D R. W M . M A RT Y M A RT I N

PREPARING FOR HEALTH CARE REFORM

PATIENT CARE PROTECTION AND AFFORDABLE CARE ACT IN A NUTSHELL

Incenting prevention and primary care.

Aligning incentives in payment.

Increasing transparency.

Increasing efficiency and investments in IT.

Rewarding value-based services.

Source: Rooney (2011). Is Your Supply Chain Ready to Survive Health Care Reform?Journal of Healthcare Contracting.

HEALTH INSURANCE

2010 Several new provisions already implemented.

2011 Innovation Center

for CMS established.

Prohibits federal Medicaid payments to states for services related to HAI conditions.

TIMELINE (2012-2013).

2012 Establishment of non-profit

insurance co-ops to compete with commercial plans.

Penalty on hospitals with high rates of preventable readmissions by cutting Medicare payments.

Medicare Value-Based Purchasing (VBP) program begins.

Medicaid bundled payment demonstration project begins.

Comparative effectiveness research fee begins.

2013 Financial relationship

disclosure required between providers and drug manufacturers and suppliers.

Medicare bundled payment demonstration project begins

Medical device tax of 2.3 percent.

TIMELINE (2014-2020) 2014

Individual and employer mandates begin.

Health insurance state based exchanges begin.

Independent Payment Advisory Board (IPAB) submits first recommendation on reducing Medicare spending growth.

Reduction in states’ DSH allotment.

2015Reduce Medicare

payments for HAI conditions.

2018 A new “Cadillac tax”

on employer sponsored insurance.

2020The Medicare

“doughnut hole” will officially be closed.

IS THIS PREDICTION PLAUSIBLE?

“To make economies of scale work in an environment featuringlower reimbursement, I predict that the healthcare

supplychain will feature further consolidation at every level.

In addition, vendors will need to rethink how their products

fit into the new processes being developed for disease

management and care coordination (page 35).”

Source: Rooney (2011). Is Your Supply Chain Ready to Survive Health Care Reform?Journal of Healthcare Contracting.

INDUSTRY CHALLENGES & RESPONSES

GoalIncongruence

EnvironmentalUncertainty

Strategy Performance

• Leveraging volume • Local SC capabilities• Process improvement • New entrants

•E-commerce solutions•Distribution services•Other new services

WHAT IS BEING MANAGED? THE ENTERPRISE-WIDE SUPPLY CHAIN

Deliver toPoint of

Use

Evaluate,Select

Contract Order Ship ReceiveandPay

Inventoryand

Store

Pick

Customer ManufacturerDistributor

Customer

Pick Use

SUPPLY CHAIN PERFORMANCE OUTCOMES

Safety

Sustainability

CustomerSatisfaction

RevenueReliability

Responsiveness

AssetsCost

Outcomes

Source: Sg2 2009 | ACHE 2009

Private Payer Professional Reimbursement Changes

Overhead / Expense Management

Practice Growth

Malpractice Costs

Pay for Call

Hospital Relations

Regulatory Changes

Quality Reporting

Workload

78%

74%

71%

32%

28%27%

22%

17%

15%

14%

78%Financial Challenges

Patient Safety and Quality

Care for the Uninsured

Hospital / Physician Relations

Personnel Changes

Healthcare Reform

Patient Satisfaction

Capacity

Technology

Malpractice

43%

41%

32%

30%

26%22%

16%

9%2%

Top Hospital ConcernsTop Physician Concerns

Hospital – Physician ConcernsPhysician Concerns

Hospital CEO ConcernsMedicare Professional Reimbursement Changes

10

IS YOUR PLAN ALIGNED WITH THE CONCERNS OF PHYSICIANS AND HOSPITAL CEOS?

