Cut Physician Preference Costs by Building Physician Bonds

Physician preference items are a known cost driver in the supply chain, yet eliminating them can cause consternation and conflict between a hospital and physicians. It doesn't have to be that way. UC Health in Cincinnati found a way to save more than $35 million over two years, while actually strengthening the physician-hospital bond.

In 2009, the University of Cincinnati, University of Cincinnati Physicians, and University Hospital came together to form UC Health. Shortly after the partnership was launched, Rick Hinds, executive vice president and CFO, and Dennis Robb, senior vice president of business operations and chief supply chain officer for the 1,700-bed organization, launched a targeted cost-cutting effort to reduce physician preference items (PPI).

When entities join together, as financial leaders know well, a signed agreement doesn't necessarily lead to seamless alignment. What's more, a PPI reduction effort isn't likely to be met with enthusiasm. But both goals are attainable, Hinds says, through a transparent and collaborative approach with physicians.

"We have really good alignment and transparency between the hospital and the physicians. And you have to have that if you're going to succeed, because the physicians are going to drive the ongoing sustainability of preference items," he says.

While one goal of the PPI effort was to reduce supply costs, an equal priority, Robb says, was to preserve physician choice from a list of multiple vendors.

UC Health created nine clinical advisory groups that included physicians, nurses, pharmacy staff, and contracting personnel to review products and determine which vendor's items and contracts were acceptable. The teams helped categorize the preference items, evaluate vendor pricing, and benchmark the prices against aggregate data to determine fair market value within each product category.

Hinds says it was the organization's collaboration with its physicians that made it possible for the organization to select just one key vendor for each item. By selecting just one vendor, the system is able to leverage its size and buying power to secure better terms, conditions, and prices.

"Physicians and nurses led the discussion and determined which were acceptable items. Then [supply management] concentrated on negotiating to get the best terms, conditions, and prices. Once we executed a contract, we could lock out the other vendors and move 100% of our business solely to that new contract within two weeks [without clinician resistance]. We couldn't have done that without having the engagement and support of our clinical end users from the onset," he says.

For instance, one team was able to reduce the acquisition cost of implants and implantable devices for total joint, spine, and trauma procedures. In this area alone, UC Health realized over $5 million in savings in 2011, or approximately 25% of its orthopedic spend that year.

UC Health's financial structure plays a role in the PPI success. "To some degree UC Health has a built-in advantage for collaboration … our physicians feel a lot of ownership of our system," says Hinds. "[The hospital and the physicians] share a common bottom line, which drives alignment and we do clinical care, research, and education. So the physicians understand why it's necessary to do [cost reductions], and they feel it's important to generate the right savings to fund the academic mission."

The shared bottom line coupled with the work by the clinical committees are what enabled UC Health to narrow the vendor pool to 23 suppliers, Hinds says. While it generally takes health systems, especially those the size of UC Health, six or more months to implement these types of supply chain changes (which delays savings to a system), UC Health completed most of these transitions in an unheard-of two-week period.

"Having that speed to contract and [staff] contract compliance was an important part of our success—we're able to get the full benefit of a three-year contract. By consolidating our spend with one vendor and doing it with clinical support, we can lock out other vendors and see double-digit savings quickly," Robb explains.

The project has extended into performance improvement projects, with similarly structured committees looking at opportunities to improve overall operations. One key outcome from the early discussions was the decision to sell the organization's rehabilitation center. At the end of 2011, UC Health sold its inpatient rehabilitation facility, Drake Center, to HealthSouth, a national rehabilitation provider, and subleased space for the operation of two patient care units that specialize in treating rehabilitation patients who don't require extensive long-term acute medical care.

The transition to rehab facility under HealthSouth allows Drake to accept more patients than under the previous long-term acute care hospital license, notes Hinds. "It was a good chance for us to sustain and grow our rehabilitation services at our site and serve the needs of our community better," he says. The decision was supported by the clinicians.

The performance improvement initiative—a system-wide examination of all hospitals, departments, clinical practices, inpatient and outpatient services—identified $15 million in savings opportunities. Additionally, revenue opportunities totaling nearly $15 million were identified by improving access, management of specific diseases such as chest pain, reduction in days in AR, LOS/discharge planning, bed utilization, and improvements in throughput. Physician preference item initiatives, spine, orthopedics, and cardiology, in fiscal year 2012, realized audited savings of greater than $6 million.

When it comes to reducing physician preference without alienating doctors, Hinds believes that what's often missing in the typical not-for-profit setting is the willingness by the hospital administration to collaborate and allow physicians to develop strong leadership and governance roles. "The physician tends to end up feeling like an employee, and that breaks down the alignment structure," he explains.

Though UC Health welcomed physicians into the governance and leadership of the organization, Hinds recognizes that "It's a difficult change for a lot of hospitals. But in the long term, physician collaboration is going to be a key to success. Yes, hospitals can get reimbursed without good physician alignment, but in the long run those organizations [without good alignment] will struggle to get the sustainable cost reductions they're after," he concludes.