By James Russell, Director of Value Analysis at the University of Texas MD Anderson Cancer Center
In Healthcare Value Analysis, our focus is on optimizing efficiency, which can be achieved through three primary methods.
The first is quantitative supply cost savings, such as paying a lower price per widget, using fewer widgets (even at a higher price), and procuring rebates for benchmarked volumes, among other approaches.
The second is qualitative improvement, achieved by increasing the efficacy of products used to reduce Hospital Acquired Conditions (HACs) such as Surgical Site Infections (SSIs), Central Line-Associated Bloodstream Infections (CLABSIs), Catheter-Associated Urinary Tract Infections (CAUTIs), and others.
The third is “soft dollar” savings, which include decreasing a clinician’s time to perform a procedure, reducing turnover time between patients, and creating procedure kits containing every needed item — ensuring clinicians use the correct items in the correct order every time, reducing variation between practitioners.
Together, these methods of project management culminate in a measurable, reportable, and targetable Return on Investment (ROI) — the essence of Healthcare Value Analysis.
Each project we facilitate has a clearly stated goal or combination of goals. The following is an example of a conversation with 10 surgeons involving the goal of reducing unwanted supplier variation in the choice of surgical tools, resulting in decreased supply costs. Clearly stating the goal, even if it is purely to decrease costs, is important. Surgeons are scientists. They understand data, and they certainly understand money. Interestingly though, many are ignorant of the actual cost of the supplies they use on a daily basis. Value Analysis can help with that.
Value Analysis Facilitator (VAF): Thank you for meeting with us today. We’d like to show you some data related to the surgeries you perform, and the supply costs associated with them. This may be information you are unaware of and our purpose is to provide real data to help inform your decisions.
Surgeon (Dr. Green): Glad to do it … quickly. I’ve a got a surgery to perform in 45 minutes.
VAF: Wonderful. In this chart, you’ll see that each of you performed about 50 minimally invasive procedures in the past 12 months using Endomechanical staplers. That’s about 500 cases in the past year. Sometimes you use one stapler, and one reload, sometimes multiples. An average for all of you can be assumed of two staplers and two reloads per case.
We have two major suppliers of these items, Company Q and Company Z. Our utilization marketshare is about equal, meaning we use about 50% Q and 50% Z. Some of you use more of one supplier than the other, but almost all of you use both suppliers to some degree. What may surprise you is that our marketshare in spend is not equal.
Surgeon (Dr. Brown): I use Company Q because that’s what I was trained on in medical school and have used them for decades. I’m familiar with it and comfortable with it.
VAF: We completely understand, and you’re not alone in the rationale for your choices. Here is some more data: In examining those 500 cases, we’ve found no difference in the clinical outcomes for your patients. Whether the staplers and reloads came from Company Z or Company Q, your patients did not experience demonstrable differences in their lengths of stay (LOS), infection rates (SSIs), returns to the hospital for inadequate pain control, or failures of the devices requiring redo’s (second surgeries). Does that sound fair?
Surgeon (Dr. Yellow): I would’ve thought there must be some differences, but we’ll trust your data.
VAF: Thank you. Even the time it takes to perform your procedures is not remarkably different, based upon your choice of supplier. A Laparoscopic Appendectomy or a Hernia Repair takes about the same time, given the complexity of the cases, regardless of whether you choose Company Q or Company Z. What’s left is why we’re here, the variation in costs.
Surgeon (Dr. Green): Here we go. You want us to practice cookbook medicine. You want to prescribe how we practice. That’s just not acceptable.
VAF: Nor should it be! We would never presume of dictating your parameters. If you determine one supplier is better for a particular patient than another, we absolutely trust your clinical expertise. We simply want your choices to be informed. If your choice is based upon your own preference, rather than the patient’s condition or anatomy, that’s a bit different. Your preference is important, but it’s important to examine its rationale and the repercussions from those choices.
Surgeon (Dr. Black): The different company’s products are very similar. I actually use both.
VAF: That’s exactly what our data shows, Dr. Black. You use Company Q about 64% of the time and Company Z about 36%. You are an excellent case for us to examine further. Would you have any objection to us showing your actual data here?
Surgeon (Dr. Black): Not at all. This is kind of interesting.
Surgeon (Dr. Green): Calm down, don’t jump on their side.
Surgeon (Dr. Black): You know how much I like data, plus, I think we’re actually all on the same side here.
VAF: Thank you, Dr. Black, I hope we can convince Dr. Green of that by the end of our discussion.
