Culture of Savings: The Clinically Integrated Supply Chain

Nick Toscano dropped by the MediClick offices the other week to discuss the future of the healthcare supply chain. Much of that conversation circled around how we create and sustain cultures of savings in our hospitals and health systems.

Nick has walked the walk. He helped facilitate the 1999 merger of the largest health systems in Southern New Jersey and became vice president for strategic support services for the combined entity. Nick instituted a model (some might say a philosophy) that has come to be known as the "Clinically Integrated Supply Chain." This collaborative model is now considered an industry best practice for high performance and cost efficiency.

Today, Nick works as a strategic advisor to the C-suite and senior supply chain officers of some of the largest IDNs in the country, helping them implement key tenets of the Clinically Integrated Supply Chain. This week and next, Nick shares with us his thoughts on cultures of savings.

---

This economy has provided a real wake-up call to our providers' C-suite. Endowment portfolios have taken a major hit, and charitable contributions are down dramatically. This means that, for the first time in many years, our hospitals must cover their costs with revenue generated from patient services. We're forced to put our operating costs under a microscope and scrutinize our expenses for every opportunity to reduce costs.

We must bring non-labor expenses into focus. These supplies and purchased services can represent up to 45 percent of all hospital operating costs, and they're inflating faster than four times the rate of our labor expenses.

That's not a sustainable trend. But if we allow it to become a catalyst for elevating our approach to the healthcare supply chain, it can become a real opportunity to establish the cultures of savings that MediClick talks about.

Cultures of savings must start at the top. When I led an IDN's shared service organization, the role was one of a single executive-level position that had full responsibility for all non-labor expenses. You might call it the Chief Resource Officer (CRO). For CEOs and CFOs, it meant one source of accountability when non-labor costs are challenged. But more importantly, it forces an integrated approach to managing your cost structure, supplier agreements, and optimization opportunities. It provides a leader who is part of the C-suite and in whom the senior executives have vested their trust and authority to make the changes needed to move the organization toward a Clinically Integrated Supply Chain.

What do I mean by Clinically Integrated Supply Chain? Generally speaking, it's a model that is strategically and operationally aligned with the clinical and business goals of the IDN. It makes the supply chain a partner in the clinical process; not simply a series of transactional processes. It means reducing costs through standardizing and rationalizing expensive preference items and services but avoiding the rules and bureaucracy that can create antagonism between physicians and the supply chain staff. These goals might sound divergent (can you really reduce costs and keep physicians happy?), but I can tell you they're not contradictory. It just takes passionate leaders, a complete commitment to enhancing the patient experience, full multi-disciplinary teamwork and hard work from all to get there.

At our IDN, for example, we created Clinical Resource Teams. They were led by clinicians that reported into the supply chain organization. It was their full time job to find enough savings each year to justify the costs of funding the group five times over. Not cost avoidance. They had to produce actual budget reductions that our CFO could document. It was a lofty goal, but one that has been working for years now. Why?

First, we put the Clinical Resource team members into the departments and service lines to work side-by-side with the clinicians. This allowed them to identify savings opportunities, recognize how any initiative might affect the ultimate goal of maintaining a high level of patient care, and develop relationships with the clinicians upon whom they would later ask for support in additional initiatives.

Second, during clinical integration projects, we assigned the Clinical Resource team members to physicians to engage them on both cost and clinical outcomes. I recognized early in my supply chain career that doctors don't particularly enjoy hearing from materials managers and hospital finance staff about what products they should consider using in their procedures. Properly trained clinicians, however, have credibility when approaching physicians with evidence-based data about which items can produce the right outcomes at a more effective cost to the hospital.

Third, we made sure the clinicians participated in the benefits of their work. For each project, we earmarked a portion of the savings to go back to the departments or services lines in the form of capital for equipment improvements or funding for continuing education for the staff. This helped align the physicians' and clinicians' interests with the success of the projects.

Establishing a Clinically Integrated Supply Chain is no easy task. To succeed at it, an organization must make a top-to-bottom commitment. In my recent work with IDN executives, I'm seeing that this economic environment can be a catalyst to induce our hospitals to get more innovative about controlling non-labor costs. It just might be the right opportunity to focus on creating cultures of savings.

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.

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.