The Business of Healthcare: The Science Behind VAC Product Adoption
Introduction The rising cost and variable quality of healthcare delivery in the U.S. has become the subject of great debate among policymakers, providers, payors, and patients. Efforts among some healthcare organizations have shown that there are effective methods to achieve cost savings in the supply chain process, while protecting or improving quality of care for patients. Healthcare reform has motivated many in the healthcare community to evaluate every method possible to prepare for the certainty of further government oversight and reduced reimbursement payments. Hospitals are on the front line of what is shaping up to be a long and difficult process to implement new methods to control costs and change decade old behaviors among healthcare providers. This document will provide you with a snapshot of today’s successful cost management activities in the value analysis environment among supply chain managers, clinicians and other important Value Analysis Committee (VAC) members.
Value Analysis Committee: A systematic and objective evaluation of the value of a good or service, focusing on an analysis of function relative to the cost of manufacturing or providing the item or service. Value analysis provides insight into the inherent worth of the final good or service, possibly altering specification and quality requirements that could reduce costs without impairing functional suitability. Source: Glossary of Key Purchasing Terms (2nd Edition), National Association of Purchasing Management
This paper is the third installment of a series of publications, resulted from data and interviews conducted by Blueprint, a healthcare research and practice solutions organization, that provide key insights into the effective formation and processes related to the operation of Value Analysis Committees. The previous two papers focused on the formation of the VAC and the evolving relationships between surgeons and supply chain management. This edition will provide you with key insights and trends related to new product adoption decision-making processes and the details behind how products are evaluated.
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Ideal Departmental Representation in a VAC • • • • • • • • •
Administration Materials Management Purchasing Nursing Medical Staff Infection Control Clinical Engineering Staff Training & Development Information Technology
Duties and Responsibilities: • • • • •
Evaluation and approval of existing/requested products Evaluation and approval of new/improved technologies Product sourcing enhancements (Enterprise Resource Planning, electronic systems) Communicate changes in product and services Product Standardization o o
• •
Promote intra-departmental knowledge and understanding with regard to product standardization (solving similar issues, “reinventing the wheel” resolutions) Reduced expenses in education, training, utilization, products, pricing
Monitor and benchmark progress Communicate all findings/request approvals and/or prepare reports to appropriate hospital/clinical management
Methodology: We selected a group of professionals who participate in their organizations VAC and have either supply chain or clinical roles within their hospitals. These individuals acted as subject matter experts on various topics ranging from product performance analysis to post adoption performance monitoring. We identified key protocols and important trends and then validated that information with a quantitative survey to a broader group of healthcare professionals. In this paper we explore the many variables that influence the VAC decision-making committee, the external players involved and the dynamics between them such as the GPO and the hospital. We identify benchmarking tools and the methods used by successful healthcare organizations to select and negotiate with suppliers. Specifically, we cover four primary areas of the VAC new product adoption evaluation and decision making process: Product Performance Analysis Product Pricing and Utilization Analysis Compliance Metrics and Oversight Performance Monitoring: Post Adoption
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Our goal is to provide you with insights as to how the many healthcare supply chain and clinical professionals are partnering to balance the business of healthcare with the goal of improving quality care.
SNAPSHOT: The State of the Value Analysis Committee 2011 Spending on healthcare has consistently grown faster than the economy. Centers for Medicaid and Medicare projects that by 2018, healthcare spending will be over $4.3 trillion, or $13,100 per resident (up from $8,160 in 2009), and account for 20.3% of GDP.*
The U.S. devotes considerably more of its economy to health care than other developed countries including Canada, Germany, France, UK and Japan. * Source: Kaiser Family Foundation www.kff.org. last accessed, December 21, 2011.
Just over half of national spending goes towards hospital, physician and clinical services. With an 18 to 20 percent drop in government reimbursements projected in healthcare reform, acute and long-term care facilities can no longer depend on traditional revenue sources to help meet their fiscal goals. Value analysis has become an important strategic cost reduction tool for healthcare purchasing and supply professionals in long-term and acute care facilities.
Healthcare reform will ultimately force most community hospitals to either close or merge with other hospitals Strongly Disagree Disagree Neutral Agree Strongly Agree
0% Strongly Disagree
7.7% Disagree
34.6% Neutral
46.2% Agree
11.5%
%
5
10
Strongly Agree
15
20
25
Online Survey Conducted by Blueprint November 2011 (n=30).
