Two Sides, Same Coin

Pete Allen applies contracting lessons learned from 21 years of manufacturing experience to his post at Novation

Times have been tough for hospitals. Close to 40 percent are said to be operating with negative margins. And things could get tougher, given pending reimbursement cuts, healthcare reform, and the rising price of raw materials.

“In general, 2010 was not a terrible year for hospitals,” says Pete Allen, senior vice president, sourcing operations, Novation. “Their margins were at the level of a well-oiled grocery store, but they still had a reasonably good year. But the trend is going the other way. Thirty-eight percent of hospitals are now operating at negative margins, and we’re expecting reductions with healthcare reform. A hundred and fifty-five billion dollars will come out of the provider community in reduced reimbursement for Medicare and Medicaid. The tsunami is on the horizon.”

What’s more, providers are facing economic pressures unrelated to Washington lawmakers. “The reality of commodity prices is giving us all pause,” says Allen. The price of cotton is at historic highs, while political developments in the Middle East are driving up the cost of oil and everything related to it. “And beyond all the pressures of healthcare reform, hospitals are still dealing with a down economy,” he says.

“It’s not a zero sum game,” he says, referring to the challenges facing providers. Hospitals have to remove costs – lots of them – if they are to survive with reduced reimbursement. “Some of our large facilities are no longer looking at taking a half million or a million dollars out; now they’re looking at structural changes to the way they do business.” Cost reductions of $200 million or $300 million are more likely.

‘Fascinating learning experience’
Hired by Novation in February 2010, Allen leads the strategic direction as well as the daily operations of Novation’s contracting and program services. Departments reporting to him include pharmacy, lab, food, facilities, corporate, research and business products, capital, physician preference and imaging, custom contracting, medical/surgical, purchased services and medical/surgical distribution.

He came to Novation with 21 years of healthcare supply chain experience, all on the supplier side. He served in numerous positions at Becton Dickinson Medical, including national accounts director, political lobbyist and, from 2002 to 2010, leader of the company’s worldwide infusion therapy business unit. Prior to working for BD, he spent five years with Kimberly-Clark Corp., for whom he was responsible for national accounts and global healthcare marketing.

“From a personal development standpoint, [joining Novation] has been a fascinating learning experience,” he says. “I had run businesses, and had a lot of involvement with manufacturing, marketing and sales, quality and regulatory affairs. But they were limited to the devices and categories that I touched. To get deeply involved with capital equipment, purchased services, pharmacy, interventional radiology and some of the other areas has been a great learning experience for me.”

Allen has been impressed by the degree to which Novation is a data and analytics company. More than 40 percent of Novation’s employees are focused on data and analytics. And that’s as it should be, he says.

“Given the intense pressures that the provider community is under today, as their agent, we need to know more about their business than they do,” he says. Novation’s database contains information on $60 billion worth of spending, which can be analyzed down to the line-item level. That information allows Novation and its members to analyze spending patterns and determine pricing strategies to reduce total costs, whether through commitment or pricing.

“It puts us in a very good negotiating position to drive to price leadership. Beyond that, it gives us the opportunity to partner with the provider community to identify areas where they can save money.”

The trick is to make that data accessible and usable to Novation and its members. “We have an extraordinary amount of data, but until you parse it down to usable information, our members will drown in it,” says Allen.

“Because of the pressures our members are facing from a financial standpoint, they are not adding staff in support areas, and they’re looking for technology and Novation to help them sort through what they should be doing. We’re providing them tools and data in a digestible format so they can not only understand their current spend, but so that they can make good decisions as they look to purchase capital, or contract for a major purchased service or physician-preference item.”

Allen believes the organization is on the right track, citing, among other things, the deployment in July 2010 of VHA PriceLYNX Mobile, which allows members to retrieve and monitor pricing information and compare prices using their iPhone and iPad. “I think we’re on the leading edge, but we’ll have to continue to make investments for us to continue to be relevant.”

Adapting to members’ changing needs
Allen stepped into Novation roughly 10 years after Congress started scrutinizing the activities of GPOs. The rap then was that GPOs blocked out small manufacturers and innovative companies. That scrutiny has had a lasting impact on group purchasing organizations, and Novation is no exception.

“We have an extremely robust program” for small companies and those that are disadvantaged-, women- and minority-owned, he says. “We believe that not only do we have a responsibility to provide contracts to these entities, but also it is the smart thing to do, because much of the engine of growth in the communities we serve, as well as the innovation that occurs in all aspects of our lives, comes out of small companies.”

What’s more, Novation welcomes manufacturers of innovative technologies, he adds. “If a company has a unique technology that advances care or the cost position for our members, it can get an award mid-contract-stream.”

Novation has a long history of multisource contracting. But its members’ needs are changing, and Novation is changing with them, says Allen.

“In a survey, we found over 90 percent of the CEOs and CFOs of our hospitals would be willing to exchange high levels of commitment for lowest price.”

In January, Novation introduced a committed portfolio for what it refers to as high-spend-commodity categories, including med/surg, pharmacy, office products, lab distribution and others. The portfolio has a two-year term, effective Jan. 1, 2011, through Dec. 31, 2012. “It’s good for the manufacturer, good for the hospital, and good for us, because it allows us to deliver lowest price,” says Allen. “And we can take out a lot of redundant behavior in today’s marketplace – that is, the renegotiating for commodity products that takes place at individual hospitals.”

Although the program focuses on relatively non-controversial product and service categories, Novation continues to work with its members to help them reduce the cost of physician-preference items, says Allen.

Regardless of whether physicians are employees of the healthcare system or not, CEOs are discovering the value of sitting down with their physicians and talking about the economics of delivering care, he says. “Physicians have a vested interest in keeping the hospital viable. They are getting a lot more sensitive to the need to work collaboratively with the hospital.” Physicians and hospitals that collaborate can save tens of millions of dollars on their acquisition of clinically sensitive products, he adds.

That alignment may be tested as Medtronic moves forward in its own post-GPO experiment. (See related article.)

“We need to pay attention to this issue,” says Allen. Time will tell what Medtronic will ultimately do. “We’ve been in contact with other physician-preference manufacturers. Their support for Novation and the contracting efficiencies and value we bring forth [continues].

“I will be so bold to say that in a year or two, Medtronic will look back and say it was a bad decision.”