A centralized contracting approach has enabled Spectrum Health to eliminate redundancies and reduce costs in areas ranging from facilities to labor to purchasing of clinical supplies.
At a Glance
- As a health system expands, there is a concomitant need for its leaders to take steps to ensure that redundancies in purchasing processes do not drive up costs to unsustainable levels.
- Spectrum Health in Grand Rapids, Mich., tackled this challenge by instituting a revenue-driven, patient-care-focused value analysis process that centralized contracting processes in several areas of nonsalary expense.
- Spectrum went on to uncover opportunities for cutting costs in its decentralized, non-purchase order expenses, saving 24 percent in the first of four arenas.
The past decade has seen considerable expansion among U.S. health systems, driven in large part by the need to prepare for the industry’s inexorable transition from a volume-based to a valued-based payment system. At Spectrum Health, a not-for-profit health system in Grand Rapids, Mich., we have embraced a growth strategy that has seen us evolve from a single large flagship hospital to a large regional health system that includes 11 hospitals, a health insurance provider, and 173 ambulatory and service sites. Today, as the largest employer in the western part of the state, we have 20,800 employees, including 960 advanced practitioners and physicians, and annual nonsalary expenses that exceed $1 billion.
During this expansion, we saw a need for our purchasing processes to evolve in response to the increasing size and complexity of our health system. Recognizing that Spectrum’s rapid growth would inevitably result in many redundancies, we have worked steadily to centralize the majority of our clinical supply purchasing processes. With that largely accomplished, we decided in 2012 to tackle the $500 million Spectrum spends annually on non–purchase-order expenses. Following are some of the opportunities we found and steps we have taken to reduce our costs and better manage different categories of clinical supply expenses.
From Product Evaluation to Value Analysis
The meticulous process that served Spectrum well when we were a small system became less effective as we grew. Early on, everyone in our purchasing department knew who their key customers were; product evaluation teams, although time intensive, did their jobs well, but with a focus largely limited to reducing costs through commodity items.
But as the health system grew, it became increasingly difficult to get the right people involved in the development and creation of new contracts, including the clinicians who would be using the products we ordered. It became apparent that our processes had to change to accommodate the growth and increasing complexity of our system. As a result, we instituted a revenue-driven, patient-care-focused value analysis process that also centralized the contracting process of all of our physician preference items. We rebranded our outdated product evaluation committee into five value analysis teams (VATs): cardiology/cath lab, interventional radiology, laboratory, pharmacy, and operating room (OR).
These teams established new criteria by which to evaluate requests for new products or technologies, including whether a new product increased revenue, added or reduced cost, enhanced safety, or improved patient care.
This effort required training supply chain directors from each of our mostly small, rural hospitals who were accustomed to conducting their own purchasing processes. It also meant converting contracts for piecemeal items to encompass whole commodities. Our ongoing refinement of the value analysis process also helped put us in a better position to respond to the pressures and requirements of the Affordable Care Act to cut costs and improve patient care and prepared us to expand the purview of supply chain contracting to include a review of all decentralized, nonsalary expense purchasing.
What We Found
Our initial analysis of our nonsalary expense purchasing revealed that 60 percent of our external purchased services resided in four decentralized categories—facilities, medical, environmental services, and professional services. With professional services making up 75 percent of the total spending for those categories, and the majority of the remainder representing the cost of employee benefits (including health care, dental, and long- and short-term disability), it soon became clear that several categories of nonsalary expense would offer untapped savings opportunities, beginning with purchased services. As we peeled back the layers of expenses for professional services, we discovered that the vast majority of this spending was decentralized with no assigned purchase order. In fact, we found that 57 percent of spending for identical, multicontract services was contracted out by departments working in separate silos, with no knowledge of what their counterparts were doing.
We focused our first efforts on the elevator contracts in place across our health system and discovered 11 of them—six with the same company, five with different companies, all on different schedules. We also discovered a twelfth “contract” with yet another company that was nothing more than a handshake agreement. In addition, we found 41 temporary labor agreements and 18 medical transcription companies, to name a few. Many of the contracts had auto-renewals that went on for several contract cycles. Our goal became clear: to gather all our professional services contracts under one central purchasing authority and maximize potential savings and efficiencies.
Because only three of the 11 elevator contracts had assigned purchase order numbers, we had to manually go through the entire accounts payable ledger to find the other nine companies. Although it was a relatively straightforward process to identify those that actually had the word “elevator” in their company name, there were those that we could only locate and identify by digging and cross-referencing across several different departments. Once we had all of the documentation in hand, we created one centralized team to define what Spectrum required in an elevator contract. Although some people on the team welcomed this opportunity, others were resistant to the process and very protective of the relationships they had developed with the companiesand various elements of the contracts they had created with those companies. Clear direction from our CEO and CFO helped the team overcome any initial resistance and loyalties.
With clear criteria in hand, we met several times and finally narrowed the previous six vendors to two and put the contract out to bid. The results of these efforts were a centralized five-year contract, a 24 percent cost savings, and significant downstream efficiencies in accounts payable and for the various managers from each silo who previously had to sign off on each monthly invoice. Having one centralized contract with a clear expiration also enables us to approach renewal or a new bid from a greater position of strength.
We went through the same process with the 18 different medical transcription companies and now have three centralized contracts in different specialty areas.
The Next Step
Currently, we are working on reducing our spending for temporary labor by consolidating and centralizing 41 different independently negotiated companies primarily in clerical, IT, nursing, and temporary physician services—where most of our spending is. The approach we are using involves an online reverse auction, which is a live process with a hard stop after two hours. In this process, the hospital sets an opening price point that all participating vendors, working blindly, must decide if they will meet or beat. They have a set amount of time to respond and list their new price point or opt out. After several rounds, the bid price continues to fall until the hard stop time has lapsed.
