The newly enacted healthcare reform law creates tremendous opportunities to transform the quality and cost-effectiveness of patient care. But the transformation won’t be easy. At the same time that hospitals and health systems need to make improvements and usher in changes, they face payment reforms that will put an estimated 15 percent of all inpatient Medicare reimbursement at risk.
Given this reality, it is critical that healthcare providers start working now to drive costs out of the system so they are better able to weather the coming storm.
There’s a saying in healthcare that with so many fixed costs baked into the system, the only opportunities for cost reductions come from staff and stuff. Eliminating clinical staff central to delivering quality care is the choice of last resort for any hospital CEO. That leaves us with stuff.
Reducing supply expenses doesn’t necessarily mean buying less. In fact, because these supplies are needed for patient care, buying less often isn’t an option. But it is possible to drive down the price points.
One option for securing the best possible pricing is through volume-based committed buy programs offered by most group purchasing organizations (GPOs). Much like a customer loyalty program provided by most retailers, committed buy programs secure deep discounts for the best customers. Although participation isn’t mandatory, those that do take advantage of the program can realize significant, volume-based discounts.
Take just one example from the Premier healthcare alliance’s ASCEND program. In the program, hospitals choose to commit a portion of their purchasing volume to access specially negotiated, best-price contracts for a range of products, minus physician preference items.
In committing volume, participants were able to reduce their supply expenses by as much as 24 percent for commonly-used items such as patient bedside products, can liners, chart paper and obstetrical monitoring devices in the first four months of the program. A year later, some participants in the program have achieved as much as 37 percent savings in certain categories across the product portfolio.
But reducing supply costs is about far more than just getting the best price. It’s also about standardizing, simplifying and streamlining purchasing; weeding out overuse; and eliminating unnecessary variation. The problem is that finding these opportunities for increased efficiency is the proverbial needle in the haystack, particularly considering that those who order supplies don’t always know everything about how the products are used.
The answer here is data. Hospitals can and should map utilization patterns for specific clinical areas, particularly those that generate either high-volume or high costs. Examining the results, hospitals can pinpoint anomalies and outliers within their system and investigate further by reviewing contract terms and conditions, inventory and pricing.
While this exercise will get most hospitals in a better position than they were before, the real opportunities come when hospitals have a forum to collaborate and compare best practices with one another. Looking within your four walls will help you standardize and streamline in your system, but how does your overall utilization compare with other, similar hospitals? Are there hidden variations within your system that comparisons against others would reveal?
When hospitals have a forum to compare their supply costs and utilization patterns with similarly-sized hospitals across the country, it is possible to gain a far more complete picture. For instance, hospitals in the ASCEND program participate in “climbing sessions” that target specific products to identify opportunities for greater efficiency and cost effectiveness. In one such session, the participants focused on can liners, identifying those in the program were getting the very best prices and how they were able to achieve the result. In doing so, best practices for sourcing can liners can be shared with all the participating hospitals. If followed, it’s estimated that ASCEND members could achieve $5.5 million in savings by standardizing to the ASCEND awarded supplier and addressing proper utilization.
These are exactly the kinds of cost saving opportunities that will be critical for hospitals under a reform environment. Committed buy and collaborative purchasing programs have the power to reduce the overall spend, increase efficiencies and keep scarce resources where they belong – devoted to safe, quality patient care.
David Christensen is the CEO of Prairie Health Ventures, a regional buying group of 48 hospitals and 670 non-acute care providers in Nebraska, Iowa and Kansas.