded CSF after their physicians complained they didn't have enough input into supply selection. Our GPO at the time used advisory committees to put together product portfolios it sent to hospitals for compliance. Our physicians wanted more input into that process.

So the CEOs made CSF the full authority to negotiate their contracts. Our process goes in reverse. We go to the end users of the products to find out what is medically and clinically acceptable. Not what their preference is, not what they've been trained on in medical school. I need some options so I can drive the best deal possible. Then we only negotiate with manufacturers who have products that are medically and operationally acceptable.

Second, I need clinicians to agree to use it. Doctors and nurses are scientists; they deal in facts. We need to show them the savings and the value and promise them that we're not putting anything in their hands that can harm their patient. Whether it is nursing, department heads, or physicians, they all sign off ahead of time.

Physicians now have input into the process, and we've returned cost savings to the hospital. We can promise suppliers that we will drive 90% compliance to the contract. This is how we are able to collect pricing and terms that are probably second to none in the country. We benchmark our prices against the national GPOs annually and consistently come in the top 5% in the country.

And now that we've given value to the suppliers, we've started collecting fees from them.

In fact, a very interesting phone call took place last week. I got a call from the CFO of Lee Memorial Health Systems, who just had a bonding organization looking at their books to decide how to rate Lee Memorial. They found a revenue stream that they hadn't seen before, and it was growing substantially. The bonding organization wanted to know what that was. It was the revenue stream coming from CSF. Because of that, Lee got a higher bond rating. For the first time to my knowledge the buying coop had a major affect on the bond rating of a major healthcare system.

MediClick: How does driving this level of compliance affect your relationship with clinicians?

Bob: Since we all have backgrounds in medicine, we can speak their language. Bill Tousey, a VP at CSF, is a former director of surgery and an OR nurse. I was a medic in Vietnam, and I still do surgery with my nonprofit. The doctors and nurses respect that.

Plus, they've all seen the program work. About two years ago, we did price benchmarking on orthopedic implants and found we weren't getting the value for our volume. The implant companies dealt directly with our clinicians, ignored us, and passed on increases.

Lee's CEO called a meeting one evening. He put on a nice buffet and invited the orthopedic surgeons, the implant companies, the board, and the press. He stood in front of the room and said "I have one question and one question only: Given our orthopedic implant volume, can anyone tell me why we're not getting the price we should for the amount of business that we do for you?"

You could have heard a pin drop.

We took a stance that night. The first three companies to come to us with the price we'd set would get our orthopedic contracts. The rest will hit the streets. The doctors were not pleased.

None of the orthopedic companies stepped forward so we had to delay surgeries because implants were not available at the price we wanted … for three days. Then there was a break: a small, unknown orthopedic implant company that had just 5% of our business said "we'll play." Then another company came forward. By the end of about two or three days, three unknown orthopedic companies came forward.

I told the surgeons they could start doing surgery, but they had to choose from three unknowns, not the big three. They doctors were still unhappy. Finally, they asked for a meeting with the CEO who asked me to come along. They asked what they had to do. We told them "we just need fair pricing. You can have choice, but we're not paying outrageous prices." And all the orthopedic companies came back in and played.

Thirty days later, it was time for spines. What did the neurologists say to us? "Give us the paperwork, we'll sign off, we'll do whatever you want us to do" because they saw what happened with orthopedics.

But that's the reputation we have. We drive compliance. And our medical staff knows that.

Next week, Bob talks with MediClick about replicating the Cooperative Services model.

Kerry Gillespie at Ardent Health: It All Starts With Quality

MediClick met with Kerry Gillespie a few weeks ago at HFMA's ANI Conference in Seattle. Kerry is CFO at Ardent Health, a for-profit network with 11 acute care hospitals in Oklahoma and New Mexico.

For Ardent, establishing a culture of savings starts with a focus on quality. Ardent always talks with its clinicians about how to improve quality and patient outcomes before discussing cost reductions. Kerry says this shows his clinicians that Ardent shares their priorities, and it helps align the interests of the clinical staff with the teams responsible for driving costs out of the supply chain.

Kerry also argues that medical device suppliers need to hold themselves to a higher quality standard: If they're increasing prices 20, 30, 40 percent and justifying it with claims that their new technology is generating better patient outcomes, give us the proof. Show us how quality outcomes have improved at least as much as you've increased the costs to our hospitals.

Below, we talk with Kerry about how his organization fosters and benefits from a culture of savings.

MediClick: How do you involve your clinicians with Ardent's culture of savings activities?

Kerry Gillespie: We rarely talk with clinicians about cost without talking first about quality. That resonates with them. If all they hear is "cost, cost, cost", they think all you care about is process and money. But if they hear "quality and cost; quality and cost", then they know this is an organization that cares about me and cares about my obligations to the patient. They know we're focused on doing the right things.

Managing costs in a quality organization is easier than managing costs in an organization where your nurses and other clinical staff don't think you care about quality. It affects their willingness to participate in your savings initiatives.

There's a business purpose to quality, too. At Ardent, we know we have to stay healthy from a patient volume perspective. It's really easy to manage out your costs when your volumes are there, but it's tougher to manage costs out as volume drops. There's a circular nature to it: we believe that in driving quality up, we'll keep the volumes coming in. If the volume comes in, we're more confident we can manage the costs.

MediClick: Physician preference items present an ongoing struggle for hospitals trying to rein in costs. What is Ardent's approach to the challenge, and what results have you seen?

Kerry: We've come to realize that vendors try to sell us a lot of extraneous supplies, especially for total knees, total hips, and cardiac services. For example, they insist on selling us high-end catheters even when a lower cost product would produce the same quality outcomes.

