Purchasing physician preference items: The search for a cure

Today's health care leaders are constantly challenged with the seemingly incompatible goals of improving patient care while developing strategies to reign in skyrocketing costs. Among the many cost-reduction ideas batted around the industry, one of the most promising — yet often overlooked — areas is supply management. Recent research by Professor Eugene S. Schneller of the School of Health Management and Policy at the W. P. Carey School, examined the PPI purchasing and standardization efforts of 25 major U.S. hospitals.

Hospitals, in particular, have much to gain from strategic supply management, and are reaching a point in time where enacting effective supply programs is critical. Between 2003 and 2005, the average hospital's supply costs grew nearly 40 percent, from $36 million in 2003 to more than $50.5 million in 2005, according to the Association for Healthcare Resource & Materials Management (AHRMM).

One major challenge hospitals face in controlling supply costs is the complex process of assessing, selecting, and purchasing so-called physician preference items (PPI) — expensive devices such as hip and knee implants, cardiac stents, and mechanical devices used in spinal surgery. Physicians are largely responsible for selecting PPIs and often display strong preferences about which makes and models they wish to use during surgery.

"If you look at the average hospital charge, about 30 percent of the cost is for supplies, and PPI items represent about 60 percent of that 30 percent," says Eugene S. Schneller, a professor in the School of Health Management and Policy and director of the Health Sector Supply Chain Research Consortium at the W. P. Carey School of Business.

His latest research examines the PPI purchasing and standardization efforts of 25 major U.S. hospitals. He is also working with colleagues to develop an executive education course to provide physicians and managers with the skills necessary to manage the supply environment.

Embracing strategies

Hospitals have tried, with varying degrees of success, to standardize the purchase of PPIs in an effort to reduce costs and wrest purchasing control away from doctors and back into the supply management fold. Not surprisingly, facilities that achieve high levels of cooperation among supply officers, physicians, and device manufacturers are most successful at orchestrating PPI standardization, shows Schneller's research, conducted with Kathleen Montgomery, a management professor at the University of California, Riverside.

Many hospitals view PPI management as one of the best opportunities to reduce costs and as such, are embracing strategies including limiting the number of manufacturers from which physicians can choose to order PPI devices (the "formulary" model), and imposing price ceilings for particular item categories, regardless of manufacturer (the "payment-cap" model).

Behind the formulary model is the assumption that committing to a particular manufacturer means that vendor will offer the hospital lower prices. Hospitals using a payment-cap strategy, on the other hand, expect multiple manufacturers to compete to offer equivalent products within the hospital's price ceiling for each device.

Each strategy restricts physician choice in some way, but the strategies differ both in what they attempt to standardize and who carries the burden of adjusting to that restricted choice, Schneller explains. Which model seems to be more popular? "The hospitals we studied trended toward the payment-cap strategy," Schneller says.

Because the payment-cap method forces PPI suppliers to alter their pricing strategies, it tends to equalize negotiating power between buyers and sellers, while still allowing physicians a wide range of devices to choose from, he explains. It is also easier to enforce than the formulary method, he says, but can be harder to manage because hospitals still encounter multiple vendors coming on-site, bringing new technologies and products to be evaluated.

"The formulary model also works well," he says, "because reducing the number of manufacturers a hospital has to deal with reduces complexity." On the downside, however, this strategy places a greater burden on physicians to change their preferences and adapt to new products — something which may not be in hospitals' or patients' best interests.

Power struggles and other challenges

Regardless of the standardization method they choose, hospitals face an uphill battle when it comes to implementing PPI standards, starting with the power struggle among the various parties involved. Picture a triangle, says Schneller, with the doctor, hospital, and supplier on each corner, and the patient in the middle. "If you draw a line from the patient to each corner of the triangle you get six vectors, and each of those are forces in the whole product selection process," he explains.

Further complicating matters is the fact that physicians' preferences for specific devices rarely have anything to do with cost-consciousness. Many doctors develop preferences for these items while in medical school, have done hundreds or thousands of surgeries using them, and are understandably resistant to change. "Physicians may also have specific relationships with the device vendors — manufacturers sponsor research grants and speaking engagements for doctors, for example," notes Schneller.

