Keeping Non-hospital Sites in the Fold

Contracting executives insist on single pricing for their acute and non-acute facilities, though they recognize the differing costs of distribution.

Contracting executives such as Kim Barnard of Affinity Health System have a hard enough time holding the line on prices for products used in their acute-care facilities. And in years past, that probably was enough. After all, few hospitals owned physician practices or clinics, and if they did, volume in the non-acute-care sites was probably pretty low.

But today, that’s no longer necessarily true. Menasha, Wis.-based Affinity Health, for example, owns more than 20 clinics and a surgery center in addition to three acute-care hospitals. Volume in those non-hospital sites is high enough to warrant hospital-level pricing, says Barnard, director of materials management. In fact, it’s something that Affinity Health has fought for – and achieved. But it has done so only after considerable planning, effort, and an investment in time and money. Today, Affinity is its own low-unit-of-measure distributor.

Indeed, distribution is a key factor driving prices in the non-acute-care market. Primary-care distributors argue that servicing a non-hospital site, such as a clinic or nursing home, costs more on a per-unit basis than servicing a hospital. The distributor has to pack and ship more orders, prepare more invoices, and spend more time reconciling payments. What’s more, primary care distributor sales reps often assist the office or clinic staff in the ordering process. For all these reasons, Journal of Healthcare Contracting readers have either 1) accepted the fact that the “cost-plus” for products shipped to non-hospital locations will usually exceed that for their hospitals, or 2) begun acting as their own primary-care distributor. At the same time, many IDN contracting executives have fought for – and received – pricing parity from manufacturers for products used in their hospitals and non-acute-care facilities.

Growing awareness by clinicians
Contracting executives aren’t alone in their efforts to control spending among their non-hospital sites. In fact, they are getting more cooperation from the clinicians and staff members who work there. It helps if those clinicians are actually employees of the IDN. But even when they’re not, clinicians today seem to have a greater awareness of the need to control supply chain expenses.

“Speaking with this group of members, it’s obvious they’re more aware and becoming more sophisticated [about contracting],” says Russ Ede, vice president, non-acute care, Amerinet. Dollar-volume growth in Amerinet’s non-hospital program grew 12 percent last year. “They want to take advantage of what a GPO can do for them,” he says.

“Over the last 20 years, more and more acute-care facilities have started to get into [non-acute-care] businesses,” points out Tom Wessling, vice president of nutritional services and environmental services for Amerinet. “They’re picking up nursing homes, physicians’ offices, primary care facilities. With that comes more and more awareness of group purchasing organizations, because they’ve used them [on the acute-care side].”

Like other GPOs, Amerinet has contracts with both manufacturers and non-acute-care distributors, says Gene Byerly, Amerinet’s vice president of materials management. “We usually set up some kind of cost-plus structure based on volume to accommodate contracted items. Then we have a ‘not-to-exceed’ markup to accommodate non-contracted items.” Distributors are free to be even more aggressive with customers if they need to. “We’re also looking at some value-adds, such as online ordering systems or anything else [the distributor] can do to help the customer.”

But on the manufacturer side, “our goal has always been to get the same manufacturer contract pricing [for acute- and non-acute-care members] whenever possible,” says Senior Vice President of Corporate Contracting Dale Wright. “There’s been some pushback, but many are coming around, especially with the advent of clinics that are getting pretty large.”

Working both sides
For individual IDNs, there appear to be two keys to getting one price for products used in both the acute and non-acute-care setting. The first is volume, and the second is the degree to which an IDN’s acute-care and non-acute-care sites are integrated. Affinity Health has factors working in its favor on both counts.

Barnard has fought for pricing parity for years. “With the surgery center and the number of clinics we had, our volume was good,” she says. But it was the fact that she had worked on both the acute- and non-acute-care sides of the business that advanced her cause more than anything else.

From 1986 to 1992, Barnard worked in hospital materials management. Then, in 1992, she was appointed director of materials management for the LaSalle Clinics (now the Affinity Medical Group) in Menasha. There, she organized standardization programs and developed a centralized warehousing/distribution program for the 38 clinics.

In the process, she learned some valuable lessons. For example, she learned about the influence that lead nurses can have over product selection in the primary care environment. “If you can educate the nurses on products, they more or less convince [the doctors] that this is the right thing to do.” She also took the opportunity to teach the nurses about group purchasing organizations. “We’d have monthly meetings with 40 nurses, and we’d [show] them, ‘This is what a GPO is; this is contract compliance; this is the effect on your spend if you are not compliant with contracts.’ Knowledge is power. Some people just don’t know [the impact of purchasing groups]. Some don’t care. But if it affects them, they will pay attention.”

In 2000, Barnard became director of materials management for Affinity Health, with supply chain responsibility for both its hospitals and non-hospital locations. (Up until that year, the clinics and hospitals had their own materials programs. But when Affinity acquired 100 percent interest of the clinics, it brought all its sites together under one management structure.) “It really helped that when the hospitals bought the remaining shares of the clinic sites, the physicians were already geared up, and they understood what standardization meant,” she says.

Indeed, working in both the acute and non-acute-care environments made Barnard particularly well-suited to bringing Affinity’s integrated materials program to the next level. She added 10,000 square feet to the 14,000-square-foot distribution center in Menasha, which had been servicing the non-hospital sites. Today, Affinity distributes products to all locations from that one warehouse.

