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.

Something as simple as a checklist …

When US Airways Flight 1549 lost both engines after striking a flock of Canadian geese, crash landed in New York's Hudson River and all 155 passengers and crew survived, America hailed Captain Chesley B. Sullenberger III as a hero. Humble Captain Sully – as he came to be known – insisted that the successful crash landing, the Miracle on the Hudson, was a team effort by the entire crew.

As Harvard surgeon, journalist, and bestselling author Atul Gawande points out in his book The Checklist Manifesto, the captain's modest claims may be grounded in truth. But in addition to the heroic efforts of the cabin and passenger crews, another unlikely hero seems to have emerged. The checklist.

In his latest work, Gawande – who made tsunami-size waves last year with his New Yorker Magazine article on healthcare spending in McAllen, Texas (an amazing expose that I strongly suggest you read) – shows how adding a simple checklist to a standard process can save you from calamity by helping you make sound judgments and reduce the likelihood of errors. I admit that I am no list maker, never have been. But the results cited by Gawande are so powerful and unexpected that I am rethinking my approach!

Just like his piece about McAllen, Texas, Gawande's checklist idea raises eyebrows, and not just mine. As seasoned professionals with deep experience and understanding of our specialty, we can lay legitimate claim to our multitasking and performance-under-stress skill sets.

But Gawande's research proves that a simple checklist can benefit the most seasoned professionals. He recounts how a checklist has saved lives, even within his own operating room. In fact, in eight test hospitals around the world, a ninety-second checklist before surgery reduced deaths and complications by more than one-third!

Interestingly, the research shows that much of the success isn't so much the checklists themselves, but rather the teamwork that the checklists help to instill in the individuals working together on a particular task. Before I bring this teamwork idea to the supply chain, let me continue to illustrate this point with the checklists used on Sullenberger's flight.

Sullenberger and First Officer Jeffrey Skiles had never flown together before the January 15, 2009 trip. Upon starting the engines at the gate, the two ran methodically through their checklists, which included introducing themselves to each other and to the rest of the cabin crew. Then, also as dictated by the checklist, they discussed the plan for the flight, any concerns, and how to handle potential trouble.

In taking these list-mandated steps, Gawande writes, Sulley and Skiles transformed themselves from strangers into an effective team. When trouble struck 90 seconds after takeoff, each team member knew his role.

We know something about roles in the medical setting, don't we? Thousands of professionals go to work each day to concentrate on making the appropriate diagnoses, ordering the right products, prescribing and administering the right medications, and performing successful procedures. We focus so intently on our particular specialty that it can be easy to lose sight of the intricate interdependence of our roles in achieving the end game: the delivery of quality patient care.

The value analysis process provides a good case study in microcosm for this interdependence. The committed collaboration of supply chain professionals, clinicians, physicians, and financial analysts toward a common goal can produce dramatic breakthroughs in standardization and cost reduction. Many of us have seen this. We've also seen similar VA efforts end in failure.

So how does a checklist, which many of us consider as a way to get the "dumb stuff out of the way," help individuals expand their preoccupation with core competency and enable them to function as a cohesive unit? In many team situations, Gawande suggests that the first element be that of introductions: name, title, role. That's what the crew of Flight 1549 did.

Introductions are not perfunctory. Psychological studies have uncovered something profoundly simple: when individual members of a group don't know one another's names, they don't work together nearly as well as when they take the time for introductions. When you know someone else's name, you automatically establish a human connection, and the quality of your communication with that person increases significantly.

In a team setting, this goes a long way in coming together to carry out a common mission. Gawande has noted in his own practice that, when given a chance to introduce themselves and voice any concerns at the beginning of a case, the participants in a surgical procedure are more likely to note problems and offer solutions, and in real time. Much as a co-pilot is responsible – per the checklist – for verbally confirming changes in course, speed, and altitude made by the pilot, a checklist puts pointing out surgical errors squarely in the line of duty.

Consider the benefits of the checklist to value analysis teams: it establishes the category of product being evaluated – commodity or PPI – and what the requisite data is for each. It ensures that the whole team clearly understands the decision criteria. It establishes a time line. It identifies follow-up activities to measure time to conversion. And so on.

"Man is fallible," Gawande writes, "but maybe men are less so." Good stuff.

It was good stuff for Flight 1549, too. First Officer Skiles tried to restart both engines, as airline protocol (yes another checklist) dictated. But if Sully and Skiles didn't perform the pre-flight checklist in which they introduced themselves and became a team, then perhaps both men would have reacted by attempting to re-start the engines at the same time. No one would have been solely focused on gliding the plane safely into the Hudson.