Our temporary labor task force decided on six vendors to compete against one another in this live event. We have used reverse auctions several times before with great results, producing several contracts that include office supplies, anesthesia medical equipment, copy machines and printers, hip and knee implants, and several other large spending areas. The reverse auctions not only produce great cost savings, but also simplify the purchasing process and help draw in curious physicians and other key stakeholders, gaining their buy-in and support of the lowest bid.
The Next Frontier: From Value Analysis to Evidence-Based Value Analysis
The physician preference device market, a relationship-based model that results in a 20 to 40 percent profit margin for the majority of these device companies, is a $30 billion market in the United States. For decades, the medical device industry has worked collaboratively with hospitals, clinicians, and physicians to extend and save lives, here and abroad, but these relationships have tilted out of balance, and the model needs to evolve to survive, prosper, and respond to the changes in our country’s healthcare system. With health care accounting for nearly 18 percent of our nation’s GDP, we need a more common-sense approach that doesn’t exempt physician preference items, but that recognizes that they, too, are nothing more than commodities.
In the current physician-preference model, physicians make decisions about vendor contracts based on which companies they believe—and are influenced to believe—make the best products, whether they be hip replacements, stents, or other devices. But it is hospitals, and ultimately consumers, that bear the costs, even as revenues continue to decline. Many of these contracts include mandatory gag clauses that restrict price transparency and an open competitive market. Further complicating matters, sales representatives are frequently allowed into such procedural areas as cath labs and ORs in advisory capacities while the physicians are performing procedures. Studies are beginning to surface that show a direct correlation to the use of higher cost items when a company representative is present during a procedure. Moreover, for many medical procedures, sales reps earn more than physicians.
Manufacturers also often rush products to market and hospitals, in an effort to be the first to offer it and hasten its use. In some instances, this practice has resulted in lawsuits based on the lack of proper training. Meanwhile, the manufacturer continues to sell the product to competing hospitals in the region by convincing them that purchasing the product is necessary to keep pace with the competition or risk losing market share. As a result, geographical regions can become inundated with new technology, and hospitals that lose the marketing war can be forced to mothball new clinical equipment technology.
A relatively straightforward solution to these problems is to redefine existing VATs as “medical-based-evidence teams” (MBETs). The new MBETs will be in a position to efficiently evaluate categories of physician preference items, defining them as commodities and treating them as such to rein in costs. To be approved by an MBET, the case for new technology for devices and equipment must be supported by clear, nonbiased medical-based evidence over a sustained period, proving that they perform as advertised and that they are indeed superior to the long-standing, stable technology they are replacing.
Spectrum, like most hospital and health systems, is only in its infancy with this model. Resistance to change by independent physicians and medical device companies is a potential barrier in developing a successful MBET; however, as healthcare costs continue to rise, change will be inevitable and organic. Healthcare reform, bundled payments, hospital mergers and acquisitions, and other factors will help align incentives between physicians and hospitals. These aligned incentives will make the MBET model a natural best practice, redefining the process in which new technology is reviewed and accepted by hospitals and driving down the cost of commodities by billions of dollars annually across the country.
Many hospitals and health systems have entrenched cultures that can make it challenging to realize reductions in spending on purchased services, no matter how self-evident the benefits may be. Whether you’re seeking to implement opportunities you already know of or to better define those that are out there, here are some steps you can take based on our experience at Spectrum Health.
Scour accounts payable to define all non–purchase-order spending. At Spectrum, we found that 75 percent of our expenses were in professional services, including elevator maintenance and temporary service.
Get the word out. Create and distribute a system-wide memo and/or a questionnaire to inform employees of your goals and solicit information about contract details. Hold team meetings to discuss objectives and create buy-in. Develop an internal PR campaign using your company newsletter that discusses the benefits to both the system as a whole, but also to the individual departments directly affected.
Overcome resistance. Garner support from the top through a memo from your CEO or CFO. Solicit ideas from those whose cooperation you need; help them feel part of what you’re trying to accomplish rather than a passive object of change. Share the success stories of other similar initiatives that are happening in your or other health systems.
Look to mitigate risk, not just to reduce cost. Risk is an area of great concern to most CEOs and CFOs. Looking at your opportunities from this perspective and thinking creatively will help you define and capture many more opportunities. See “Thinking Outside the Pizza Box,” above, for one example of a not-quite-so-obvious approach.
Christopher Baskel is system director, supply chain management, Spectrum Health, Grand Rapids, Mich.
Consolidating Purchasing Power
In 2003, Spectrum formed a regional group purchasing organization, the Great Lakes Hospital Purchasing Network (GLHPN), to benefit 10 additional hospitals in west Michigan and help reduce the overall cost of healthcare in the region. GLHPN allows its members to access Spectrum Health’s entire contract portfolio and since its inception has saved its member hospitals more than $20 million.
Thinking Outside the Pizza Box
At Spectrum, pizza is as popular as a round-the-clock snack or meal as it is anywhere, with clear preferences existing among departments, as well as among patients who do not have diet restrictions. But keeping track of changing restaurant delivery people, who are required to be up-to-date on their tuberculosis vaccines, was a nearly impossible task. So we decided to consolidate our pizza vendors and have some fun in the process with blind taste tests. We asked four pizzerias to submit samples and competitive bids to a cross-departmental tasting team, which ultimately awarded the contract to the kitchen in Spectrum’s own Children’s Hospital—a tasty way to advance patient safety while keeping the profits in the health system.
Publication Date: Monday, March 03, 2014