Executive Interview: VHA Settles on a Focal Point

VHA CEO Curt Nonomaque talks about a new approach to the market

Curt Nonomaque has seen VHA through good times and challenging ones. As vice president and treasurer, he spent two years (from 1989 to 1991) helping VHA reduce the losses it had absorbed in its VHA Enterprises subsidiary, particularly its unsuccessful managed-care venture. At the same time, he led VHA’s efforts to convert the organization to a cooperative. Later, as executive vice president of VHA, he was instrumental in establishing Novation (in conjunction with the University HealthSystem Consortium) in January 1998.

Now, as CEO of VHA, Nonomaque is involved once again in reshaping the organization, although he would describe it as “fine-tuning” rather than a “reshaping.” Indeed, in a recent interview with industry media, Nonomaque compared VHA’s current efforts to those of golfer Tiger Woods to improve his already-successful swing.

VHA’s new “swing” can be observed in its highly focused mission statement. It says, simply, that VHA’s mission is to help its members improve their clinical and economic performance in two ways: by providing supply chain management services (e.g., group contracting); and by facilitating networking among its members, primarily through its 18 regional offices.

Nonomaque joined VHA in 1986 as a financial analyst with VHA Enterprises and was named assistant treasurer of the subsidiary company in 1987. In August 1989, he was appointed vice president and treasurer for both VHA Inc. and VHA Enterprises. In February 1992, he was promoted to senior vice president and chief financial officer of VHA, and then to executive vice president in March 1996. He was named CEO in May 2003.

The Journal of Healthcare Contracting spoke with Nonomaque recently about VHA’s direction, as well as the changing relationship between the clinical and administrative staffs at today’s non-profit hospitals.

JHC: Recently, you stated that during the past year, VHA has worked on refocusing itself on two things: 1) offering industry-leading supply chain management services, and 2) supporting member networks that foster the joint development of solutions for key clinical and operational challenges. Is this a departure from the past?

Nonomaque: In the supply chain management area, we were focused for many years on negotiating the best prices for commodities. Clearly, we still do that. But we are expanding our customized contracting [capabilities], whether it’s contracting for physician-preference products or performing unique buys Ð e.g., capital buys or regional purchasing, where groups of members who are willing to change behavior to drive additional value for their organizations agree to come together.

We are continuing to expand our clinical resources in the supply chain area. That’s important in helping [hospital administrators] and clinicians work together to provide the best care possible and to ensure that they have access to the best products and pharmaceuticals, in the most cost-effective way.

We are continuing to build our information-systems capability. One of the lesser-well-known things about VHA is the strength of our database, which helps our organizations know what they’re spending in the supply area and how they compare to other organizations in the database.

The last piece [in the supply chain area] is that we have streamlined and developed our team to make sure they have the tools and training to work effectively with our members and help them bring down their spending.

On the member network side, we now have a strategy. Previously, our 18 regions served primarily as a distribution channel for our services to our members. Today, on both a national and local basis, we are focusing on what these organizations tell us they want delivered to them, and what they want to work on. Our members are holding each other in greater accountability. We’re asking them to come together and commit to certain collective activities.

JHC: Who is coming together at the regional level? CEOs? CFOs? Nurses? Materials managers?

Nonomaque: It’s not uniform across the country, but in most cases, CEOs, CFOs, COOs, chief nursing officers, materials managers, pharmacists and chief medical officers are meeting on a regional basis.

I might add that we sponsor national groups as well. I work with a group of 10 CEOs who lead very large integrated health systems across the country. Although many participate in local and regional groups, they want to come together nationally, because large IDNs can share opportunities with each other that they might not share with small organizations in their own geographical areas.

JHC: You have talked about the importance of administrators working with physicians. Yet your recent report on physician/hospital relationships [“Physician Hospital Relationships: Forging the New Covenant”] described a breakdown of that relationship, largely due to the economic concerns of doctors. How can VHA help these two groups work together?

Nonomaque: I wouldn’t say the relationship has broken down so much as it is being challenged. Aligning incentives is critical. VHA has a real opportunity to provide a safe environment where executives, physicians and others can learn together and work together to solve common problems.

An example might be our regional initiatives in which groups have focused on some of the medical devices that are driving up costs for our organizations. We have found that, when presented with data, physicians will change their behavior.

On the clinical side, we have clinical and operational data tools to allow physicians to compare their performance with their peers in terms of outcomes and efficiencies. Doctors don’t want to be outliers.

JHC: You mentioned the importance of continuing to improve your information systems capabilities. Were you referring to developing systems to help your members with clinical benchmarking?

Nonomaque: I was referring to our supply chain side. However, our continuing emphasis is on helping our members have as much information Ð actionable information Ð as possible.

What I’m suggesting is that VHA has to have access to the best data possible, both in the supply chain, as well as clinical and operational improvement. But more critically, we want to develop the resources to help our organizations use that data to change their performance and behavior.