Give a checklist a try, and please let me know how it works!

Tony Johnson at Novant Health: Everyone Has a Seat at the Table

As a U.S. Army officer specializing in health care logistics for 20 years, Tony Johnson's discipline kept the military supply chain moving in health clinics, combat units and military hospitals in Europe, the United States and Africa.

Tony's military-style command catapulted his career into supply chain roles in hospitals stateside. He quickly learned that the authoritative approach to materials management he used in the military was less effective in the traditional hospital setting.

But he's ok with that! In fact, he's adapted quite well to Novant Health System's collaborative philosophy. As Senior Vice President and Chief Supply Officer of the 13-hospital, Winston-Salem-based health network, Tony builds relationships that keep supply chain costs in check.

He says this teamwork—backed by the skills of his strategic sourcing group—has netted $65 million in cost reductions in fewer than two years. Tony believes that success breeds success. The more his team reduces costs, the more folks from all over the health system want to join him.

This collaborative environment is due in part to a model of cooperation that Novant uses during strategic sourcing events. ARCIE, as the model is called, ensures that everyone—from executives to physicians—is involved in finding the best solutions to the supply chain issues.

We sat down with Tony to talk about Novant's collaborative culture and how the company's commitment to the supply chain impacts savings.

MediClick: What is the role of the supply chain at Novant?

Tony Johnson: The supply chain is integrated across the entire Novant system and is completely accountable for all supply-related costs. That means we're moving the supply chain into all areas of the hospital.

Some time ago, the operating rooms had a spike in costs that no one could explain. When the CFO asked me why, I told him that supply chain doesn't control what they do with supplies inside the OR. He said, "You're the chief supply chain officer, I don't care where the supplies are, you are accountable for them."

That was our catalyst to move into the operating rooms in our smaller facilities. Today, we're moving into the OR in our larger facilities, too. We want an end-to-end visibility of what happens in the operating room: who's buying what supplies and what supplies are actually stored there. Our next target is the cath labs.

In addition to being accountable for supplies, any contract for goods or services also comes through supply chain—from the C-suite on down. That enables us to receive standard supply chain pricing across all of Novant's facilities.

In fact, the supply chain group actually sourced a general contractor along with engineering for three new hospital projects. Then the Novant Strategic Sourcing Group purchased materials that the contractor would have traditionally purchased and marked-up. And for supplies that the contractor did need to purchase, we looked at the market price and collaborated with the contractor to get a better one.

MediClick: Supply chain managers are good at the process sides of change, but there's also an enormous cultural side of creating a vision, communicating it and building support. How do you go about creating a vision and building support for it at Novant?

Tony: Nothing beats having a great vision from the beginning. You've got to get the blueprint right, it has to be viable, and it has to be something that will make a change. Before I even joined Novant, the supply chain executive was senior in the organization. This vision enables us to easily communicate with anyone, from the highest levels of the executive team all the way down to the operating room.

Novant's chief medical officer is an advisor for strategic sourcing. He's the one who recommends the experts who we should be using as a resource. It's like having a direct connection with all the physicians all of the time.

Now certainly you have to earn their trust, but you can build those relationships and put that vision out there and sell it.

But it's not the supply chain person out there preaching; the company believes in it so the executives at the highest level are stepping forward and being the voice. It makes our jobs a lot easier.

MediClick: One of the main issues that divides supply chain managers and care providers is physician preference items. What is Novant's philosophy on physician preference items and how does that impact the way supply chain earns the trust of physicians?

Tony: Novant's culture, at its core, is very collaborative. So instead of strong-arming physicians, we build relationships with them. We also let them know that our goal is to not limit their product choice in any way. Instead, we go after what we think is an aggressive best in class price in the market.

Our process is very structured. First we analyze the market and learn everything we can about the supplier. Next the staff in our contracting department spends time with physicians to evaluate products, look at the market and explain costs differences.

Then these physicians sit at the table with us to negotiate contracts. Most vendors market their product directly to the physicians. By bringing physicians into the negotiations on our side of the table, we effectively eliminate the vendor's divide and conquer techniques.

We recently had a vendor who stuck with a premium price after we told them the price we were willing to pay. So we put the vendor on notice that we won't pay them a premium just for the privilege of using their product, which is no different than the others. We told them to conform to our pricing requirements or they have to go.

The vendor saw this as a bluff because they had already developed a good relationship with the physicians. They waited until two weeks before the deadline to give us the prices we wanted.

