Meet the Cousins

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“The alternate care market, from a supply acquisition standpoint, is a very different market, with very different markups, than acute care,” says Chuck Mauro, director of materials management at UNC Health Care, Chapel Hill, N.C. No doubt many Journal of Healthcare Contracting readers have noticed the same thing. In fact, compared to its acute-care cousin, the non-hospital market is a bit untamed, from a supply chain perspective.

Take Triangle Physician Network, a network of UNC-owned community medical practices across central North Carolina. Until recently, these practices were strung together fairly loosely. Then, last year, UNC created a limited liability corporation called Triangle Physician Network. “That way, we could serve them better, and they could become, from my perspective, much more of a ‘family member’ in the IDN,’” says Mauro.
What Mauro found was not unlike what many of his colleagues are finding, as hospital systems acquire physician practices and try to incorporate them into the IDN.

“It was apparent that each location operated with a high degree of independence and autonomy,” says Mauro. They were making their own decisions about what to buy. And even within each location, there was very little control over purchases. “They would buy exactly what the doctors wanted. If there were four doctors [in one location], and each wanted a different glove, they had four gloves.”

And though the non-acute-care facilities were being well serviced by their physician distributor, Mauro noted a lot of price fluctuations. “Prices changed on items within the space of a few months,” he says.

To try to bring some order to the situation, UNC implemented the same Lawson materials system in the non-acute-care facilities as it had in its acute-care locations. “We’re pecking away at the contracts, the things they buy, and we’re moving very slowly toward standardization,” he says. And he’s working with the physician distributor to “nail down a contract and bring the higher markups down to something closer to those of UNC.”

What Mauro found was not unlike what other IDN contracting executives have seen when they bump up against non-hospital facilities. His approach – working with the clinics to institute some supply chain management principles, and working with the physician distributor to get some consistency in pricing, not to mention a lower markup – is one that many IDNs are taking. But there are others.

“We’ve seen several models,” says Kenny Wilson, senior vice president and general manager, ambulatory care, Cardinal Health, Dublin, Ohio. In some cases, the IDN materials executive puts into place materials management practices, such as electronic ordering systems, but stays out of the day-to-day management, as well as distribution. At the other end of the spectrum, the IDN contracting executive not only implements materials management processes, but tries to aggregate volume and seek uniform pricing across the IDN, notes Wilson. And then there’s everything in between.

What’s clear is that as hospital systems acquire physicians’ practices and other non-hospital providers, IDN executives must make some basic supply-chain decisions, such as:

  • To what extent will the IDN materials team exert its influence on the non-hospital sites?
  • Will the IDN seek one distributor to service both non-acute and acute-care sites? If so, will it seek one cost-plus markup for all sites, or will it settle for two?
  • Will the IDN materials team take it upon itself to distribute products to the non-hospital locations, or will it continue to outsource that to a distributor?
  • How aggressively will the IDN promote group purchasing to the non-acute-care facilities?
  • Will the IDN try to standardize products across the continuum of care, or will it settle for one set of products on the alternate care side, and another on the acute-care side?

Loose federation of independent practices
Omaha, Neb.-based Alegent Health faced some of the same challenges as UNC. Alegent Health Clinic comprises approximately 45 locations across the Omaha metropolitan region and surrounding rural areas. The Clinic is a separate corporation with its own tax ID, but it is owned by Alegent Health, an IDN comprising a number of acute-care facilities and ambulatory centers. The Clinic itself comprises more than 200 providers, of which 160 are physicians.

“Previously, it was a loose federation of independent practices,” says Eric Mooss, associate administrator of clinic integration. “All of them ran pretty autonomously. For example, they had different vendors for various products and services. We never really leveraged the benefits of coming together as one fully integrated clinic structure.” Five different med/surg distributors serviced the Clinic locations.

In April 2009, the Clinic put out an RFP for a prime vendor, that is, one distributor to handle all its locations. “It’s not that we were experiencing bad service from our vendors, or even bad pricing, because we were using Premier contracts,” says Mooss. But Clinic administrators recognized that by narrowing the number of distributors to just one, it could realize efficiencies. “We wanted to make it easier for the front-line clinic folks and management team to interact with just one vendor,” he says.

Alegent Health Clinic ended up awarding the contract not to one of the nationals, but to Lincoln, Neb.-based Midland Medical.

Go with the little guy
“We focused on the fact that we weren’t the big guy, and on the things we could do because of that,” says Kathy Bradford, the sales rep for Midland who has been assigned to the Alegent account. “And we offered inventory management programs, which sparked a lot of attention from them.”

“Midland was big enough to service all our sites, but they were also small enough so we could have a solid relationship with them,” says Mooss. “And when you need something and you can call the CEO of the company and get it done, that’s pretty powerful.”
Midland was competitive on price. But Alegent Health Clinic was also interested in working with the distributor on innovative inventory management programs, such as consignment.

So far, the relationship has worked out as Alegent had hoped. “Kathy [Bradford] is amazing,” says Mooss. “One of the benefits is that we have her on the ground at all our clinic locations.” In fact, Alegent is Bradford’s sole account. “She’s our eyes and ears for a lot of things even beyond supply chain. Having one company working with us has given us more insight into how our clinics are operating from an operational efficiency standpoint.”

Indeed, Bradford is involved in the Clinic’s integration committee and clinical council, which discuss standardization opportunities; and its mergers-and-acquisitions team. Her role in the M&A team is to set up newly hired physicians with products and equipment.

“Standardization is awesome,” says Bradford. “I’ve never known this to happen [as it has in Alegent].” After just a year of work, the Clinic has standardized on a number of things, including rapid test kits, alcohol preps and even nitrile and vinyl gloves.

