Challenges and Opportunities in Procurement

A Private Hospital Perspective

Dr Simon Woods

Executive Director Cabrini Malvern

Relationships

• Trust

• Multi - stakeholder

Disclosures

• Salaried employee of Cabrini Health

About Cabrini Health

• Not for profit private health group

• 2 acute hospitals – 500 and 100 beds

• 20 operating theatres

• Emergency Department

• 2 Rehabilitation sites

• Palliative Care and Aged Care facilities

• Integrated, home based care program (HITH)

• Technology and Linen divisions.

Dr Simon Woods Executive Director Cabrini Malvern (General Manager) and Executive Director Cabrini Pharmacy

• 1979 – • Medical Practitioner

• 1985-2011 • General and Upper GI Surgeon

• 2007-2014 • Executive Director of Medical Services Cabrini Health

• 2013- • Executive Director Cabrini Pharmacy

• 2014- • Executive Director (General Manager) Cabrini Malvern

Hospital Supplies – a less than perfect market • A large number of buyers and sellers

• No entry and exit barriers

• Perfect factor mobility

• Perfect information

• Zero transaction costs

• Profit maximization

• Homogeneous products

• Non-increasing returns to scale

• Rational buyers

• No externalities

• Da Vinci robot & other monopolies

• Technology ‘lock in’ TGA regulation

• Assets largely immovable

• Commercial in confidence

• We wish!

• Hospitals are price takers from health funds

• That’s not what vendors tell us!

• Economies of scale

• More on that later

• Massive regulation including prosthetic

schedule

A transparent market

Non transparent markets

Price transparency

• Sellers market power • Patents, non-uniform pricing, complex contracts

• Preferences often not re-visited over long periods

• Target doctors individually

• Hospitals’ purchasing power? • Driven by doctors – surrogate buyer

• Volume variation between hospitals

• Ambiguous price information

• Difficult to source cost data from others

• Cost of price/product comparison and change

Price transparency for medical devices

• Physicians often unaware (unconcerned) about absolute product price.

• Choices based on familiarity, brand, relationships, history, performance.

• Pricing often “blurry”

• Potentially divergent objectives; hospitals vs physicians

• Manufactures exploit this divergence • Loyalty, promotion, education, support

• Transparent pricing desirable, but currently impossible

Pauly M, Burns L. Health Affairs 2008. Price transparency for medical devices

Pricing Awareness?

• 503 respondents

• Few orthopedic surgeons know the costs of the devices they implant. • Implants account for up to 87% of cost of procedure

• Three fold variation in prices paid by hospitals

• 80% rated knowledge of cost > moderately important

• 36% surgeons and 75% residents rated their knowledge as poor or below average

• Only 20% able to estimate cost (+/- 20%) correctly

Okike K, et al. Health Affairs. 2014;33

Common Supply Pitfalls

• Not consolidating vendors • Utilisation/volume savings

• Efficient inventory management

• Poor contract compliance • Implement and monitor

• Underinvestment in Clinician Engagement • Vital to engage clinicians in product and vendor decisions

• Choices driven by desire for patient care

• Support of leadership committees is crucial

Rizzo E. Hospital Review 2013. The supply chain’s role in making or breaking hospitals’ margins, competitive edge.

Setting the scene Engaging with the private clinican

• Patients and families are the focus of our care

• But: • Clinicians bring the elective procedural work

• Most of our clinicians are not employed by Cabrini • “secondary customers”

• They have alternative hospitals seeking their services

• Clinicians value safety, clinical outcomes and efficiency

• They have little knowledge of business and operate on high margins

• Mostly they value….

Traditional idea of autonomy is changing

Clinician Autonomy

Clinical Governance

Regulatory Compliance

National Standards

Commercial Pressures

Changing the paradigm

Doctor as customer

The compliant doctor

Engaged doctor as partner

Engaging Doctors in the Health Care Revolution

• Doctors: • anxious and angry about transformation

• fear loss of autonomy, respect, and income

• grieve for the past – denial – anger

• Ambitious strategies they do not embrace are doomed.

• Hospitals must focus on what can be gained, positives.