That was a huge contract. It was about $30 million worth of purchases. Initially, the physicians were uncomfortable with this type of negotiating. But since we brought them to the table, they trusted us. They looked at us as partners.

MediClick: With your organization being so collaborative, what is your process for strategic sourcing?

Tony: I have a fairly robust staff in the strategic sourcing group. We made the decision to invest in recruiting team members from various industries because that's where we found the skills we needed. So we've got folks from Ford Motor Company, Ingersoll Rand, General Electric. The typical profile of our sourcing manager is an MBA who is Six Sigma and Lean certified.

The result has been phenomenal. We started recruiting these professionals in 2006 and from August 2006 to the end of 2008, the cost reduction that group has brought us was $65 million, but they haven't done it alone.

We involve all of the stake holders in each sourcing event using what we call an ARCIE model [Approve, Recommend, Consult, Inform and Execute]. That means for every project, an executive approves it, a group recommends the solution, a group consults the stakeholders, a group informs the audience and a group executes the solution.

When we put our projections out there, folks know they can trust our numbers and they see what's happening on their balance sheet. Success breeds success. The more successful we are with our numbers, the more people want to work with us as part of the process.

MediClick: Cost reduction is a very controversial term in that it can be measured in a variety of different ways. What do you mean by cost reduction?

Tony: When our accountants validate savings for supplies, they consider cost savings as the old price, minus the new price and only when it is purchased. We do not book things in advance.

When we wrote a contract for orthopedics, the estimate was initially $5.5 million below the old contract. We didn't take $5.5 million savings; we go implant by implant, screw by screw as they're purchased and we add them up every month. We only take them for one contract cycle.

So if the contracts are written for three years, we count those reductions each month for three years. When those contracts run out we can't claim that anymore. We have to start over at that current price.

The reason we do this is because integrity in what we report is paramount. The CFO is looking for money that actually came out of the expense column.

I've been in this business a long time. Believe me, it's satisfying when you get a call from one of the hospital administrators and they say "Oh my gosh! I've been looking at my financials and the supply costs are really down."

MediClick: Thanks for the insights, Tony!

TXT Savvy Dad Applies Lessons from the Supply Chain

It may be poor form to strut my newfound text-savviness after so long a blog hiatus, but since leaving my youngest child at college in August (whose imminent departure was the reason for the hiatus in the first place), I have learned to thumb my way around a QWERTY keyboard pretty darned well.

Yes, this former texting phobe has learned that, like a Skinner rat pounding for food pellets, my persistent thumb jabs also are rewarded: my daughter "talks" to me! I live for the tinny buzz that signals a new message of abbreviated words and punctuation smiley faces.

How does this relate to the hospital supply chain? Give me some latitude, and I think you'll see where I'm going.

So my youngest daughter and I are texters. My oldest daughter, a bona fide Facebook fanatic, uses the browser function of her cell phone to provide status updates to all her cyber-friends. And then there's my wife…she actually believes cell phones are meant for talking. Strange concept, I know.

Here's my dirty confession: since we each got cell phones at different times, our accounts were with different vendors. Yep. A brief lapse in paternal oversight, and they had effectively divided and conquered the family cell phone dollars! Not only did we use all these different features (billed for individually I might add), but we let the cellular carriers charge us top rate because I didn't bother to pool our accounts to get some purchasing power.

A colleague showed me this article about a poor dad whose teenage daughter was apparently trying to set the world record for number of texts sent in a month. She beat 10,000! The phone bill was $4,756.25!

My family never did that kind of damage, but you can be sure it snapped me to attention. I decided to take control by borrowing a page from the value analysis play book.

I brought together all the various bills from the phone carriers to analyze the expense. As expected, it was a lot!

Next, I sat down with my family to determine what everyone really needed to stay in the communication loop. Unlimited texting was a given. But my oldest daughter took one for the team, offering to give up the phone-based internet access and foregoing the real-time Facebook updates. Finally, it was clear that – with my wife as the only "talker" – we didn't need quite as many minutes as our plans allowed.

I had buy-in from my "users", I had the information I needed to shop around for a better deal, and so I started calling the cellular carriers to find the best price.

Cutting to the chase, we ended up with a family plan (one consolidated bill) where we could share voice minutes and take advantage of unlimited text messaging. Best yet, I got rid of the variable components of my monthly bills (mainly overage charges), and we're saving over 30 percent a month!

What's the moral here? For one, sometimes what we learn at work can help in our personal finances, too. More importantly, even though I let multiple vendors take advantage of my inattention to this expense for a brief period of time, it's never too late to take control.