3
30
35
40
45
Hospitals are feeling the pressure to retool their Value Analysis Committees to be a more effective instrument to combat cost escalation. Although the VAC has been around for several decades, its success as an effective means to manage costs has been negligible in many organizations. The reasons vary, but our previous research sited three significant shortcomings of the profile of a VAC that struggles with success: 1. The lack of collaboration between administration and clinical groups 2. The lack of VAC manpower resources 3. The inability to thread information sources to create a complete picture of the true costs across the hospital However, the persistent economic condition in the U.S. is ironically facilitating behavioral change that was unimaginable just a decade ago. Hospitals are under pressure from high unemployment and changes from the healthcare overhaul laws and have been buying out doctors’ practices, a move that more closely aligns doctors with budget-focused hospital administrators and financial discipline. Supply Chain Managers are now fostering collaboration with surgeons by being more transparent on the cost of doing business and helping the surgeon realize the potential implications of adopting a new product. Institutions are becoming more transparent, sharing the fiscal realities of product choices with doctors and explaining the value and importance of compliance. Most Supply Chain Managers we interviewed expressed a commitment to provide the physician with product choices and have made special accommodations that deviate from the traditional GPO single contract arrangement. Most agreed that successful hospitals are clinically driven supply chain organizations.
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A clear indication of VAC advancement among U.S. hospitals and the potential increase of C-Suite commitment in VAC manpower resource allocation is the huge influx of clinicians who are now seeking education and experience in supporting value analysis efforts at their respective hospitals. The Association of Healthcare Value Analysis Professionals shared the results of their organizations’ recent Maturation Survey. According to research conducted by AHVAP, 80% of AHVAP members report strong to very strong support for Value Analysis roles by C-Suite. These observations could be indicative of the national trend of more hospitals pursuing the establishment of a Value Analysis Committee as a method to identify the leaks in the system and start plugging them up, in order to balance their books.
4%
3%
AHVAP 2011 Years of Value Analysis Experience
2%
Under 5 6 to 10 11 to 15 16 to 20 21 to 25 26 to 30 Over 30
10%
53% 28%
Online Survey Conducted by Blueprint November 2011 (n=30). AHVAPs contribution to content development of this white paper does not suggest nor represent any professional relationship with Covidien.
The lack of integration of disparate data sources within the hospital, such as clinical, financial, payor and product costs continue to undermine the VAC in optimizing cost management. The emphasis and ability to conduct high-level analytics (i.e. margin analysis, utilization, comparative analysis, etc.) are essential to conduct effective analysis and achieve true on-going cost savings by the VAC. In 2011, we saw the once perceived conflict between the objectives of the healthcare providers and the objectives of the business of healthcare converge into a cooperative, focused effort to help ensure the financial viability of the hospital, while protecting the quality of care for the patient.
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Improving the Business of Healthcare: Top Down Budget Planning Effective organizations collaborate. That is easier said than done considering the task of managing the organizational and human behaviors that have always made collaboration so difficult. Regardless of the hospital, organizations that are successful at managing costs follow two basic disciplines; they collaborate among the various administrative and clinical groups and have an effective, structured process. Those two characteristics are the foundation of a successful VAC and the practice of which starts at the very highest level of the organization. When considering how an organization measures success, one of the primary components is savings. Each year successful organizations meet to discuss the financial goals of the organization for the upcoming year. Many establish a fixed cost reduction objective based on projected inflationary or anticipated reductions in reimbursement. Present at these discussions are typically the VP of Supply Chain Management, VP of Finance and members of C-Suite. The GPO typically supports the process by providing insight into market conditions, anticipated price increases, projections on inflation or other factors that could potentially impact costs. They provide this information by each product category. Once the total savings price is established, the Supply Chain Management group goes through each VAC to see what is a realistic savings per Value Analysis Committee. For example, the pharmaceutical VAC may be asked to shave off $1M in savings. The Supply Chain Managers try to establish a fair share environment, being careful not to be unreasonable or ask for cost cutting from a VAC that can’t make it happen.
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Value of Bending the Cost Curve (in $ Billions) $21.1
$2.2 $17.8
$18.4
$18.9
$16.4 $14.9 $12.8
FY 2004
$13.0 Actual Aggregate Hospital Expenses Projected at 2004 - 2008 Trend Actual Expense After Cost Control
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
Source: Massachusetts Hospital Association (MHA) report, Hospital Costs in Context: A Transparent View of the Cost of Care, April, 2010
The goal is to offset the inflationary costs to zero, but some Supply Chain Managers achieve more giving perhaps millions back in savings to the organization. Steve Patton, Assistant VP in Supply Chain Management for Alexian Brothers Health Systems in Illinois, has been able to meet or exceed the annual savings goal each year for the last three years. “Although we are focused on savings, not organizational profitability, the millions of dollars we achieve in savings affords the organization the ability to invest in such things as technology, marketing and improved patient care,” said Patton.