Lee T, Cosgrove T. Harvard Business Review. Engaging Doctors in the Health Care Revolution. June 2014

A common starting point

• >95% of clinicians and financial managers • Agreed that high quality services would only be affordable if clinical

and finance colleagues are properly engaged to achieve the desired outcomes together.

http://www.hfma.org.uk/publications-and-guidance/publications.htm?sort=1&keyword=clinical%20engagement&categories=info_8

The top three barriers – according to Clinicians

• Lack of basic financial awareness/skills among clinicians

• Lack of robust cost data

• Poor presentation of financial and clinical data

The top three barriers – according to Finance Managers

• Variability of cost and income data

• Lack of robust cost data

• Lack of basic financial awareness/skills among clinicians

Why does engagement matter?

• Business viability

• Safety

• Quality

• Willingness to adopt and accept change

• Better communication

• Greater standardisation

• Reduced waste

• Opportunities for volume discounts and rebates

Both groups agreed – good engagement requires…

• Availability of good data • Clinical

• Financial

• Clinical champions AND Finance champions

• Shared vision and culture.

Doctors know the trends

• Reluctant to change some practices. • Often eager to adopt new (?sexy) innovations • But beware the enthusiastic early adopter

Not all advice is evidence based

Medical staff engagement. The risks of getting it wrong.

Poor Engagement + Underutilised Capital

“Why did you listen to him – he knows nothing!”

“Other hospitals

have much better….”

“You bought the wrong

equipment”

How can doctors be engaged?

• Align goals of individuals and organisation • Demonstrate that you are running a business

• Hospital success is linked to their success and vice versa

• Provide information on specialty and individual performance

• Link financial outcomes to rewards/incentives (non financial)

• Involve doctors in decision making

Organisational commitment to engagement

Rational and emotional engagement. Both required to drive performance

..increased willingness to go above and beyond the normal job demands….

…managers are one of the strongest drivers of engagement….

Bust the myths

• “But we are concerned with clinical outcomes”

• “Aren’t you not for profit?”

• “Aren’t you making plenty of money?”

• “Doesn’t the Catholic Church contribute to you?”

Demonstrate you are running a business

• Talk about it

• Write about it

• Show them the financial reports

• Tell them your successes and failures

• Talk about the external environment • Health funds

• PBS reforms

• Pathology and Medical Imaging changes

…just means that we spend money thoughtfully and mindfully.