The same basic rules apply in the hospital supply chain. To take control you need to be able to aggregate your spend data, analyze exactly where your dollars are going, sit down with your users to understand their needs (separating "nice to haves" from true needs), identify where you can standardize, and take this new purchasing power to market to negotiate the best price possible.

It works for a family with out of control phone bills, and I see it work every day for hospitals that decide to take control of their supply expenses.

Postscript: Last week, my younger daughter told me that she wanted a webcam for her laptop so she could Skype with her friends. It doesn't end, does it?

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 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.

Open Letter V: Sisyphus or the Flywheel

Effective supply chain management is hard. While its costs account for 25 to 35 percent of overall operating expenses, too many hospital CEO's still don't treat it like a core competency. Respectfully, that's a mistake.

I recently finished Jim Collins' book Good to Great. It chronicles 11 publicly-traded companies that made and sustained the transition from average performers to outstanding industry leaders, discussing the traits they have in common. These traits are often surprising and always illuminating. They range from the personalities / leadership styles of the CEO's to the use of technology as a core competency enabler rather than a strategy in and of itself (remember Pets.com?). It's worth the read, and its lessons apply very well to hospitals.

There was no sudden burst of speed, Collins writes, which launched any of the companies from middle-of-the-pack obscurity to market front-runner. Instead each spent years perfecting their business models, always with an eye on the world around them, until they executed better than anyone else. Over time, "good" became "great" as the companies generated momentum their competitors couldn't duplicate. After years of hard work and preparation, you might say, they became overnight successes.

Collins compares the journey to turning a 2 ½ ton steel flywheel mounted on an enormous axle. At first you push it with all your strength, yet its progress seems imperceptible. But you keep at it. You push relentlessly, fueled by informed conviction. You recruit others into your organization to push with you. Slowly, it responds to your force and begins to pick up momentum (as you knew it would). This motivates the team to push harder, keeping at it until the flywheel's own momentum lends a hand, cycling it smoothly around its axle.

Each of the good-to-great companies identified the key revenue and expense components that were critical to achieving their strategic goals. They put knowledgeable, self-motivated people in charge of them. And they made sure that these people had the tools to enable their success.

Winning hospital CEOs approach their supply chain this way. They view it as core to the business, (i.e. a component upon which strategic success depends). They invest in the right people – self-motivated people – and provide them the tools they need to make the supply chain more efficient and more effective. They enable them to create substantial savings.

All too often, I fear, some CEOs feel toward their supply chain operations as Sisyphus must feel about his boulder. Remember him from Greek mythology? He managed to anger the gods and was forced to push a massive rock to the top of a hill only to see it roll back to the bottom. "Now repeat, Sisyphus – for all eternity." OK, maybe not that bad but, to me, seeing hard-earned revenues eroded to dust by sharply escalating supply expenses definitely qualifies as a recurring nightmare.

Imagine this Sisyphean scenario: one of your value analysis teams spends months evaluating drug eluting coronary stents. The members decide they can consolidate from three separate suppliers to one, and the winning bidder commits to pricing that promises six-figure savings in the coming fiscal year. Your team has pushed a big rock to the top of the hill.

Unfortunately, you only see Sisyphus at work. Despite a successful project of stent standardization and market share leverage, the savings don't seem to make it to the bottom line. When your CFO reports new numbers from the cath lab, expenses are higher! The boulder has rolled back down the hill, right?

NO! It turns out that expenses increased because case volume increased. The savings on stents were actually higher than projected, because you used more. The value analysis team should be celebrating. Instead, they're wearily pushing the eternal rock again. The very legitimate six figure savings, and the stent project that should launch a thousand similar projects, are hidden under a thick overcoat of red ink.

Hospitals must employ tools (like this) that quantify projected savings in the supply chain and then track actual savings over time. If you're behind schedule, the tools will tell you why. (Perhaps it signals a need to focus on decreasing product conversion time.) If you're ahead of schedule, great! Replicate! But most importantly, measure. The drug eluting stent price reduction may not have salvaged the bottom line, but it sure as heck helped. And it's the perfect poster child for projects that can change P&L red to beautiful black.

As I said, the supply chain is hard, but it is also rich with savings opportunity. Quantifying and tracking realized savings with accuracy, accountability, and repeatability can be the difference between lugging giant rocks to the hilltops and seeing that flywheel spin in circles using its own momentum.