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Product Performance Analysis Evaluation of product performance has clear advantages and consists primarily of a formal internal evaluation and supplemented with external validation among credible hospital groups. The evaluation of a product generally requires 90 to 120 days from start to finish. During this period, the VAC establishes the anticipated clinical and economic outcomes and measurement parameters. The Value Analysis Committee’s motivation to formally assess a new product will depend on the origins of the evaluation itself. For example, is it an evaluation request by a physician group or driven by the Supply Chain Manager to adopt a less expensive product? 4%
Request by Physician/end-user or Medical Department Profitability of a procedure Cost Reductions/savings Community Standards of care-technological demands Recalls or FDA alert Chart
15% 33% 23% 25%
Competition between hospitals is accelerating purchasing new equipment and the pursuit of procedural centers of excellence to help improve profitability and attract patients Strongly Disagree Disagree Neutral Agree Strongly Agree
0% Strongly Disagree
0% Disagree
7.7% Neutral
73.1% Agree
19.2%
%
10
Strongly Agree
20
30
40
50
Online Survey Conducted by Blueprint November 2011 (n=30).
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60
70
80
90
The effort to evaluate a product’s use in a clinical environment serves multiple VAC objectives. In many cases, it is a means to expose surgeons and OR staff to a new product in an attempt to get clinicians comfortable with the product before making the switch. In these cases, the Supply Chain Management team has already completed the product pricing and cost savings analysis. The evaluation of new technology products is more involved and requires additional preparation and the establishment of clearly defined measurements. Many hospitals will establish the framework of the evaluation to facilitate procedural margin contribution analysis. Did the product reduce operating room and/or surgeon time? Will use of this product eliminate other OR costs? What is the anticipated product utilization per surgery? These are some of the financial metrics that are captured for new product evaluations. GPO’s can play a large part in product evaluations. When gathering product information, the hospital may tap into the collective experiences of peers who have common membership in the GPO. John Rafferty, Director of Supply Chain at Wyoming Valley Healthcare Systems looks at Centers of Excellence for benchmarking and has used clinical committees at various GPO’s to identify best clinical practices and products used. Facilitated by the GPO, the information and access to other hospital VAC save substantial time and energy and provide statistically relevant data rather than anecdotal evidence. Many GPO’s have collected extensive data through their own due diligence, from the vendors and other outside sources.
Measuring How Products Promote Patient Care Tracking and measuring the clinical implications of a new product’s use remains a more difficult task for many hospitals. This is an area where most hospitals agree there is room for improvement. The right tools for tracking are not available so the data is very selective and based on qualitative discussions with clinicians and other end-users. Likes and dislikes of a product seem to be based on individual case experiences rather than statistically based data. Assessments are completed 30, 60 or 90 days out depending on the product. Often, quantitative analysis is provided by the supplier, but difficult to validate. Some key measurements related to safety, efficacy and promoting patient care include: • • • • • •
Time in OR Average length of stay Infection rates Product failure due to manufacturer role Improvement in outcomes Readmission rates
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A Survival Guide for Successful Hospitals Imperative # 1: Proactively Manage Finances • • • • • •
Model the financial consequences of reform Forecast frequently—at least quarterly, better monthly Monthly monitoring or on demand benchmarking key financial measures Understand cost structures and accurately identify opportunities for improvement Translate cost data into operational initiatives tailored to a changing payor mix Actively collaborate with payors to move toward shared goals
Imperative #2: Commit to Quality •
Hospitals must prepare for increased scrutiny by the public and they will need to raise the bar of quality and accountability of clinical, financial and patient satisfaction outcomes
Imperative #3: Foster a collaborative, transparent culture • • • • •
Hospitals must hire skilled leadership with high standards of integrity and credibility Employee retention and satisfaction strategies will need to be implemented in order to minimize staff turnover Benchmark hospital performance through standard definitions and measurements to peer facilities Optimize the value of innovation and new technologies while avoiding me-too or up-sell products Hospitals need to understand and be aware of what other competitors are doing in both local and national markets
Imperative #4: Actively Engage Your Medical Community •
Hospitals need to promote cooperation and trust with physicians and assure them that they share the same commitment to high quality patient care
Imperative #5: Recruit, Educate, and Retain Proactive Board •
Maintaining a viable hospital under health care reform demands that boards engage in ways most have never had to in the past
Source: INGENIX CONSULTING Five Imperatives for Healthy Hospitals Under Health Care Reform
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The following are examples of product evaluations provided by health care professionals that participated in our research:
Case Study #1: Suture Conversion Objective: Maximize savings by switching to a comparative product that offered the hospital substantial savings. Overview: Evaluation goal was to give physicians the opportunity to trial the new suture and get their buy-in to transition from a suture they preferred and had an emotional attachment. The decision to convert had already been made by the C-Suite prior to the product evaluation. Methodology: Evaluation: Focused on the larger facilities within the purchasing group and set up a 90 day surgeon evaluation period. The supplier provided generous in-service training. Post evaluation indicators included surgeon reported satisfaction. Results: Surgeons and other clinical members agreed there was no appreciable difference in the performance of evaluated suture and supported the VAC in the decision to switch products. Achieved significant savings.