JHC: What effect have the Capitol Hill hearings and media reports had on VHA? Is the organization different today because of them?

Nonomaque: There are many factors that make us different today. The Senate inquiries are just one of three or four that have brought change in our industry. The others are increased competition, the cost pressures facing our members, and the need to demonstrate quality and cost-effectiveness.

The biggest change for us has been our focus. We have a track record of results, but we are focused on a couple of things in which we have to be best in class.

The second change has been that the value proposition for our members has increased dramatically. Over two business years, we will have doubled our cash distributions to our members. In two years, we will have gone to more than $200 million in operating income in 2005 [from $121 million in 2003 and $162.3 million in 2004]. We have achieved that through revenue growth and expense reduction.

People tend to watch how much cash is distributed, but I believe that there are two bigger ways to impact our members: The first is impacting their spend on the supply chain side; and the second is the member network piece. I believe that the [latter] Ð organizations working together on things of acute interest Ð has the potential to be of even greater value than the supply chain.

Specific to the Senate hearings, VHA has always been an ethical organization. But I believe we have tightened up much of what we do.

JHC: The VHA Health Foundation identifies and promotes clinical and operational “best practices,” and stimulating community health programs. [VHA Health Foundation is a public foundation that awards grants to healthcare providers that demonstrate a novel and/or better approach to solving a healthcare-related problem or need. Examples of projects being funded include a mobile clinical education delivery system, a methodology to study best practices in the ambulatory care setting, and a system to provide nutritionally appropriate food to low-income people through food pantries.] Yet the Foundation’s work relies on funding from manufacturers. Does this continue to be a viable funding model, given the scrutiny that Congress is paying to group purchasing and potential conflicts of interest?

Nonomaque: Actually, the VHA Health Foundation gets 80 percent of its funds from VHA. None of the people on its board or staff have anything to do with contracting, and the decisions about which grants to fund are made by an independent party. Because it is a public foundation, the grants go to non-VHA members, as well as VHA members. The 2005 grantees will be announced in the fall.

JHC: Obviously, VHA believes that GPOs and alliances must continue to offer far more than medical-surgical contracts. Can you explain why?

Nonomaque: The analogy that comes to mind is department stores’ reaction to single-genre stores. You had your department stores, and then all of a sudden, [a company such as] Best Buy appears, blowing the electronics department out of the other stores.

We have gotten out of some “nice-to-do,” interesting things. We have narrowed our approach. We are not using profits from the supply chain to subsidize other things of interest to our members. Instead, we have created a business model in which all our members pay core charges to access VHA supply and network services, and then fees for custom services [on an as-needed basis]. This has given us an increased operating discipline. I don’t attribute this to the Senate hearings, but to the competitive landscape we’re in. The members said, “The old VHA was fine Ð the all-for-one and one-for-all approach. And we liked that you took dollars from group purchasing and brought us other services. But we want a clearer understanding of the value of these services and how much they are costing us.”

JHC: Along those same lines, to what extent are clinicians looking for VHA for help in clinical matters?

Nonomaque: Our efforts have to be focused. We can’t look at every clinical area and opportunity. This is where our regional piece fits in. More than 150 clinicians work for VHA; most are deployed close to our members.

Our work with the Institute for Healthcare Improvement shows some of the opportunities available for us to be very helpful. [In April 2005, VHA joined the Institute for Healthcare Improvement’s “100,000 Lives” campaign as a partner. The campaign encourages hospitals to apply known best practices for clinical care in order to save 100,000 patient lives over the next 18 months, and to save 100,000 annually thereafter.]

But any organization that tries to make clinical quality a competitive issue is not doing healthcare any good. I don’t care if it’s Premier or the American Hospital Association, or local hospital associations that are working on initiatives; we’ll come in and be part of that.

JHC: In January 2005, VHA and UHC announced their intent to “evaluate strategic options” regarding their majority ownership of Neoforma. Why?

Nonomaque: VHA, UHC and Novation have always had the contractual right to ensure that the services we get from Neoforma Ð the technology partner for Marketplace@Novation Ð are best in class. Late last year, Neoforma’s board made a decision to look at their strategic alternatives. We took that very seriously. As the largest shareholder in Neoforma as well as its biggest customer, we wanted to make sure our members’ value was protected.

JHC: What would be the impact of selling your interest in Neoforma, given that $8.8 billion of VHA members’ total purchases of $18.4 billion are purchased through Neoforma’s Marketplace@Novation?

Nonomaque: I look at it like this: Think how much it cost to get a 20-inch plasma or LCD TV five years ago. Today, you can pay that same amount for a 52-inch or 60-inch flat-screen TV. The same thing is occurring in e-commerce. There are emerging alternatives that compelled us to say, “Let’s make sure that what we’re getting from Neoforma is the best, and at the very best price.”