Surgeon (Dr. Green): The clock is ticking.
VAF: OK, let’s use Dr. Black as our primer. He performed exactly 50 surgeries last year, using the products in question. He averaged two staplers and two reloads per case. As stated, he used both companies at 64% / 36%. No differences in clinical outcome data were noted. Here’s the financial data. A stapler from Company Q costs the hospital $450 each and a reload $250 each. That’s an average cost per case of $1,400 when he chooses Company Q. This pricing is not excellent, it’s fine. When benchmarked with other hospitals that use the same items, it falls around the 50th percentile, meaning 50% of the hospitals in our benchmarking database have a better price.
Surgeon (Dr. Green): What database?
VAF: We are members of a GPO (Group Purchasing Organization). That GPO contracts with large suppliers on behalf of its members to negotiate pricing. Utilizing their services reduces both the time and effort it takes for us to execute a contract. Our Strategic Sourcing department executes about 200 contracts per month. Anything we can do to shorten the time for each is beneficial.
Surgeon (Dr. Yellow): And they have our data?
VAF: They do, along with thousands of other hospitals. That’s how we can get a robust benchmark number when comparing our metrics to others.
Surgeon (Dr. Yellow): They have us by name? Like, they know every procedure I perform, what I use, and what the outcomes are?
VAF: Yes, we transmit that data to them, under strictly enforceable confidentiality agreements.
Surgeon (Dr. Black): OK, get back to me.
VAF: Gladly. When you choose Company Z, a stapler costs $1,500 each and a reload $900. At your average utilization per case, that an average cost per case of $4,800. When we compare that to Company Q at $1,400, you can see there’s quite a difference ($3,400). Let’s multiply this by all your cases. You performed 32 cases with Company Q at a total cost, just of the Endomechanicals, of $44,800. You performed 18 cases with Company Z at a total cost of $86,400. Our hospital spent almost twice as much on staplers and reloads when you chose Company Z, even though they were less than half of your total cases.
Surgeon (Dr. Black): I had no idea. That’s kind of absurd.
VAF: Let’s see what the savings would be, if you decided to move all your business to Company Q. Those 18 cases would be $3,400 less expensive. That’s total of $61,200 in direct supply cost savings, if you chose to use Company Q instead of Company Z. You already us both products, so there’s no real learning curve. It’s simply your choice.
Surgeon (Dr. Green): What if he decides there are some patients that Z is just better than Q?
VAF: That’s totally his call. In fact, let’s run the numbers with a new ratio of 90% Q and 10% Z. The net result is $44,200 in savings.
Surgeon (Dr. Yellow): So, you’re saying he has to change.
VAF: Not at all. The choice is his. Now I’ll be honest. If, after receiving this information, Dr. Black starts using more Z than Q, it’d be kind of strange. We might question why he’s spending more per case than less, now that he knows the cost difference.
Surgeon (Dr. Brown): Maybe he’s doing it to spite you!
VAF: Let’s hope not! Anyway, we’ll provide each of you with your data and the overall data of the 10 of you. We’ll show each of you the potential savings of moving various percentages of our business to Company Q, but here’s the highlights. As stated, by utilization, we’re about 50 / 50. That’s 250 cases per year with Company Z. If we moved 10% of them (25) to Company Q, that’s $85,000 less we’ll spend on Endomechanical staplers and reloads in a 12-month period. Approximately 30% equals $255,000. Approximately 50% is $425,000. We’re talking real money here.
Surgeon (Dr. Green): I have to admit, I didn’t know this was that impactful. But you’re forgetting a kind of dirty little secret.
VAF: Company Z pays some to you.
Surgeon (Dr. Brown): You knew that?
VAF: Absolutely. Payments made from manufacturers to physicians, and to teaching hospitals, are publicly reported data. Anyone, including your patients, can log into the CMS (the Centers for Medicare and Medicaid Services) Open Payments portal and look you up. We’ve done our due diligence and looked up all 10 of you.
Surgeon (Dr. Brown): I don’t think I like that (smiling).
VAF: We are not here to embarrass you. You’ll notice that information, despite being available freely on the internet, is not on our slides here. But you need to know that we know, that your leadership knows, and that your patients could know. If it makes you uncomfortable, it’s your own behavior that’s the issue.
Surgeon (Dr. Yellow): Wait a minute, you guys are getting paid by the suppliers? Isn’t that a conflict of interest?