Case Study #2: New Product-Silver Coated Foley Catheters Objective: Validate supplier new product claims Overview: Reputable supplier suggested use of a new silver coated catheter would result in lower infection rates. Supplier was willing to keep the new product price at parity with their existing catheter to remove the price barrier during the product evaluation. Methodology: 90 day tracking of infections among patients where silver coating catheter was used. Used traditional catheter as control group. Results: Although a decrease in infection was observed, VAC could not validate direct link to use of new product. Rather, other issues were identified and eliminated, resulting in lower infections among the use of the new product and the control group.
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Case Study #3: New Technology Product - Heart Valve Objective: Identify alternative procedure to poor efficacy heart valve patch cutting Overview: Previous surgical procedure included the surgeon cutting the heart valve patch, which was not producing the desired outcomes and required more surgeon time than practical. A new product had a customized solution that did not require manual cutting. The product price however was significantly higher. Methodology: 90-120 day new heart valve product trial with close surgeon involvement. Outcome: Shorter operating room time and better patient outcomes were observed during the evaluation. In addition, a drop in patient readmission was observed. Although adoption included increased costs, product was adopted to improve patient care and minimize further risk.
Case Study #4: New Technology Product - Anesthesia Pain Pump Objective: Assess cost benefits of surgeon requested Physician Preference Item (PPI) Overview: Shoulder surgeons requested PPI based on research literature that claimed improved quality of care for the patients and considered it the local standard of care as was already in use by neighboring hospitals. Methodology: Limited evaluation of two devices from two vendors. Reimbursement specialist was also involved. Outcome: In reviewing the reimbursement, it was confirmed that there was capitated pricing for the procedure and the use of the peripheral pain pump would not result in extra reimbursement. The New Technology VAC determined that the use of the peripheral pain pump resulted in improved patient outcomes since there was better patient participation in the early stages of rehabilitation. The decision was made to adopt this product for the benefit of the patient despite the additional non-reimbursed expense.
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In general, there are three primary methods a hospital VAC may try to reduce costs or improve profitability related to new product adoptions: 1. Price optimization: The process to benchmark, identify and negotiate optimal supplier pricing that will offset increases in inflation. 2. Maximizing procedural margin contribution: The on-going evaluation and assessment of procedural profitability and the opportunity to further reduce costs in the OR without undermining patient quality. Process includes on-going assessment of product utilization in the OR environment. 3. Optimizing product compliance: A method to achieve cost reduction by tightly controlling and reporting on GPO contract compliance.
Price Optimization Determining and negotiating product pricing are major tasks for the Supply Chain Manager and the Value Analysis Committee. The ability to successfully achieve cost savings through diligence in price benchmarking is a complex and time-consuming process. Many hospitals simply do not have the internal staff to conduct a thorough price analysis and either conduct limited analysis internally or outsource some or all of the process to third party service provides or their GPO partner. Organizations fortunate enough to have the internal staff conduct sophisticated analysis, which includes primary and secondary research, market analysis, GPO evaluations, price benchmarking, and impact analysis to procedural margin contributions.
In what capacity does your organization use an external GPO to assist in new product adoption, evaluation and decision making? We do not use an external GPO for new product adoption Conducts complete product evaluation and representation Provides us with price analysis services Provides references to verify product performance Provides us with price benchmarking support
11.5%
30.8%
53.8%
42.3%
80.3%
%
10
20
30
40
50
Online Survey Conducted by Blueprint November 2011 (n=30).