Sincerely,

Mike

An Open Letter Part II: A Penny Saved Is a Penny Earned

By Mike Merwarth, President of MediClick

Though my teenage daughters roll their eyes each time I recite Benjamin Franklin's appeal to personal thrift, I hear a more empathetic response from hospital executives. After all, IDNs routinely survive on margins between zero and four percent. Because we operate so close to the edge, we've trained a sharp eye on the bottom line to make sure there's a buffer between us and the red ink.

In my last note, I urged hospital CEOs to make the supply chain a strategic priority. It remains the richest trove for rescuing dollars from the expense column of our financial statements, but that won't happen without making a firm commitment to the people running your supply chain and investing in the tools they need to get the job done.

In this note, I want to run through a simple model to make the case that investments in supply savings do considerably more for your bottom line than investments aimed at growing your revenue base. Stay with me on this. Even if it looks like an accounting exercise, you'll see that it goes to the heart of strategy and operations.

Let's look at a hypothetical IDN and its income statement:

Hypothetical 20 Hospital IDN (Income Statement)
		% of revenue
Revenue	$1,000,000,000	100%
Supply Expenses	($250,000,000)	(25%)
Payroll Expenses	($400,000,000)	(40%)
Other Expenses	($330,000,000)	(33%)
Margin	$20,000,000	2%

 

Its cost structure and margins are typical of an IDN its size. However, the CEO is not comfortable with the tight margin and wants to look at his options by modeling some changes to revenue and expense over the next few years.

He turns first to his business office and asks them to come up with ways to increase revenue by ten percent and show its impact on the bottom line. They've been studying demographic data for months and believe the graying of the baby boomers will soon lead to a spike in demand for knee and hip replacements. They recommend aligning with the highest producing (by case volume) orthopedic practices in key markets, repositioning the IDN as the place to go for hip and knee replacement surgery, and repurposing their OR suites for more orthopedic procedures.

Soon enough they expect the efforts to generate an additional $100 million in revenue per year. Their model looks like this:

Hypothetical 20 Hospital IDN Income Statement (10% Revenue Increase - More Hip & Knee Procedures)
		% increase
Revenue	$1,100,000,000	+10%
Supply Expenses	($275,000,000)	+10%
Payroll Expenses	($440,000,000)	+10%
Other Expenses	($363,000,000)	+10%
Margin	$22,000,000	+10%

 

While the move into orthopedics achieves the desired revenue growth, it carries with it a proportional increase in expenses. The additional volume means a need for more staff to cover the procedures and more supplies for the cases. As a result, the $100 million in new revenue only adds $2 million to the bottom line, for a 10% margin increase. For an IDN approaching $1 billion in annual expenses, that really doesn't put the bottom line on firmer footing.

The CEO turns to his supply chain team to tackle the expense problem. He challenges them to decrease supply costs by two percent.

The vice president of supply chain has been studying some data, too. At their current orthopedic case volume, she sees that the clinicians are using hip and knee kits from several different manufacturers at a wide range of price points. She knows that with the right tools, she can make a solid argument to the value analysis team to consolidate to fewer products, increase volume and market share with certain vendors, and negotiate an IDN-wide contract with much better prices. She anticipates savings of $5 million, and her model looks like this:

Hypothetical 20 Hospital IDN Income Statement (2% Supply Expense Decrease)
		% increase
Revenue	$1,000,000,000	+/-0%
Supply Expenses	($245,000,000)	-2%
Payroll Expenses	($400,000,000)	+/-0%
Other Expenses	($330,000,000)	+/-0%
Margin	$25,000,000	+25%

 

That $5 million in supply savings falls directly to the bottom line, increasing the margin by 25 percent and creating a wider financial cushion for the CEO. Better yet, with the analytical tools now available to her, the supply chain executive can better manage her supply contracts, analyze information in real-time, and demonstrate that the money she expects to save is making its way to the bottom line.

In an ideal world the CEO can pursue both projects simultaneously. But today's environment requires healthcare executives to preserve the hospital's capital while acting swiftly to protect their margins. If you're willing to make the investment in your people and the tools they need, your supply chain team is the quickest route to reducing costs and expanding margins.

So, Benjamin Franklin didn't just coin a folksy adage on frugality to pass from doting fathers to disinterested daughters. In the hospital world, each penny we save falls straight to our bottom line, fortifying our financial health and keeping our margins in the black.

Do you have a story similar to this hypothetical vice president of supply chain? If so, I'd love to hear how you contributed to your organization's profitability by rescuing dollars from the expense column.

Sincerely,

Mike Merwarth