As a Premier shareholder, and majority owner of Premier affiliate Prairie Health Ventures, Alegent Health is a loyal user of Premier contract items. That said, some items used in the clinic are not covered on Premier contracts. “We’ll continue to drive a lot of cost and waste out of the system from the expense side,” says Mooss, looking ahead. “We will have to get more efficient in our [processes] and overhead management.”

Sticker shock
Some IDN contracting executives – accustomed to operating on the acute-care side – experience sticker shock when they see the markups that non-hospital distributors have been charging the non-hospital sites, such as physicians’ offices.

“[Physician distributors] know their business, so it would be presumptuous of me to say I know it better than they do,” says Mauro. Still, he questions distributors who say their cost-to-serve non-hospital sites is greater than serving hospitals. “I’m not sure I understand what those higher costs are,” he says.

If push comes to shove, IDN contracting executives can and should talk to the IDN’s hospital distributor about potentially servicing the non-hospital sites, says Mauro. “If [the physician distributor] won’t work with me, I can turn around and say [to the hospital distributor], ‘What can you do for me?’” he says.

“Understandably, health systems want to incorporate newly acquired physician practices into their existing hospital-based medical supply price structure,” says Wilson. “But the cost to serve hospitals vs. the cost to serve individual physician offices is very different.

“With health system supply chains, hospitals are afforded economies of scale. Bulk quantities, solid formularies and simplified delivery structures mean that distributors can pass savings on to larger hospital customers …. Supply orders for physician offices are significantly smaller, vary widely and often occur more frequently because of inadequate storage opportunities.

“The logistical and physical differences between serving individual physician offices and hospitals, with an equal level of service, means that the prices for physician offices will vary from those in the hospital or IDN setting,” continues Wilson. “And that cost differential has to be absorbed somewhere along the supply chain.”

A different logistical model
“I think hospital [contracting executives] realize that the logistical model [for non-acute-care facilities] is different, and that there’s a cost associated with that,” says Scott Wakser, owner of DiaMed USA, Canton, Ohio. “But they’re very good at negotiating that differential.” In May, DiaMed was awarded the business of Summa Physicians Inc., a network comprising almost 230 physicians in and surrounding Akron, Ohio. Summa Physicians is part of Summa Health System, Akron.

“The key is, [the distributor] has to show them the value of low-unit-of-measure as well as the cost of delivery,” says Wakser. That said, contracting executives are aware of the services DiaMed offers non-hospital customers, he says. Those services include a dedicated customer service rep, a dedicated field sales rep, and another inside person who handles the group purchasing component of the relationship, to ensure the customer is in the correct tier and is receiving the pricing to which it is entitled.

Product standardization
Although standardization is never far from a contracting executive’s mind, the contracting and distribution executives to whom JHC spoke are agreed that while standardization among clinic entities is a worthy goal, standardization of products across the entire IDN – acute- and non-acute-care – is probably not.
“I consider product standardization as something you move toward, but never reach,” says Mauro. “The closer you get, the better you are financially. So I don’t expect to ever totally get there, but I do expect we can do better with the clinics than they are now.”

But standardizing across an entire IDN is challenging, says Mauro. That’s true even for just the acute-care component, particularly if it encompasses community hospitals as well as university teaching hospitals, as does UNC Healthcare. “There is an opportunity to standardize, but we have to take into account that our missions are slightly different.”

The needs of non-acute-care facilities differ from those of acute-care hospitals, says Wilson. “Their needs are different, and patient acuity is different.” For example, the complicated procedures performed in hospitals may call for one kind of “Cadillac” glove, whereas the majority of procedures in a non-hospital setting may call for another kind. “There are situations where [the non-acute-care facility] doesn’t need that high-acuity product, but it still provides safe healthcare to the patient,” he says.

Making it work
As contracting executives face a brave new world of alternate care contracting, they need to be prepared for some surprises, particularly the differences in distributors’ cost to serve acute-care and non-acute-care providers. Some of those in a position to do so are considering ditching the physician distributor altogether. “I think a lot of IDNs are considering a model where they can internally distribute to their own locations,” says Mauro.

“While that model can work,” says Wilson, “it simply means that hospitals either absorb the cost of distribution somewhere else along the supply chain, or modify the level of service to their physician offices. More often than not, however, self-distributing IDNs quickly recognize both the cost and the challenges of distribution in terms of meeting service level expectations of physician offices.”

Physician distributors not only provide “streamlined distribution services” to non-acute-care sites, but they also provide a number of value-added services, which IDN contracting executives would find hard to duplicate, says Wilson. They include:

  • Helping physician offices compare their materials management models and profitability to offices of like-size and geographic relevance while benchmarking performance based on industry averages.
  • Providing seamless connection to vendors of performance-improving technologies and services, such as electronic medical records and revenue cycle management tools.
  • Delivering data that can support change, such as enhanced product choices (including standardization of products).
  • Providing immediate calculations of inventory turns, valuation, usage by location and expiration control.
  • Enabling access to supply chain technology, such as hand-held scanners, customized catalogs, par level replenishment and electronic order tracking.
  • Connecting platforms that make it possible for healthcare providers to seamlessly order supplies from multiple vendors through one system and have those supplies delivered to multiple locations.

That said, contracting executives can institute changes that can reduce the physician distributor’s cost to serve, and hence, their own costs, adds Wilson. First, they can automate their ordering processes, hence transmitting orders to their distributor on a timely basis before its cutoffs, and giving the distributor an opportunity to aggregate the site’s volume over a period of time. Second, they can work on “rightsizing” their product choices, that is, selecting products that fit the unique needs of the non-acute-care facility. And third, they can automate their inventory control procedures, so they can better predict their needs given the caseloads they face.

Working together, the IDN contracting executive, clinic manager and distributor can figure out how to bring best value to the non-acute-care facilities, says Wilson.