13
60
70
80
90
When hospitals evaluate a product, the VAC depends on information from a variety of sources. Nurses and technicians provide a wealth of experience and knowledge. Frequently, they are the end-users making their feedback crucial. There are various external resources available as well to help gain an understanding of the fair market price of products by region. Many hospitals start the process by referring to the federal registry, which is a database made available by Center for Medicare & Medicaid (CMS) and provides information on procedural and product use reimbursement. This information is of significant importance to the hospital and greatly influences the price discussions with suppliers. Continued downward pressure on reimbursement rates requires the Supply Chain Manager to maintain an intimate knowledge of those rates and often contacts reimbursement government representatives directly to defend or argue for an increase in reimbursement based on patient care, outcomes and financial realities.
“When a supplier’s sales representative pitches a new product claiming it is better or unique, it is important to point out the impact of its reimbursement rate, even if there is little to no change.” There are a number of other external resources used to help objectively evaluate and benchmark products and procedures: Food and Drug Administration (FDA): The FDA provides online resources and a database of product performance evaluations for hospitals to reference when considering adoption of a new medical device product. Emergency Care Research Institute (ECRI): Provides non-biased information to the healthcare industry. It is considered the “Consumer Report” of healthcare products. Hospitals pay an annual fee for product pricing guidelines, fair market analyses, product performance evaluations and benchmarking. MDBuyLine: Provides similar data for capital equipment and provides hospitals with the insight and support services to help optimize medical technology investments and assist in price benchmarking of technology. SG2: Offers advanced analytics, measureable business intelligence, education and publications to improve healthcare delivery and organizational performance.
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Many institutions may also solicit the manufacturer for product statistics. However, that information is sometimes greeted with some skepticism and a lot of due diligence has to be put forth on the part of the hospitals to validate. Hospitals also access information from their GPO’s, which collect data from all their members and can provide price-benchmarking studies in most categories. Many GPO’s also have consulting arms that healthcare organizations can access during the product evaluation process. Some GPO’s offer web based tools that give hospitals access to contract catalogs and price management systems, which support the price benchmarking, contracting and compliance needs of the hospital.
Weighting assigned to each new product adoption criteria
15% 25%
Financial Operational impact Clinical effectiveness Market adoption Strategy
15%
20%
25%
Online Survey Conducted by Blueprint November 2011 (n=30).
Steve Patton is Assistant Vice President, Purchasing Services, Purchasing Services at Alexian Brothers Health System (ABHS) and is Six Sigma trained. All negotiations, pricing and execution of purchase orders go through him before being handed over to the organization’s distribution group. He deploys Define, Measure, Analyze, Improve, Control (DMAIC) strategy with his team, which includes two, master educated, RNs as Clinical Value Analysis Managers and one Financial Analyst. Alexian Brothers Health System uses Premier as their hospital GPO and their relationship is strong. Steve meets with the Premier Representative every week to maintain transparency in the relationship.
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Under these ideal conditions, Alexian Brother Health System (ABHS) has been able to establish a process flow for each new product adoption evaluation and decision and take strong positions with suppliers when negotiating price. One of its primary supplier negotiation tactics is called All Play methodology. In this approach, each Value Analysis Committee is asked to establish a standardized price for each product being considered. When establishing a standardized price, ABHS does its homework. It conducts research using the resources mentioned above and looks at each supplier individually. ABHS then puts product buckets together and assigns suppliers one price for the four or five primary components. The VACs are then asked to narrow down and select the top suppliers in that particular product line. For example, there are roughly one hundred and eighty spine product manufacturers. ABHS will narrow the playing field down to fifteen based on market share, reputation and other factors. Then ABHS will issue a Request for Agreement (RFA) with an established standardized price per unit. The selected suppliers must agree to the price and, although there is some room for negotiating during the process, if the supplier is unwilling to agree to the price, they are locked out of the process and the hospital for the duration of the agreement. All other suppliers who did not receive the RFA are locked out as well for the duration of the agreement, which is usually two years. The All Player methodology may seem to undermine supplier collaboration, but Mr. Patton notes he will spend many hours in discussions with each sales representative negotiating and facilitating how they, and as a team, will put the program together. According to Mr. Patton, the relationship is very collaborative and constructive in nature.
