Consolidating purchased-service contracts leads to substantial savings and the potential for higher quality outcomes for Spectrum Health.
It came as no surprise. When the consulting firm Christopher Baskel used to review spending patterns at Spectrum Health (Grand Rapids, Mich.) identified nearly $300 million in annual non-salary expenses with the potential for cost savings, the system director of supply chain management knew exactly where to begin: purchased-service contracts. “They told us we were doing well and in the lower third nationally for supply cost as a percent adjusted patient day,” Baskel recalls, noting that he already knew as much. “We have over $1 billion in non-salary expenses, including elevator maintenance, temporary labor, employee benefits, nursing, IT, human resources and more. I suggested we begin with that. As a result, they found that approximately a half billion dollars was spent annually without a purchase order.
“As your organization grows, your opportunities grow as well,” he continues. So, when Spectrum Health added another hospital, the IDN also added more employees, benefits, nurses, elevator contracts and more. The job was getting done, he adds, but in a decentralized – and ultimately more expensive – fashion.
With over 31 years of experience in healthcare supply chain management, Baskel is no rookie at recognizing cost-savings opportunities. Prior to joining Spectrum Health, he worked with two large academic medical centers and a community-based 10-hospital health system. He joined Spectrum Health in 2002, where he is responsible for enterprisewide logistics and contract management. In addition, he and his contract team have implemented over $40 million in cost savings through 1,100 distinct projects, ranging from devices to service agreements. In 2003, he helped create Great Lakes Hospital Purchasing Network, a VHA supply network comprising 12 non-owned health systems in western Michigan, and in 2005 started the Michigan Minority Business Development Council for Healthcare. As chairman, he has helped the council establish over $5.2 million in new business for 18 minority business establishments in Michigan.
Most recently, Baskel and his contract team worked with Spectrum Health’s cath lab and operating room management teams, including the physicians, to reduce the supply cost for cath lab and cardiac rhythm management (pacemakers and defibrillators) products; drug-eluting stents (for a savings of $5.1 million); and hips and knee ($1.1 million in savings). “Our efforts earned Spectrum Health the VHA national award for physician preference cost reduction, as measured by VHA’s PriceLYNX benchmark data against 1,600 hospitals,” he says.
So, nearly two years ago, when the opportunity presented itself to consolidate purchased-service contracts, Baskel and his team “launched a campaign to do just that,” beginning with elevator service. “Even two years ago, I don’t think consolidating purchased-service contracts were on many people’s radars,” he says. “Now it’s becoming a much talked about opportunity.
“We identified nine decentralized purchased-service contract opportunities to standardize across our health system,” he continues.
“The first, elevator service, is now complete. In this process, we identified 12 individual elevator service contracts across our health system, six of which were with the same company. Each of the 12 contracts was implemented without a purchase order, in a decentralized format, each with separate individual contract expiration dates.”
After finishing this project, Spectrum Health now has one centralized elevator service contract and has saved 22 percent in the process, Baskel points out. “This is a good example of how we can mitigate risk and ensure the highest quality outcomes, as well as save cost,” he says. The healthcare industry is consolidating, he adds. As this happens, supply chain executives such as himself must continue to find more efficient ways to manage multiple contracts.
Next on the agenda
Baskel continues to consolidate Spectrum Health’s non-PO expense contracts, currently focusing on temporary labor. This can be tricky, he points out, as every department – IT, human resources, nursing, etc. – has temporary labor. Still, “this is something we would like to see under one roof,” he says, joking that he told the human resources department, “You need to look at temporary labor once every 30 years whether you need to or not!” What human resources may not realize, he adds, is that temporary labor spans many departments. “health systems don’t always realize how decentralized they are.”
As many a pioneer can attest, with new ideas comes pushback. “It’s not what we know, but what we don’t know [that scares us],” he says. Yet more and more administrators and staff at Spectrum Health have bought into the need for consolidation of purchased-service contracts over the past 10 years.
In time, Baskel anticipates tackling purchased-service contracts across nine different areas at Spectrum Health. Benefits, such as long- and short-term disability insurance and consultant fees are on his radar and may be his next project. “It’s a matter of priorities,” he says. “Where is it important to save money and improve quality? Do we want the best printer paper or the best surgical products?
“Getting people on board is always the first challenge,” he continues. “So two years ago, I used the consulting card. Once the consulting firm said it was necessary to consolidate purchased-service contracts, it got the attention of our top executives. Today, it’s part of our value analysis stream,” he says.
In fact, he envisions the consolidation of purchased-service and all non-salary spend to eventually be on everyone’s radar at hospital systems across the country. At least, he sure hopes so. “It has to be,” he says. “Where are we going to get the revenue for healthcare reform?” When it comes to consolidating non-salary expenses, the savings may not be visible to everyone at first, he notes. “Every dollar we save is probably better than revenue. But, you can’t see, feel or touch it. So, out of sight, out of mind.”
As supply chain executives know all too well, there are many considerations that impact healthcare spending. “Years ago, a CFO said, ‘I thought we had an outstanding new contract on X-ray film,’” says Baskel. “I told him we did. There are so many factors involved, such as utilization and waste, which drive up the total cost. The lower price paid at the pump did not ring true. All he saw at the year end was a higher film spend than the previous year.” Which is why it’s so important to increase awareness within the IDN, he adds.
Looking forward, Baskel anticipates some changes on the healthcare horizon, particularly with regard to physician preference items. “Supply chain contracting, in conjunction with our physician partners, will begin to use evidence-based medicine and quality outcomes in defining specific product attributes (not brand preference), which will establish the clinical standards required for contract awards,” he says. The stage will then be set for the emergence of generic equivalents to physician-preference products.
And, why not, he says. Particularly with regard to such standard items as, say, shoulder anchors used by sports medicine surgeons, now that the patent has expired on brand names, the generic products are essentially the same quality at a third of the price, he points out. “It is not difficult to figure out what the savings would be for a large IDN spending [over] a million dollars on an annual basis for this product. When a process using evidence-based medicine is used to make decisions, it will all come out in the wash. In the early 1980s, doctors would have balked if someone suggested they offer their patients generic pharmaceuticals. And, look where that market is today!”
Sidebar: Going down
Spectrum identified 12 individual elevator service contracts across its health system, six of which were with the same company, says Baskel. Each of the 12 contracts was implemented without a purchase order, in a decentralized format, each with separate individual contract expiration dates. After finishing this project, Spectrum Health now has one centralized elevator service contract and has saved 22 percent in the process, Baskel points out.