Employee physician model
Just as Barnard takes advantage of the fact that Affinity owns both its acute- and non-acute-care sites, so too do contracting executives with several other IDNs with whom JHC spoke – Henry Ford Health System, Group Health Cooperative and Geisinger Health System. In each case, the way in which the IDN is structured has facilitated the process of non-acute-care contracting.

Spanning 40 counties and 20,000 square miles in north central Pennsylvania, Geisinger encompasses three acute-care hospitals and 40 community practice sites. Most of its 900+ staff doctors, scientists, residents and fellows are employed by the IDN. The IDN contracts with McKesson Medical-Surgical for distribution services to its non-acute-care facilities, and Owens & Minor for distribution to its hospitals.

Under the direction of Associate Vice President of Supply Chain Services Deborah Templeton, Geisinger has centralized purchasing and contracting. As such, it demands manufacturer pricing parity for its acute and non-acute-care sites. And by and large, it gets it, though “there still is a small minority of vendors that will not recognize [parity],” she says. Like Barnard, Templeton aims for system-wide standardization of products. “Standardization is a system-wide goal,” she says. “It doesn’t matter if it’s acute care or primary care.” The clinics are represented on Geisinger’s clinical evaluation committees, and all sites order off Web requisitions, which are tied into a common materials management information system. All these things help Templeton stay tuned into who’s buying what, and at what price.

Group Health Cooperative
In the Pacific Northwest, Group Health Cooperative is in the process of shedding its two acute-care hospitals, opting instead to focus on primary and specialty care, and “outsourcing” inpatient care as needed. Group Health is a cooperative that provides health insurance and care delivery to approximately 580,000 members in the northern part of the state of Washington.

The IDN maintains a central warehouse in Tukwila, Wash., about 12 miles south of downtown Seattle, from which it services its outlying medical centers and clinics, says Steve Howard, director of materials management. That central facility houses all the purchasing and contracting staff, as well as warehousing, distribution and supply transportation. Owens & Minor is the IDN’s prime vendor.

Group Health owns its clinics and employs the physicians who work in them, says Howard. Those two things, along with the fact that the IDN has a centralized contracting function, pretty much ensure that Group Health gets one price from manufacturers for products used in its primary-care as well as acute-care sites.

Like Templeton at Geisinger, Howard works toward product standardization across all of Group Health’s sites. Standardization increases volume, and leads to lower prices as well as SKUs, he says. In addition, it dovetails with Group Health’s emphasis on evidence-based medicine and system-wide standards of care. “The best way for us to keep down our liability is to have a consistent standard of care,” he says. “Part of that is us saying, ‘Here’s the product we will use across the entire group.’” Howard and his staff can’t dictate which products those will be, but they can prevail upon key clinicians to make their case for particular products in front of their peers, then let peer pressure do the rest. “That’s really the only way you can control this thing,” he says.

Henry Ford
With four (soon to be five) hospitals and 35 primary care clinics (some of which are called megacenters, because they offer outpatient surgery), Henry Ford Health System’s Jim O’Connor has his work cut out for him in terms of monitoring and controlling spending in the non-acute-care sites. But like Howard, Templeton and Barnard, he has one thing in his favor: Many of Henry Ford’s physicians – and there are about a thousand of them – are employees of the IDN. (The exceptions are the physicians who practice at the Henry Ford’s community-based hospitals, who are private practitioners.)

“The employee-physicians … are very engaged in driving [product] standardization,” says O’Connor, who is vice president of supply chain management. “And that helps facilitate standardization of products, processes and clinical outcomes.”

The IDN employs Owens & Minor as its primary med/surg distributor. The distributor brings products directly to Henry Ford’s acute-care facilities, but the IDN is responsible for the redistribution of products to its primary care clinics, using a third-party distribution company.

Henry Ford has 13 standing value analysis teams, which comprise representatives from both the acute-care and outpatient settings. “I’m a big advocate of involving end users in selecting products,” says O’Connor. “To that end, we’re engaging clinicians in the process and facilitating the discussion, which results in decisions people can embrace.” Within the past year, O’Connor has been trying to drive system-wide standardization of diagnostic and capital equipment.

“We have accomplished a great deal,” he says. “We have a common supply chain information system, which the clinics are on as well. We’ll be installing a Web-based requisition system in August. We have a centralized accounts payable ability, which helps drive standardization of business processes and helps create visibility of spend outside the normal contracted areas …. So we attack it from all these different vantage points. We try to narrow variation under the premise that you can only have one best practice.”

As a result, Henry Ford obtains one set of prices for products for both its acute-care and non-acute-care sites. “I understand there’s a different cost model [for non-acute-care sites], and that it has to do with … the cost of delivery,” says O’Connor. “But if I were to agree to [differential prices], I would try to isolate that transportation cost.”

Some manufacturers – particularly those of physician-preference items – balk at the prospect of extending one price for acute-care and non-acute-care providers, says O’Connor. “They’ll say, ‘We’ll give you the highest tier for your main facility, but not for your community care locations.’ That’s unacceptable to us. We’re one legal entity. We want to see universal pricing, regardless of clinical setting.

“Traditional hospitals are morphing into something that looks quite different. They’re looking like large ambulatory centers. The point is, regardless of clinical settings, we feel there should be product standardization and price parity.”

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