“Some of the best relationships I have formed with suppliers were formed during the PPI evaluations and negotiation process.” The All Player methodology may not be the ideal approach if you are looking to maximize cost savings, but it does yield significant savings, while providing the physician with product selection. Alexian Brothers Health Systems wanted to avoid forcing the clinical teams to commit to one product because it saved the most money. They wanted the surgeon to have choices and recognize their individual needs. Another savings method used by ABHS is using the Construct methodology. This process includes the grouping of common components to establish a single price point. This is typical in orthopedic surgery where a procedure may require the use of four or five primary components offered by the same manufacturer. A kit or bundle pricing is negotiated with the supplier with the savings being greater than if the products were negotiated separately.
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Price benchmarking
● Executive engagement and participation ● Physician engagement and participation ●
Stakeholder engagement and participation
●
Goal alignment and linkage to strategy/vision
●
Structured process to secure data
● Project management to define timelines ●
Use of benchmarking tools and information
● Tool(s) to trend, track and document outcome ● Systematic process to communicate results to all levels of organization
● Access to staff with deep analytical and clinical skill sets These are just some examples of how the hospital has leveraged market intelligence and process standardization to gain savings and reduce risk. Edmond Hardin, Vice President, Provider Solutions at Mercy Health (formerly Sisters of Mercy Health System) notes their organizations willingness to take an honest look at themselves and make behavioral changes to reduce risk is important.
“I see an increase in accountability through process and tracking. More importantly, I am observing a greater awareness across our teams that if we do not change, someone else will do it for us and we may not like the outcome.” Assessing New Technologies Most hospitals differentiate new technology introductions from standard products evaluations. Typically, a separate new technology Value Analysis Committee is dedicated to this effort. Determining the value and cost of a new technology has many more considerations than the evaluation of a replacement product. Typically, in addition to the product evaluation process, a full pro forma will be developed to assess the financial impact for the hospital. Efficacy, reimbursement, patient demand, surgeon satisfaction, patient outcomes, clinical performance, and operational impact are many of the factors measured.
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Pre-Purchase Check List
1. PRO-FORMA REVIEW —
a. Volume Projections, Lease Costs, Disposible Costs, Other
2. PHYSICIAN COMMITMENTS AND SIGN-OFFS BY SPECIALITY a. Urology b. OB/GYN c. Cardiac Surgery d. General Surgery
3. MARKETING EFFORTS — a. Hospital and Vendor Supported Factor on New Volume
4. IDENTIFIED COMPETITORS/TARGETED AREAS
a. Measuring Cases Leaving Catchment Area
POST-PURCHASE ANALYSIS 1. VOLUME MEASUREMENT — How Many Additional Cases Year-to-Year Comparison
2. VALIDATE ACTUAL PHYSICIAN VOLUMES BY SPECIALITY 3. REVIEW OF REVENUE/EXPENSE BY SERVICE LINE 4. INCREASED MARKETING EFFORTS 5. REVIEWED PATIENT OUTCOMES 6. REVIEWED VOLUME OF PATIENTS LEAVING OUR CATCHMENT AREAS 7. CONTINUE TO RECRUIT PHYSICIANS 8. IDENTIFY BARRIERS TO PHYSICIANS TO PREVENT USAGE
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Just a decade ago, hospitals were less disciplined and more liberal allowing surgeons to bring in new products without conducting even a high level price evaluation, only to find they lost their shirts on the procedure two or three months later. Just five years ago, surgeons were being confronted about driving business to their preferred suppliers. That behavior has been rapidly declining in the healthcare industry and rare in hospitals with advanced Value Analysis Committees. More important than the processes and oversight that would prohibit such behavior, surgeons now understand the financial implications to the hospital and are much more likely to collaborate upfront with the VAC.
Perceptions of Change: Forming Alliances with Suppliers Suppliers make genuine efforts to help us improve quality of care and manage costs Strongly Disagree Disagree Neutral Agree Strongly Agree
0% Strongly Disagree
23.3% Disagree
30% Neutral
43.3% Agree
6.7% Strongly Agree
%
5
10
15
20
25
30
35
40
45
Online Survey Conducted by Blueprint November 2011 (n=30).
Healthcare professionals have noted a growing trend by suppliers to support hospital efforts during the new product evaluation and adoption process.
“It is no longer the tail wagging the dog; there are more partnerships now with suppliers than ever before.”
