Finding buried treasure

May 1, 2011

Overcoming the barriers to better spend management in healthcare.

Krista Fuller

U.S. healthcare systems today find themselves in an unenviable position. According to the Healthcare Financial Management Association (HFMA), the cost of supplies is growing at 23 percent annually, while reimbursements and revenues are flat. Health reform makes the issue even more drastic. Medicare and disproportionate share hospital payments are expected to be reduced by $121.5 billion and $36.1 billion, respectively, on an annual basis. Any other market-driven industry would be out of business facing this imbalance, but healthcare has no such luxury. That means that today it is vital to control supply costs by maintaining accurate purchasing data and significantly improving contract compliance. Unfortunately, the norm for healthcare organizations is less than 50 percent compliance with negotiated contracts for purchased items.

The constant challenge of organizational spend visibility

Helping healthcare organizations spend money wisely requires first establishing a comprehensive view of how and where money is currently spent. Improving spending performance and supply-chain efficiency requires an analysis of past spending based on accurate data from across the health system — even the most challenging areas, such as the OR. Recently, technology solutions have emerged that deliver this kind of visibility accurately and consistently and enable organizations to dig deeper into the procurement process and develop a strategy around spending. Detailed, meaningful data allows hospital decision makers to develop a process that ensures savings.

Once healthcare organizations have analyzed and classified their spend data, they can develop a strategy for improving purchasing efficiency, improving contract pricing and terms and, ultimately, compliance. However, turning savings potential into savings reality is more complex in healthcare because of the competing interests and hierarchies inherent to most organizations. Patients, physicians, administrators and insurers all have distinct interests at stake that exacerbate the challenge of cost containment.

Breaking the shackles of
physician preference items

Keeping the entire purchasing organization in compliance with existing negotiated contracts on every purchase is one of the most difficult challenges. When you add clinical personnel into the mix, things can get downright messy.

The most costly goods — such items as implants and medical devices — are often purchased by physicians directly from vendors, one at a time, rather than through a strategic sourcing initiative. These are called physician preference items (PPIs) and virtually all of this purchasing exists outside more organized purchasing channels. In fact, up to 61 percent1 of a hospital's total supply expenditures is for items such as hip implants and stents, which physicians like to select themselves. These PPIs are typically the most expensive supplies in a hospital's budget.

As businesses, hospitals recognize that when they can choose among competing products, they may have opportunities to negotiate better prices. However, hospitals' efforts to help negotiate the purchase of these expensive items may not be welcomed by either the physician or the vendor. The physician has clinical concerns regarding patient outcomes that are not influenced by the cost of the device or implant and, in many instances, individual vendors provide services necessary to the physician in terms of inventory management and training. Yet, the goals of reducing costs and providing quality care do not need to be mutually exclusive.

Gaining control of expenditures related to physician preference items is not a straightforward matter of hospitals' negotiating better purchasing contracts with suppliers and then dictating to physicians which devices they can use, but rather a process of determining how to achieve effective cost control while still offering choices that physicians consider clinically sound. Technology that provides spend visibility combined with contract management through a single platform can reduce the cost of physician preference items by providing visibility into the purchasing process and creating a framework for collaborative spending strategies based on open dialog. Forward-thinking hospitals and healthcare organizations are establishing committees that include physicians and purchasing administrators to determine if and how cost saving can be realized through contract management with preferred suppliers via a centralized e-procurement system.

The solution

To handle the volume and breadth of products needed by diverse users involves creating efficiencies around maintaining product data, automating the search for supplies and managing contract spend. Today's hospitals require an e-procurement partner that specializes in enterprise-wide contract compliance by supporting comprehensive, detailed contracts, large product lists and high-quality data. Solutions that enable more efficient maintenance of product content, standardization of item requests and enhanced user-search capabilities in a single electronic repository known as a Virtual Item Master are helping healthcare organizations to dramatically reduce costs.

A Virtual Item Master provides unified product and pricing information for spending visibility and control.
A traditional ERP item master is incomplete and requires expensive data management and scrubbing, whereas a Virtual Item Master can combine a traditional item master with GPO contracts, PPI contracts, self-managed contracts, service contracts and non-contracted goods. A Virtual Item Master also provides a simple, intuitive user experience that promotes contract compliance for every purchaser whether they are hospital buyers, clinicians or materials managers. By standardizing and simplifying the ordering process for all items, combining price validation with workflow, and gathering robust spend data healthcare, organizations are able to uncover
buried treasure.

1. Montgomery, Kathleen; Schneller, Eugene S. Hospitals Strategies for Orchestrating Selection of Physician Preference Items. W.P. Carey Healthcare Supply Chain Consortium, W.P. Carey School of Business, Arizona State University.

Krista Fuller is director of product marketing
for SciQuest.
For more information
on SciQuest solutions:

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