Clinical Costings – Providing information at Specialty and Individual level

• A single specialty, procedural financial data

Doctor Total Profit DirectCosts Indirectcosts Total Revenue Separations ALOS

Profit / Sep Ave Cost/ sep Ave Rev/ sep Ave Hours ICU Ave OT Mins Profit per OBD

A (-236,014) $ 542,466 $ 191,048 $ 497,501 143 1.87 (-1,650) 5,129 3,479 0.03 97 -$881

B (-148,075) $ 284,582 $ 108,409 $ 244,917 62 3.08 (-2,388) 6,339 3,950 0.00 106 -$775

C (-81,086) $ 278,939 $ 110,103 $ 307,957 95 2.16 (-854) 4,095 3,242 0.24 91 -$396

D (-54,262) $ 295,149 $ 96,399 $ 337,287 116 2.12 (-468) 3,375 2,908 0.00 74 -$221

E (-28,594) $ 70,365 $ 14,746 $ 56,517 29 1.17 (-986) 2,935 1,949 0.00 75 -$841

F (-16,936) $ 175,216 $ 45,346 $ 203,626 43 3.00 (-394) 5,129 4,735 0.49 115 -$131

G (-15,686) $ 155,335 $ 60,279 $ 199,929 77 2.05 (-204) 2,800 2,596 0.34 41 -$99

H (-11,527) $ 144,262 $ 38,381 $ 171,117 60 1.85 (-192) 3,044 2,852 0.00 62 -$104

I (-5,776) $ 103,395 $ 41,709 $ 139,329 70 1.76 (-83) 2,073 1,990 0.00 33 -$47

J (-3,140) $ 9,836 $ 2,802 $ 9,498 1 9.00 (-3,140) 12,638 9,498 0.00 260 -$349

K (-2,266) $ 8,675 $ 2,745 $ 9,154 2 1.00 (-1,133) 5,710 4,577 0.00 125 -$1,133

L 666 $ 226,109 $ 78,187 $ 304,964 163 1.36 4 1,867 1,871 0.00 34 $3

M 11,737 $ 319,022 $ 85,360 $ 416,119 127 1.99 92 3,184 3,277 0.20 64 $46

N 18,352 $ 146,763 $ 81,328 $ 246,445 112 1.99 164 2,037 2,200 0.00 31 $82

O 28,825 $ 133,660 $ 59,569 $ 222,056 108 1.44 267 1,789 2,056 0.00 28 $186

P 30,262 $ 331,169 $ 104,380 $ 465,812 133 2.74 228 3,275 3,502 0.00 34 $83

Q 108,008 $ 250,725 $ 122,409 $ 481,143 179 2.08 603 2,085 2,688 0.42 29 $290

R 203,563 $ 830,412 $ 297,014 $ 1,330,993 477 2.22 427 2,364 2,790 0.49 28 $192

Total (-201,948) $ 4,306,082 $ 1,540,214 $ 5,644,363 1997 2.07 (-101) 2,928 2,826 0.21 49 -$49

Incentives – do they work?

What’s in it for me? • Tickets, dinners, trips – short term, trivial

• Financial sharing arrangements – difficult to administer

• Sustained improvements to productivity – meaningful, win-win • Increased theatre efficiency improvement

• Unit/division secretarial support

• Data manager, IT support

• New equipment

• HFMA round table – physicians more interested in efficiency gains than direct rewards

https://www.ecri.org/Documents/MDPT/Implant%20roundtable.pdf

Greater Standardisation

• Reduce waste

• Reduce inventory

• Reduce work

• Reduce risk

• Reduce unit price

Greater standardisation

• Why did we stock every brand and every type of orthopaedic cement?

• Why did we have 5 brands of antiembolic stockings?

Match clinicians to the issue to be considered

• Avoid one or two “Clinician Representatives” providing token representation on Equipment Committee

• Only ask doctors about decisions related to their specialty

• Don’t waste more of their time than is necessary

• Schedule meetings out of hours

• Beware unilateral strong advocates

Involve doctors in decision making

• By groups or elected representatives • Avoid self appointed opinion leaders

• Let them evaluate but not negotiate with vendors

• Involve them in meetings with vendors

• Show them business cases and invite comments

• Tell them the price differentials in the offers • not absolute price which may be confidential

• Ask them to prioritise CAPEX requests

Laparoscopic trocars

• High volume

• Multiple providers

• Little difference in functionality

• Proposition to consolidate

• Consultation re preferred device

• Consensus achieved

• Major savings due to volume discount

Rebatable items • Wide choice in pacemakers &

defibrillators

• No preferred provider

• Frequent change in clinician preference

• Implications for patient safety – tracking of devices

• Offers made to major companies to provide proposal to become preferred supplier

• Clinicians advised which company to prefer – if devices therapeutically equivalent

• Major consolidation to one provider

• Cardiac data manager funded from savings

Engagement doesn’t always save money • Laparoscopic equipment

tender • 5 vendors trialled • 2 rejected by clinicians • Vendor A preferred but

substantially more expensive than close second choice vendor B

• Clinicians elect for vendor B as relatively ambivalent when shown price difference

• Fibreoptic endoscopy tender • 2 major suppliers • Vendor A significantly more expensive • Universal user preference for Vendor A • Vendor A chosen despite cost in view

of clinician preference

Clinician engagement in summary

• Clinician engagement is feasible

• Make finances transparent

• Work to align organisational and individual goals

• Make them accountable to their peers for decisions

• Involve clinicians from the outset

• Always stress that changes must not be at expense of quality and safety

Future opportunities

• Improved costings • RFID tagging of consumables

• RFID tracking of patients – assists with measurement of time in OR etc

• Appointment of clinical leaders

• Seek evidence based decisions

• Encourage clinician attendance at management meetings eg. cardiac, perioperative, maternity • Not just specialty group meetings.

• Insight into broader issues.

Relationship vs Transaction

Transactional Relationship

Solu

tion

P

rod

uct

Complex – one off New theatre fitout

Straight rebuy Gloves Cleaning chemicals

Complex – long term Imaging equipment IT dependent purchase

Recurrent – evolving Stents Laparoscopic consumables

Who do you market to?

Hospital Straight Rebuys

Clinician Novel Procedures

Modified Rebuys

Keep us informed re

emerging technology

Thank you. Questions?