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The price negotiation process for hospitals with a more advanced Value Analysis Committee is much easier than hospitals that do not have the resources, market intelligence or processes in place. One participant is quoted as saying, “Many hospitals pay what they do because they don’t truly understand costs. They could be paying 75% of the cost of what you get reimbursed and not know it.” Collaboration between the manufacturers and hospitals has greatly improved as many manufacturer’s sales teams have acknowledged the industry shift in cost management and modified their working relationships and process to be more in line with the hospitals product introduction procedures and information needs. However, manufacturer price transparency still remains elusive as hospitals continue to attempt cost savings optimization from within the hospital and the distribution channel.
“We are trying to eliminate our own dysfunctional behavior, because it leads to variability and variability leads to increased costs.” Procedural Margin Contribution and Product Utilization The determination and tracking of procedural margin contribution is primarily a function of the finance department. During the product evaluation phase, infomation is collected to support on-going procedural margin contribution analysis such as product utilization, reductions or increases in surgery time, incidence of infection and impact to procedure duration. The analysis is less a function of the VAC, but instead a parameter that the VAC follows when evaluating a product. Surgeon practices, payor mix, the penetration of managed care, and negotiated contracts all have an impact on individual hospital margins. Mature hospitals typically have the process and means to track change in product price or utilization and can identify the impact to the margin contribution of that procedure. The impact of a surgical products’ price on the procedural margin is ideally tracked and made available to the VAC during the evaluation process. Often, mature hospitals develop preference cards for each surgery and come up with a cost of the procedure per surgeon. Alexian Brother Hospital System is advanced in tracking contribution margin to the point that they know which surgeons are aligned with a specific vendor and can compare contribution margin per case by surgeon and vendor. Variations in surgeon technique often impact the number of products used in a procedure which can also be identified using this process.
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Hospital cost savings initiatives Contracting directly with suppliers Strictly enforcing product compliance and utilization Engaging in a parent/sister GPO relationship Establishing an internal GPO service Establishing an internal supply chain system Acquiring procedural margin contribution tracking software Improving inventory management Consolidating which products we keep inventory Merging with another hospital system Adding staff resources to improve our price analysis Acquiring product utilization software Changing our GPO affiliation
46.2% 53.8% 3.8% 0.0% 15.4% 11.5%
80.8% 66.4% 3.8% 30.8% 19.2% Online Survey Conducted by Blueprint November 2011 (n=30).
42.3% %
10
20
30
40
50
60
70
80
90
“Some hospitals have no idea how the price of a product impacts the procedural margin contribution. It is hit or miss, losing money in one procedure, but making it up in another.” However, many hospitals and surgical services have only crude cost-accounting systems. Hospitals typically do not have enough information to make appropriate and advantageous strategic decisions, giving payors a clear information advantage. As the financial situation becomes more precarious, this information becomes increasingly more important. In our own internal survey, 50% of healthcare professionals responded that their new product adoption decisions are not tied into the procedural margin contribution numbers. The resource-based relative value system (RBRVS) was instituted as Medicare set out to contain increasing costs in the healthcare system. However, several academic institutions have demonstrated that the system reimburses too little, such that hospitals and practices may be losing money by performing certain types of procedures. The RBRVS system was instituted with the goal of containing costs, but the calibration was not intended to reimburse below costs.
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Costs continue to increase and reimbursement remains inadequate. Although many academic medical centers and hospitals continue to focus on cost containment at a macro level, many believe there has been inadequate investigation into the relationship between hospital margins, clinical practices and the impact to patient quality of care.
