Seven Strategies to Solve Healthcare’s Cost Problem

Lee H. Perlman and Susan D. DeVore, for HealthLeaders Media, August 21, 2009

As the White House and Congress pursue comprehensive healthcare reform, one fact remains clear: the status quo is unsustainable and the growth of healthcare spending must be slowed.

From the perspective of the hospital supply chain, where many products and commodities are purchased every day, misaligned financial incentives discourage collaboration, efficiency, and improved quality. Gifts and financial incentives can result in marketing trumping sound science. Too often, insufficient evidence about what works best leads to using the latest and most expensive—but perhaps not the most clinically appropriate—new technologies. The result? Healthcare costs continue to soar with no parallel increase in quality.

It doesn't have to be this way. America's healthcare providers buy almost $350 billion in products annually through group purchasing organizations. A recent analysis by our organizations, using the Premier alliance's clinical and financial database, found that national health expenditures can be reduced by $317 billion over the next 10 years by giving GPOs additional tools to help members and other healthcare providers control their supply costs.

In a June 12 letter to President Obama, we proposed that these tools will allow us to eliminate inflationary cost increases for medical supplies and pharmaceuticals by creating a more competitive and transparent purchasing environment.

But what reforms will deliver on this promise? How will they be paid for? And what expenses can be eliminated while still allowing hospitals to deliver high-quality, affordable healthcare?

In virtually every other sector of our economy, supply prices decrease over time as innovative companies enter the market and compete to meet demand. But in many cases the cost of healthcare products has increased year after year—a pattern our nation can no longer afford.

Our analysis identified seven specific savings opportunities that could help strategic purchasing alliances reduce purchase prices and improve efficiency in the supply chain.

Improved alignment between physicians and hospitals
With better collaboration, hospitals and doctors can work together to better standardize practices, uses of medical supplies, and processes that could help hospitals reduce waste, costs, and unsafe behaviors. But today, physicians make the clinical treatment decisions while hospitals bear the costs. If hospitals could share the savings they realize as part of an effort to improve and standardize processes, analysis suggests savings of 2%-4% a year on high-cost cardiovascular, orthopedic, spine, and ophthalmic procedures, which could yield 10-year cumulative savings of up to $128 billion.


Implementation of unique device identification
The creation of a national unique device identification system is a large, critical piece to fully recognizing savings and improving patient safety. It is implausible that in 2009 there is no uniform bar coding system for medical devices, particularly since Congress directed the Food & Drug Administration to implement such a system nearly two years ago. We can track thousands of items, speed recalls, and efficiently manage the supply chain for a grocery store, but we can't do the same for medical devices in a hospital. If the FDA were to issue the regulations needed to automate supply management by developing a standard method to identify devices, we could improve efficiencies and patient safety. These improvements would generate $16 billion in annual savings, according to independent analysis from the Efficient Consumer Response study "Improving the Efficiency of the Healthcare Supply Chain."


Transparency in payments to physicians by manufacturers
Requiring manufacturers of drugs, devices and medical supplies to publicly report financial relationships with physicians would help expose payments that could create conflicts of interest. These conflicts can encourage inappropriate and more costly care, such as the greater use of more expensive branded drugs rather than equally effective generics.


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