These vendors are driving the cost factors through our physicians and taking control away from the hospitals. The medical device companies put their reps on aggressive commissions, so they go out and build these great relationships with the doctors. Before you know it, you're using stuff in your operating rooms you didn't have a clue were being used. It's a ton of money, and it's driving up the costs of your services.

So, we're working hard to address this.

We're part of the Acute Care Episode [ACE] Demonstration project through CMS which allows us to work with our physicians to reduce costs. It lets them participate in the up-side of cost reductions through gainsharing. We're able to substantially improve their payments on individual cases.

In terms of engaging physicians, if you can give them an appropriate economic incentive that includes an enhancement to the quality of care delivered, they will work with you every time. We're exploring this through the ACE Demonstration project. 

We also stay very focused on the top 20 most expensive med/surg items in all of our facilities. The individual hospital's CFO, materials manager and department heads have conversations with the physicians about utilization and alternative items they might use. Our regional materials managers are ultimately responsible for reducing costs on these items and they report monthly to the corporate office. It's part of our ongoing supply chain operational review.

This process has been very successful. In 2008 alone we took almost $4 million out of supply costs.

MediClick: Does Ardent blaze its own trail, or do you subscribe to a particular process improvement methodology?

Kerry: We recently introduced Lean to our revenue cycle management and realized we had significant waste in our upfront registration processes. We're going to take out 60 percent of the steps and 30 to 40 percent of the costs associated with registration.

We're beginning to bring Lean into our clinical departments, too. Right now we're building a value stream map of the emergency room of one of our biggest facilities, and we'll implement Lean processes there soon.

For people who say Lean works well in manufacturing but not in the patient care setting, I see that as an excuse. It's true that every patient is different, and we're not making simple widgets. But you can use the same principles: pull out the steps that don't add value, reduce the variability, etc. All those things make complete sense in any environment, not just manufacturing.

As I've mentioned, quality is a critical part of the equation. The interesting thing is that when you reduce cost and reduce variability, you improve quality. It's a Six-Sigma concept, and while we haven't implemented that specific methodology, we're borrowing heavily from its ideas. It's making us considerably better and improving our quality metrics.

MediClick: There's been a lot of talk lately about Harvard Business School Professor Clayton Christensen's The Innovator's Prescription. It has renewed dialogue about the true definition of "integrated delivery network." Tell us about Ardent's approach to providing integrated healthcare.

Kerry: I'm familiar with Dr. Christensen and his works, and we're trying to follow a true integration model.

For example, Ardent has a pretty good-sized health plan in our Albuquerque market with about 40 percent market share. We've developed the program so we can sell insurance to organizations at a significantly reduced cost. We pass that cost down to the hospitals, so they're motivated to reduce their costs in order to continue to maintain their budgets.

Albuquerque represents a single market inside of Ardent. It includes the hospitals, the health plan, and all the other services we provide. These are all rolled up into an overall market budget with an earnings target. A significant portion of compensation for the managers is tied to the success of the entire market as well as their individual business units. So it creates aligned incentives. They're motivated to make the health plan successful by containing costs, and they're also responsible that the hospitals keep costs in check.

We don't own physician practices, so the doctor side of it can be a challenge. But everything else is integrated very well.

MediClick: What challenges do you see for the future of the healthcare supply chain? 

Kerry: If the industry is really going to reform itself, the suppliers have to come along. They have to participate and sacrifice, too, or reforms are going to be real problematic and put too heavy a burden on the hospitals.

There's something wrong with a medical device company making a 40 percent gross margin on their business and we're doing well to be at seven percent. What's wrong with that picture?

Every time I turn around there's a new pacemaker or new defibrillator. I can't keep a lid on hips and knees because all these joints are always getting a new tweak and being marked up more each time. The device manufacturers are pushing them on the doctors saying they provide better care for their patients. So the doctors are bringing the new products into the hospitals, and we don't have a say in the matter.

The hospitals have to ask: do the innovations improve outcomes at the same rate their prices increase? I'm not seeing new devices producing 20, 30, 40 percent better outcomes. Then how can we justify their prices going up at that rate? We must look at effectiveness when addressing rising costs.

MediClick: Thanks for sharing, Kerry!

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 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.

Healthcare Is Not Immune

A local journalist was surprised when I told him MediClick's customers, like all hospitals, are feeling the tight squeeze of this economy. "I thought healthcare was immune," he said. "You know, people always get sick."

I thought of his comment this morning when reading Paul Levy's letter to the employees of Beth Israel Deaconess Medical Center (BIDMC). As CEO of BIDMC, he delivers a candid report on the state of the hospital's finances, preparing his team for the hardships that accompany an expected $20 million loss this fiscal year. While soliciting innovative cost savings ideas from employees, he also warns to be prepared for lay-offs and salary reductions.

It's true that people always get sick. But like BIDMC, few hospitals are immune when being hit simultaneously with declines in reimbursement, soaring incidents of uncompensated care, and fewer patients registering for elective procedures (from which the relatively high margins help keep hospitals in the black year after year).

Labor is an obvious place to turn when healthcare executives are looking to reduce costs quickly. Wages, salaries, and employee benefits are by far the largest expense category for any hospital. But when demand picks back up (as we all know it will), it can take a lot of time and money to rebuild great clinical and support teams.

In my "Open Letter to CEOs" series, I continue to urge hospital executives to invest in their supply chains as a strategy. As the second highest expense category, the dollar figures are too high to treat it as a low priority. In these challenging times we must build cultures committed to rooting out costs and making smart purchasing decisions. While this won't always make us immune from layoffs, I am confident we can reduce them.

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?