Supply chain’s role in value-based care

Outcomes-based contracting has to transcend silos of care – and incorporate clinicians’ input

We’ve all heard the phrase “low cost, high quality always wins.” Few people will disagree with this simple but sage advice. But is it really true in today’s fee-for-service world?

Several recent studies have demonstrated that despite new readmission penalties, organizations with the highest rate of readmissions actually drive more profit compared to their peers who’ve transformed care protocols to proactively prevent unnecessary re-visits to the acute care setting. So it appears we are caught in the cross-hairs at a moment in time where payment reforms haven’t quite caught up with operating reality.

This certainly doesn’t mean we should slow down efforts to improve quality and outcomes, but it does surface a few important questions, including these two: What outcomes measures really matter to drive improved performance? What is the healthcare supply chain’s evolving role in managing the balance between cost and quality?

Supply chain impact
The transformation of the fee-for-service model to value-based care is not a question of “if” but of “when.” Advisory Board Company research has shown that over 10 percent of admissions are already covered by risk-based payment models, with over 80 percent of hospitals reporting they already participate in some level of value-based models or will be by the end of 2013.

Healthcare reform and dramatic demographic shifts are challenging hospitals to deliver top quality care for less, and the pace of innovation is furious. Value-based care requires that we move beyond looking at cost from a short-term perspective to understand what truly drives better long-term outcomes, a paradigm shift with direct implications across the supply chain.

We’ve been speaking with executive leadership across hospitals and suppliers to assess what they can impact within today’s constraints and where they are making investments for the future.

The discussion must start by defining what outcomes measures really matter and improving our ability to correlate specific supply decisions with improved performance. Evaluating and defining outcomes is a multi-step process that involves hospitals, surgeons, primary care physicians and insurers. Each stakeholder collects important data specific to his or her role in patients’ lives across a different window of time.

Outcomes-based contracting
As the data currently stands, hospitals track patients’ immediate stay, and surgeons follow their recovery. Primary care hospitals and insurers subsequently follow their long-term health trajectory. The key to unlocking outcomes-based contracting is linking these silos of knowledge. But where is the starting point? And what’s the road map from here to there?

Well, factors that affect procedural cost, such as operating room time or personnel costs, may be the easiest place to start, especially since this data already resides within hospitals. As hospitals become more sophisticated in assessing total cost, they will be able to broaden the scope of evaluations to include episode-of-care cost (data surgeons can supply) and lifetime costs (data within the reach of primary care physicians and insurers). These types of data can more accurately capture the impact of supply chain decisions on anything from likelihood of readmission to likelihood of revision. The good news is, accountable care organizations and population health management strategies incentivize collaboration.

Enlisting clinicians’ support
In the short-term, healthcare can make tremendous headway by empowering clinicians in collaborative contracting decisions, and by moving away from price and “ready baked contracts” as the primary determinate for contract awards. After all, clinicians – not executives – best understand what clinical technologies are required to provide the best patient care.

Rather than restricting choice by standardizing or “forcing” clinicians to award decisions for short-term price gains, hospitals should engage in productive dialogue with clinicians around which products truly drive better performance, and leverage data to truly understand why. Physician alignment is the cornerstone of building the framework for outcomes-based contracting, but laying the renewed partnership’s foundation requires a systemic, not episodic, approach. Instead of viewing physician preference as an inhibitor to maximizing supply chain value, top performers engage clinicians with a formal infrastructure that enables them to take ownership in sourcing decisions and provide insight into what factors truly drive product selection.

By making this a data-driven discussion, hospitals and physicians can shift away from this being a politically sensitive discussion to a fact-based mission, as both strive to understand those circumstances in which specific products might actually justify a premium because they indeed drive lower total costs through better performance. In many cases, these discussions have led to physicians appropriately questioning the cost variation among similar supplies where there is no clear evidence that marketed features do in fact improve either short- or long-term outcomes.

In brief, we have the data today for outcomes-based contracting. It’s sitting in the heads of our physician partners and we can unlock it by bringing credible data to our efforts in order to pivot from conversations around preference to conversations around product requirements.

Interdependence with suppliers
Rather than focusing solely on price, hospitals should recognize their interdependence with suppliers and explore ways to help uncover shared value. Historically, suppliers have not partnered with hospitals on these efforts because reduced use of supplies translates into lower profits. But recognizing that physician preference alone is no longer going to dictate market share, progressive suppliers are responding to this shift by sharing risk to prove their ability to drive lower cost and high-quality care.

By aligning suppliers and providing meaningful incentives around achieving clinically and cost-effective utilization, hospitals create new opportunities for suppliers. This requires that hospitals and suppliers take a true partnership approach and share value by taking real costs out of their day-to-day interactions and creating meaningful incentives when products do in fact drive better outcomes.

Harry Kirschner is managing director, The Advisory Board Company. He can be reached at