One Boston medical center cut roughly $9 million from its supply chain spend in 2013 and is on target to cut another $8.5 million in 2014. "We go where the money is, which a lot of the time is physician preference items like knees and hips," says its director of purchasing.
As hospital CFOs continually look for new ways to rein in spending, the supply chain—which is second only to labor as a cost center for provider organizations—is a natural target.
Most providers work with a group purchasing organization to contract with vendors at competitive prices, but many are realizing that relying only on this approach isn't going to cut it anymore.
Hospital leaders are now also turning their focus inward and assessing the clinical value of the products they are buying. Through this process, they are standardizing costly physician preference items, such as hip and knee implants, and limiting the selection of these products they bring into their system.
Standardizing care and getting the most bang for the buck with clinical resources are important strategies for improving cost efficiency. In the recent HealthLeaders Media Intelligence Report,The Clinical Strategy for Financial Health: Care Redesign and Standardization, 49% of respondents cite improved utilization of clinical resources and 47% cite care standardization as being among the top three clinical activities that provided the highest dollar value in cost containment contributions this fiscal year.
Driving Down PPI Costs
A big part of reaping the financial benefits of standardization is getting a handle on physician preference item purchases, says Steve Cashton, director of purchasing and contracting at Boston-based Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School with 649 licensed beds and about $1 billion in annual net patient service revenue.
BIDMC cut roughly $9 million from its supply chain spend in 2013 and is on target to cut another $8.5 million in 2014. "We go where the money is, which a lot of the time is physician preference items like knees and hips," Cashton says. "We are not talking about small numbers. These are big opportunities."
Through its clinical quality value analysis program, BIDMC looks at the overall value of each supply it purchases, factoring both clinical outcomes and cost into the equation. Cashton and his team are never satisfied with pricing, however, and always push for a lower unit cost, he says, even when the CQVA process determines the value is strong.
"There are always opportunities to save more money, so we'll go back and do a request for proposal in a particular area," Cashton says, citing a recent example where BIDMC saved $1.2 million on a med-surg product by putting the vendor through the bidding process again.
"By making them run the race, we got better pricing, even though we ended up staying with the same vendor."
One of the main reasons BIDMC has been successful in reducing supply chain spending through the CQVA program is because it is an organization-wide initiative that receives senior executive support, including from the CEO and CFO, Cashton says.
"We've embedded the CQVA process throughout the organization so when people are thinking about a new product or project, they want to get us involved," he says. "I've been at organizations where supply chain folks had to interject themselves, and here people come to us right from the start so it's not a battle to get involved."
Jeff Baiocco, chief financial officer at Eastern Idaho Regional Medical Center, a 312-staffed-bed institution in Idaho Falls, says that as part of healthcare giant Hospital Corporation of America, his organization has achieved substantial supply chain savings.
"Supply chain is an area where we benefit from being part of HCA because we can leverage economies of scale on pricing. There is nothing new about that," he says.
What is new at EIRMC is the emphasis on digging more deeply for cost savings by working to standardize its PPI purchasing.
Find Deeper Healthcare Supply Chain Savings
"The challenge we have is that we've already run a lot of the easy costs out of the system through bulk purchasing," Baiocco says. "Standardization is the new challenge as we look at trying to reduce variability so we are not stocking five or six items, but are instead stocking two."
Standardizing PPI is often more easily said than done because physicians generally have strong opinions about the products they use, Baiocco acknowledges, adding that any progress that can be made in this area is a step in the right direction.
"If we can eliminate even one item, it allows us to capture some of the purchasing power that is left to gain. Physician preference item management is really a big part of where we are focusing our attention," he says.
Setting a Price Cap
Beth Ward, chief financial officer at Dallas-based University Hospital UT Southwestern, which has an annual operating budget of about $2 billion, says that rather than limit the number of vendors, her organization has done a value analysis of each product and set a maximum price it is willing to pay for individual items.
"As an example of how the value analysis process works, we will pay so much for total joints, and anybody that wants to play will play," she says. "We haven't limited the vendors, but a lot of them have dropped out because they won't meet our pricing."
A physician who wants to continue to use a particular product that doesn't pass muster in the value analysis process has to negotiate with the vendor to cut the price, Ward adds.
"If the providers want to bring in that product, they will work with the vendors to get the pricing down, and that has happened in several instances," she says. "No product is allowed into the system without going through the value analysis process."