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How To | Supply Chain Management

A 5-step process to achieve and sustain physician preference item cost reduction

How To | Supply Chain Management

A 5-step process to achieve and sustain physician preference item cost reduction


Joseph A. Jackson, managing director, Strategic Healthcare Services LLC

  • Examining and reducing supply costs is especially important in the COVID-19 fiscal environment, but identifying and reducing the costs of physician preference items (PPI) in particular can be challenging.
  • Hospitals and health systems should use a five-step process that begins with cleaning and organizing PPI cost and utilization data.
  • Comparing product prices with those of other organizations provides insights that can be used to get physicians on board and negotiate price reductions with manufacturers.

The adverse effect of COVID-19 on hospital financials is due in large part to the temporary cancellation of elective procedures. Now more than ever, it is vital to ensure electives are as profitable as possible.

A great place to start is by lowering the supply costs for these procedures. The challenge is that the most expensive supplies are typically physician driven. In fact, many hospitals and health systems struggle to identify and reduce the costs of physician preference items (PPI).

Fortunately, a five-step process can help health systems maximize savings on PPI.

Before the process begins, a multidisciplinary team should be drafted to tackle difficult PPI cost reduction projects. Supply Chain, Finance, Clinical and the C-suite should be represented. Each team member will bring a unique point of view to ensure the balance between cost-effectiveness and product quality is maintained throughout the project.

1. Organize the data

The first task is determining how much the health system is spending on PPI and in which categories. To do that, the team should clean and organize the PPI cost and utilization data.

The task can be daunting: Many health systems spend tens of millions of dollars on PPI that are spread across dozens of product categories and numerous vendors. A general-ledger “data dump” of high-level expenses and case counts will not provide the information to effectively drive down PPI costs. The team should go several levels deeper.

PPI usage data should be grouped by product category and vendor. For larger spend categories such as total joints, spine and cardiac rhythm management, the utilization and cost data also should be organized by patient to determine which physicians are using which products, from which manufacturers, at what specific unit cost and on which types of cases and patients.

Organizing and cleaning the data using this top-down approach will greatly sharpen the focus on where to look for potential savings from specific product categories, manufacturers and surgeons.

2. Benchmark products

Once the team has a better understanding of the PPI costs and allocation, the next step is benchmarking. This process involves comparing a health system’s product prices with those of other organizations.

A health system should use the manufacturer’s part number as the primary data point to compare pricing against other organizations that are utilizing the same product but at a better cost. Poviders typically can find competitive benchmarking databases through subscription-based third-party software platforms.

The team should build the savings target by merging the benchmarked price points with the current volume, utilization and spend data. Comparing a health system’s actual PPI product usage and spend to the benchmarked price points produces a hard-dollar savings target that does not depend on a physician changing products. It also helps the team prioritize where to focus and act.

The exhibit below illustrates how this information can be organized.

Sample PPI Benchmarking Chart

Category Name 25th Percentile Savings 50th Percentile Savings 75th Percentile Savings 90th Percentile Savings
Cardiac Rhythm Management Devices  $11,475.78  $75,193.32  $126,207.87  $156,599.81
Peripheral Vascular -    $26,741.75  $51,025.86  $75,038.96
Heart Valves  $8,171.00  $29,028.50  $39,507.40  $45,607.40
Power Equipment Disposables -    $16,215.79  $25,922.85  $31,195.18
Vein Harvest Products  $710.68  $9,630.00  $16,529.70  $25,179.98
Osteobiologics  $2,090.50  $10,695.70  $12,839.20  $16,606.78
Neuro Stimulators  $1,651.82  $7,443.41  $12,369.43  $13,994.08
Synthetic Mesh -  $5,175.55  $7,455.53  $8,886.90
TOTAL  $24,099.78  $180,124.02  $291,857.84  $373,109.09

Source: Strategic Healthcare Services, LLC

3. Engage physicians

At most organizations, the task of identifying and implementing PPI cost reductions can be politically sensitive. Preserving physician choice of product instead of consolidating manufacturers can help you engage physicians in the cost reduction effort. Consolidation of manufacturer contracts, which yields greater savings opportunities, can be done over time while a rapport and trust is built with physicians.

Leaders should share the PPI utilization data, savings targets and payment data with physicians to help gain buy-in. It may take multiple meetings to earn physicians’ trust and support for the project. Presenting clean, robust and organized data on internal usage, external pricing and payment is critical.

4. Negotiate

During negotiations with manufacturers, the team should reference the detailed analysis and price-benchmark data. The benchmarking analytics should include spending in comparable product categories at other hospitals, scatter graphs and percentile price rankings of current and target costs.

These analytics show manufacturers that the health system has done its homework and has not cherry-picked the best published price. Good data and physician support can draw concessions from the manufacturer in the form of meaningful savings.

5. Validate

The health system should validate all pricing that is offered during negotiations, including for lightly utilized items. Negotiators also should be aware of new items added to the price sheet. A common tactic used by manufacturers is to offer concessions on highly utilized items but upsell other products (which likely are more expensive) to physicians in the operating room to make up the lost revenue.

Bottom line: A health system should see lower pricing across the entire price sheet. Additionally, all new items should go through a value analysis process before being added to the contract.

Worth the time and effort

Driving meaningful and sustained savings in PPI is challenging but worthwhile, especially given that supply costs are second only to labor in a hospital’s expense budget. Furthermore, PPI costs often exceed 40% of a hospital’s medical supply expenditures.

Ensuring you have the right team, good data, competitive benchmarking, physician support and a thorough pricing-validation process will help you negotiate from a position of strength. In turn, you’ll be able to drive savings in a long-term, sustainable way.

About the Author

Joseph A. Jackson

is managing director, Strategic Healthcare Services LLC, Atlanta (jjackson@shs.us.com).

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