These physician-vendor relationships have come under fire recently. Critics claim that vendors' influence over, and payments to doctors skirt the line between collaborative relationships centered on patient care, and unethical payoffs to ensure lucrative hospital contracts for PPIs. Many doctors, however, say they maintain close relationships with vendors because they work in conjunction with them to develop new devices and improve existing ones.

In addition, vendor sales reps provide important training and teaching about new technologies, says Schneller. As if that contentious dynamic weren't challenging enough, hospitals attempting to orchestrate a more controlled PPI purchasing process must also convince doctors of the necessity of standardization efforts — and persuade them to participate in the process. Most of the hospitals in Schneller's study report using value analysis teams (VATs) to facilitate standardization processes and decision making.

These teams are responsible for assessing various products, determining their ability to improve patient outcome, and weighing those factors against cost. Getting physicians to join VATs is essential for several reasons, notes Schneller. Their buy-in to the standardization effort signals a united front to device manufacturers, which helps hospitals in their negotiating efforts. Also, physicians working at the hospital are more likely to accept PPI restrictions if they know the decisions were supported by doctors on the VAT.

Schneller is working with Natalia Wilson, a W. P. Carey research associate, to develop a training program in supply management for orthopedic medical residents. "It is a real challenge to make our current practitioners aware of the improvements that can be brought to their practices and hospitals through supply management," Schneller said. "Our goal is to provide a framework for physicians to be reflective about this area throughout their careers — and it has to begin during their training."

PPI standards in action

While these myriad challenges make it difficult to for hospital supply managers to conceive, implement, and maintain PPI standardization programs that earn doctors' seal of approval, the effort can reap rich rewards. New York-Presbyterian Hospital (NYP), for example, saved more than $10 million per year in each of the last two years sourcing clinical products — the majority of which were physician preference items, according to Dr. Anand Joshi, director of clinical procurement for NYP.

The secret to the hospital's success? Not falling into the trap of automatically viewing the relationship between hospital supply executives and physicians as adversarial. "My team at NYP has truly created an atmosphere of engagement and collaboration between supply chain professionals and the physicians who utilize PPIs," explains Joshi, who holds both an MD and an MBA from Columbia University.

Joshi also credits the hospital's method of using different strategies/approaches to handle different types of PPIs. "What works for drug eluting stents may not work best for hips and knees. The right strategy is driven by the context and specific situation," he says. "In some cases, we work hard to keep our utilization standardized to one primary supplier.

In other cases we have found better success allowing a number of suppliers to continuously compete for business. What makes doing this well so hard is knowing what makes sense in which situation," he adds. Hospitals seeking to develop successful cost-reducing standards programs such as NYP's must make several important and interrelated decisions, shows Schneller's study:

1. how to define "standardization" and a standardization strategy
2. how to implement the chosen strategy
3. what mechanisms to use to encourage cooperation with the strategy

Ultimately, Schneller believes hospitals should borrow a page from other industries' supply chain playbooks, where companies and vendors working closely to develop purchasing programs is the norm. "We'd like to see much more collaboration among buyers and sellers. A great outcome would be for hospitals, doctors, and vendors to work together to achieve better clinical outcomes for patients, ensure the use of appropriate products, and drive cost reductions," he says.

That formula is exactly what Joshi prescribes as well. "With effective engagement of all parties [involved in the PPI standardization process], it is possible to lower costs, keep physicians happy, and ultimately deliver the best possible care to patients — which is why everybody got into this business to begin with," he says.

Bottom Line:

• Hospital supply costs have skyrocketed, increasing nearly 40 percent between 2003 and 2005. A large portion of that increase is for physician preference items (PPI) such as hip and knee implants, and cardiac stents.
• Standardizing PPI purchasing is one promising strategy for controlling and reducing these costs, but is difficult to achieve because of complicated relationships between physicians, hospital supply staff, and device manufacturers.
• Two main models are emerging for standardizing PPI items: limiting the number of manufacturers physicians can choose to order PPI devices from and imposing price ceilings for particular item categories.
• Hospitals that orchestrate successful PPI standards programs are those that can effectively recruit physicians to participate in the effort, and find a way to maintain vendor cooperation while limiting their influence in the process.

Today's health care leaders are constantly challenged with the seemingly incompatible goals of improving patient care while developing strategies to reign in skyrocketing costs. Among the many cost-reduction ideas batted around the industry, one of the most promising — yet often overlooked — areas is supply management.