VAF: Actually, it’s perfectly legal. As long as the payments are not actual cash. A company can sponsor you to speak at a conference and pay all your expenses … in Aruba! They can pay for your attendance at a local educational presentation with dinner and drinks and cover all of the costs. There are lots they can do that doesn’t violate anything. We have hospital policies about it, but that’s not why we’re here.
Surgeon (Dr. Green): Exactly. If I’m getting these perks from Company Z, there’s an implied expectation that I’ll use their products. And they aren’t bad products.
Surgeon (Dr. Black): They just cost three times as much!
Surgeon (Dr. Green): That sounds like a contracting problem.
VAF: Another excellent point. We have spoken to Company Z about adjusting our pricing. If they agreed to do that and bring their prices close to Company Q’s, we wouldn’t have had this meeting. This meeting is our last step. We’d much rather achieve cost savings without taking up your precious time. Dr. Green has surgery in 20 minutes!
Surgeon (Dr. Green): Don’t be a wise guy (smiling).
VAF: Seriously. When we went to Company Z and requested a price adjustment, they basically laughed at us and said they had loyal surgeons here who would never change to their competition.
Surgeon (Dr. Black): Did they now?
VAF: Absolutely. If some of you that use Company Z wanted to talk to your friends, I mean the representatives from Company Z, it could go a long way to influencing their behavior and increasing our leverage. We’re not asking to have the lowest price in the nation, we simply want to be treated fairly.
Surgeon (Dr. Brown): Hey Dr. Black, tell them next time you play golf together!
Surgeon (Dr. Black): Like you don’t (sheepishly).
Surgeon (Dr. Yellow): And do they pay for this golfing outing?
Surgeon (Dr. Green): Of course they do.
Surgeon (Dr. Yellow): I’ve been missing out!
VAF: Boy, are we getting off track! Although maybe not really. Again, our goal is not to prescribe your behavior, it’s to inform your choices. The decisions you make in choice of product have real consequences, not just in the hospital’s expenses but sometimes in the bills your patients receive.
Surgeon (Dr. Yellow): Wait a minute. We use DRGs (Diagnosis Related Groups) for billing. We get paid a certain amount for the procedure, regardless of what we spend.
VAF: Kind of. This is very complicated, but in general, all your patients don’t fit into that scenario. Many have co-pays that are determined by formulas. Some of your patients are actually self-pay and pay some kind of percentage of what we charge. I won’t begin to suggest that I understand it all, but our Revenue experts would be glad to chime in. Suffice it to say that the choices you make can have an impact on your patient’s bill.
Surgeon (Dr. Yellow): I really didn’t know that. I mean, sure, I want the hospital to pay fair prices for the things I use, but I want my patients to pay as little as possible out of their own pocket even more.
VAF: I think Dr. Green has work to do. Let’s stop here and meet again in a month. We’ll continue to track your data and show you if anything has changed. Please feel free to speak with the Company Z reps about this meeting and encourage them to stop taking advantage of us. Also, our Operating Room specialist is right here and can alter your preference cards for these cases however you like. Here’s a suggestion: How about we put Company Q on every preference card for laparoscopic surgery? If you want Company Z for a specific case, just tell your team and they’ll swap it out.
Surgeon (Dr. Black): How about we talk to our “friends” the reps first and see if we can make any headway.
VAF: Fair enough. Thanks again for your time and I hope this was interesting. We’re glad to look at other categories anytime you’d like.
Finding a Balance
As you’ll notice, the Value Analysis professional will go to great lengths to be cordial, yet factual. Friendly, yet objective. A balance is necessary. We want to work with these surgeons in the future, and we want them to talk to their colleagues positively about our process. We would not serve our long-term mission by offending them and embarrassing them. But we also want their respect. We earn that through data, information, and requiring rationale for inefficient behavior.
This conversation is meant to show that even when some of our goals are not necessarily in sync, we can bring Clinicians,Finance, and Supply Chain together for common purposes. Unwanted variation that creates inefficiency is the enemy of quality, cost-effective care. By stating our objectives clearly, it’s okay to say we’re trying to save money, we can often overcome resistance to change and battle that all too frequent manta “But that’s the way we’ve always done it!”
James Russell is the Director of Value Analysis at the University of Texas MD Anderson Cancer Center, located in Houston, Texas. He is a Registered Nurse with over 35 years of experience in three disciplines: Critical Care, Psychiatry and Supply Chain Value Analysis. He has published dozens of journal articles in nursing leadership and value analysis. He is a frequent conference presenter and podcast guest. When not at work, you can find him and his spouse (also a nurse … and an attorney) spoiling their rescue dogs.