Five Purchasing Trends Driving Significant Cost Reductions in Healthcare

March 8, 2016

This article originally appeared at on March 8, 2016. 

By Michael J. Alkire, Chief Operating Officer, Premier Inc.

$302.8 billion - that's the financial hit health systems have absorbed since enactment of the Affordable Care Act (ACA)1.

Call it the audacity of math, but the continuing financial pressures on health systems means that every year, double digit reductions need to be achieved. Below are five strategies that every health system can leverage to survive and thrive in this new financial reality.

The Shifting Sands of Payment Policy
The ACA unleashed value-based payment programs designed to wean providers off fee for service, and toward accountability for population health. Between value-based purchasing, ACOs, bundled payment and a new physician fee system that includes options for risk-based payment, it's clear the shift to population health is not a's a fact.

What's missing in this discussion is how this shift effects the supply chain. In most systems, purchasing is a decentralized activity. Even in a clinically integrated network, each partner operates different software systems for procurement, accounting, contract management and finance, creating blind spots across the continuum. This can seriously hamper product standardization efforts, volume buys for best-in-class pricing, as well as efforts to improve efficiency, adding unnecessary expense at a time when revenues are contingent upon realized savings.

Unifying systems for a holistic view of purchasing across the entire continuum is the paramount goal in this environment. By marrying all the functions associated with purchasing across the continuum on a single platform, materials managers can close gaps and generate the significant savings needed to succeed in the new world of payment reform and cost cuts.

Data, Data, Everywhere!
Almost all group purchasing organizations (GPOs) offer great prices for contracted supplies. But the next frontier is getting to a price point of zero, avoiding any purchases unless they yield a better clinical outcome at a better cost. Today's reality requires achieving both. And the dollars at stake are huge. As a nation, we spend an estimated $700 billion each year on healthcare that has no effect on outcomes2. That's enough to buy every U.S. citizen a 60-inch HDTV each year.

While we know that overuse is expensive and undesirable, it can be hard to spot. To find it, providers need comprehensive, longitudinal data on supply use and associated clinical outcomes, and the ability to compare that information with like organizations to pinpoint which drugs, procedures and supplies are being used to no avail. They also need to identify which departments and individuals are inappropriately using in order to target change. And they need data to automate processes so the desired outcome is hard wired into the system, and a non-compliant action becomes the anomaly.

Such information exists, but health systems are finding that the work of getting to zero requires a supply chain partner that can not only provide comparative data access, but parse it in a way that's targeted, meaningful, specific and actionable. In other words, it's not enough to just turn the data loose, health systems need guidance determining what it means and how to actually implement the savings identified.

It's My Perogative – Managing the World of Physician Preference
While many health systems have done an admirable job standardizing physician preference items (PPI), compliance will never reach 100 percent. In cases where choices must be preserved, a different strategy is needed to ensure fair, market-based pricing.

Part of the answer lies in transparency. Without reliable benchmarks for comparison shopping, vendors can charge whatever the market will bear. Sanford Bernstein looked at orthopedic prices across 100 hospitals and found facilities paying three times more than others, with no correlation to volume3. Another survey from the Integrated Healthcare Association showed prices for hips ranging from $2,300 to $7,300, a 3x variation4.

With PPIs accounting for 60 percent of all supply spend, price variation is a vendor tactic that health systems can no longer afford. But to get a handle on pricing, providers need to price compare using actual spend data, organized by product codes and disease states. Somewhat analogous to the TrueCar app for auto purchases, these data sets compare purchasing trends regionally, by device, by volume and other filters to compare quoted pricing to target pricing, giving health systems important leverage in their negotiations. With the right data available at the right time, it is possible to shave 40 percent off PPIs – real dollars that can have a real impact.

Disintermediation Nation
The traditional supply chain path to cost containment includes volume-based contracting with high compliance, pay for performance initiatives and strategic sourcing to ensure rock-bottom pricing. But this lemon has produced all the lemonade it can, particularly in the commodity products space, where the price per unit is about as low as it can go. But commodities are still needed in the health system, and pricing pressures demand the price continues to go down.

Enter direct sourcing.

In this model, health systems work with a supply chain partner that can directly contract for the production of commodity supplies based on the cost and clinical needs of the buyers, taking out an unnecessary cost layer that includes manufacturer marketing fees, mark ups, distribution expenses and added costs associated with product features that may not be clinically necessary. A bit like buying the store brand as opposed to the original manufacturer's version, direct sourcing has been shown to shave around 15 – 25 percent off many commodity goods – savings in an area where further price concessions are often impossible.

Wrestling Specialty Pharmacy Spend
While specialty drugs are only used by about 1 percent of the population, they account for about 1/3 of all new drug spend5. Yet even with high price tags, specialty drugs have significant potential to lower long-term medical costs. But that potential can only be realized if drugs are taken as prescribed.

As many as half of all patients prescribed a specialty medication skip doses, halve doses or do not fill the prescription at all. To improve compliance, health systems need a partner that has expertise in coordinating benefits for insured patients, as well as access to prescription assistance and local charities to cover costs for the uninsured. Systems also need care managers that will remain in touch with patients to ensure prescriptions are being filled and taken as ordered. Additionally, special nursing care is needed to answer questions, as therapies can be complicated to administer and understand, and have side-effects that patients need help managing.

For every 1 percent improvement these programs achieve in the rate of medication adherence, they can avoid $2 billion in unnecessary hospitalizations, physician visits, emergency visits and other prescription drug use6. In other words, a small investment in care management reaps a significant long-term reward.

1 Site-neutral in H.R. 1314, the Bipartisan Budget Act of 2015; Bad debt included in Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA); Medicaid DSH cuts included in MCTRJCA, American Tax Payer Relief Act of 2012 (ATRA), Bipartisan Budget Act of 2013 and Protecting Access to Medicare Act of 2014; 3-day window cut included in Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010; MS-DRG coding cuts included in ATRA as well as CMS regulations (Estimate of excess cuts based on hospital analysis) and the Medicare Access and CHIP Reauthorization Act of 2015 (SGR reform law); offset for two-midnight policy included in FY 2014 Final IPPS Rule; sequestration amount estimated from CBO Medicare Baseline and AHA projections of Medicare spending. Sequestration includes Budget Control Act of 2011; H.J. Res.59, extension in Bipartisan Budget Act of 2013, Military COLA fix and Bipartisan Budget Act of 2015 (estimate based on FAH analysis).
5 The 2014 Drug Trend Report, Express Scripts, published March 2015

Michael J. Alkire is the Chief Operating Officer of Premier, Inc. (NASDAQ: PINC), a healthcare performance improvement alliance of 3,600 health systems and 120,000 other providers. As COO, Alkire leads the continued integration of Premier's clinical, financial, supply chain and operational performance improvement offerings, helping health systems provide higher quality care at a better cost.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them. 

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