Product Compliance Achieving cost reductions by tightly controlling and reporting on GPO contract compliance has been a long-standing practice among many hospitals. However, a key factor of whether a hospital will drive compliance as a primary means to achieve cost savings is often very much dependent on their GPO partner. Some GPOs are more focused on the contract compliance component as a means to drive down supplier pricing and provide rebate incentives. Their volume price incentives motivate the hospitals to drive compliance among their clinical staff and keep a keen eye on compliance adherence. According to John Rafferty, Director of Supply Chain Management, CMRP at Wyoming Valley Healthcare System, a multi-hospital system, 90% compliance is one of their primary goals. It is reported monthly. Product compliance will most often provide the hospital with the best in cost savings, but limit the clinical team in product choices. Some larger GPOs have so many national arrangements with suppliers that they have a limited means to be price competitive. Compliance adherence becomes less of a cost savings mechanism because the hospital won’t generate much in the way of tier volume discounts if compliance reaches even 100%. Instead, these GPO’s are more likely to permit multi-supplier contracts or allow member hospitals to contract directly with suppliers on certain product offerings. This type of GPO also gets more involved with hospital supply chain managers and clinicians from each hospital. They become truly integrated partners, supporting process improvement and improving clinical outcomes by sharing best practices across the GPO organization member base and providing business intelligence dashboard reports that go directly to the C-Suite. Post Adoption and Product Performance: Almost universally, the healthcare professionals we spoke to during this effort clearly expressed a need and desire to improve their organization’s ability to track post adoption success. Regardless of the hospital size or VAC sophistication, they have indicated that the weakest part of the chain is manifested in two areas: Product Performance: Although most hospitals will establish a post adoption 90 day product performance evaluation, many admit this is a mere formality and what they are really monitoring is whether there are any real negative events caused by the new product introduction. The objective has always been to validate the product performance and healthcare economic claims of a new product once it has been in the hospital for a period of time. However, workload, lack of
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resources and the need to track post adoption product performance over an extended time frame has conspired to virtually eliminate this final phase of a product adoption VAC initiative. Instead, many hospitals have taken a reactive approach and will only conduct post adoption evaluations if there appears to be an undesired clinical event such as an increase in infections. As a result, many hospitals never do validate the performance expectations of a new product that ultimately influenced their decision to adopt that product. Logistics and Distribution: Another almost universal observation from the healthcare community is the frequent failure to have the fruits of the VAC new product adoption labor realized in their logistic systems. Healthcare professionals mentioned the frequency of situations when a new contract, price or product introduction would be negotiated and approved, but never have their internal systems changed to reflect the new arrangement. Often, the team that participates in the new product evaluation is different from the department that is responsible for distribution and logistics coordination of the product. This presents big problems for the VAC and the Supply Chain Management teams. Frequently, cost savings are reported to the C-Suite when the VAC process concludes. The C-Suite will often immediately reflect the savings on their financial projections.
“Our C-Suite will count on the money you told them was being saved and immediately adjust their financial assumptions. If you don’t actually realize those savings because of a breakdown in execution, you must now make up that cost savings gap.” Conclusions The research conducted revealed a significant growth in the influence and success of the Value Analysis Committee in controlling costs and making prudent new product adoption decisions. It is clear that the approaching health care reform and the continued economic conditions have provided the motivation and focus for supply chain managers, clinicians, surgeons, manufacturers and the GPO industry to collaborate in an effort to achieve cost savings, while protecting patient care. A primary upcoming initiative for AHVAP is to meet the clinician’s market demand to be well-educated and specialized in the value analysis success model. We are creating a long term goal to create a value analysis certification program that will define practice standards at the national level to meet the need and help expand the success of individual hospital Value Analysis Committees across the healthcare community.
AHVAPs contribution to content development of this white paper does not suggest nor represent any professional relationship with Covidien.
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As Value Analysis Committees get more sophisticated, they continue to identify and zero in on processes they deem to be inefficient and costly. The process continues to evolve away from merely identifying where procedural category costs are high and slashing product choices. Instead, some hospitals are becoming more advanced in managing their data sources and providing a comparative data analysis against budget. Supply Chain Managers can identify the root causes of the real cost burdens and take prudent action with the support of their cross functional teams. Once a slow progression, the VAC has stepped up their tempo to achieve significant successes concerning topics including: improved surgeon relations; supplier transparency; departmental collaboration; innovations in business decision-making; partnership relations; and margin contribution analysis and oversight. While many healthcare professionals admit there is a long way to go and many barriers to overcome such as contending with disparate data sources, outdated inventory management systems and gaining executional excellence at the logistics level, there is clearly a sense of a shared cause and spirit of innovation that will ultimately help redefine the future of the business of healthcare.
We see an increase of collaboration between hospitals sharing product evaluations, performance, and pricing data Strongly Disagree Disagree Neutral Agree Strongly Agree
3.8% Strongly Disagree
7.7% Disagree
11.5% Neutral
69.2% Agree
7.7% Strongly Agree
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Online Survey Conducted by Blueprint November 2011 (n=30).
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This educational supply chain management white paper was produced and published by Covidien in cooperation with Blueprint Media, LLC. To download other VAC white papers, please visit www.covidien.com/vacleader. COVIDIEN, COVIDIEN with logo, Covidien logo and positive results for life are U.S. and/or internationally registered trademarks of Covidien AG. All other brands are trademarks of a Covidien company. © 2012 Covidien. 1.12 P120001
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