HOSPITAL – PHYSICIAN ALIGNMENTCeding the Market Head-On Battle Splitting the Market Putting Them

on Salary

Hosp

itals

Phys

ician

s

Complex/ Unprofitable

CasesRecruited or

Employed Physicians

Surgery, Imaging, Ancillary Services

Complex/Co-morbid Cases

Independent PracticeSurgery,

Imaging, Ancillary Services

Joint Venture

Employment / Foundation

Working Together

Independent Practice

Co-Management

Source: Advisory Board 200812

CLINICAL SUPPLY CHAIN AND PPIPRESENT A GREAT SAVINGS

OPPORTUNITY

• A typical 400+ bed hospital spends about $56M annually on Physician Preference Items (PPI)

• On average, $6-10M (10-20%) could be saved on these items on an annual basis.

PHYSICIAN PREFERENCE ITEMS INTENSIFY CHALLENGE

• 30-40% of supply expense are • physician preference items

• 6–10% of operating expense

• Preference items may or may not…• be linked to outcomes/ performance• have associated contracted purchase price• be fully reimbursed

“We had our first physician preference contract negotiations to narrow the number of vendors down and guarantee 95% utilization of one vendor through engaging the physicians, resulting in an annual savings of $300,000.” - Mid Sized Hospital Survey Respondent

PHYSICIAN ENGAGEMENT STRATEGY

• Value of Time• Don’t Compromise on Quality• Show Tangible Results of Their Efforts• Recognize….

HOSPITAL–PHYSICIAN ALIGNMENTIntegration / Employment Trends

Source: Sg2 2008

1980 1985 1990 1995

Degree of Integration

2000 2005 2010 2015

Employment of hospital based specialists.

Hospital and health systems acquire primary care practices.

Many hospitals divest of primary care practices, refocus on core business.

Employment of specialists and PCPs will become more common.

Growing interest in alignment and willingness to partner with physicians.

CHART 4.1: PERCENTAGE OF HOSPITALS WITH NEGATIVE TOTAL AND OPERATING MARGINS, 1995 – 2007

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

95 96 97 98 99 00 01 02 03 04 05 06 07

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2007, for community hospitals.

Negative Operating Margin

Negative Total Margin

Source: Sargent & Smith-Daniels

FROM A LARGE SLICE OF THE PIE

OtherHospital Operating

Expense

55% to 70%

Supply Chain Management

Expense

35% to45%

Total Supply Chain Expense as a Percentage of Total Hospital Expense

WHAT ARE YOU THINKING IF YOU ARE THE CFO, CEO OR BOARD?

Source: Sargent & Smith-Daniels

25%

Supplies

* Figures based on HFMA estimates. Labor cost includes salaries, wages and benefits based on average of leading hospitals in the U.S. and Others is inclusive of profits to the hospitals. Source: S&P Industry Surveys: Healthcare Facilities; HFMA; industry reporting; Pipal Research analysis.

Total

100%

Clinical &GeneralLabor, Other

45%

Others

15%

Logistics & Distribution

15%

Total Cost Incurred by Hospitals

Supply Chain Management

To a tipping point size slice: >50% of the budget

SUPPLY EXPENSE MANAGEMENT STRATEGIES

• Reduce product pricing• Leverage total volume with single supplier• Utilization/renegotiation of corporate contracts• Assessment/reduction of value add costs• Utilization of bid process

• Increase inventory turns• Par Levels• Ordering frequency, volume

• Product standardization• Fewer items• Leverage to sole source

• Increase budgetary accountability at department level

SUPPLY EXPENSE MANAGEMENT STRATEGIES (CONTINUED)

• Product utilization review…Physician Preference Items (PPI)• Use of clinical pathways• Quantity of items used• Type of items used• Alternative procedure

• Utilize a Value Analysis approach for product selection• Based on matching (not exceeding) the quantity and

quality of resources to the required outcome

TOTAL SUPPLY EXPENSE DRIVERS IMPACT, MANAGEABILITY

• Patient acuity• Procedure volume• Patient care protocols/clinical paths• Technology• Product quality• Product brand• Price inflation• Procurement proficiency

Source: Sargent & Smith-Daniels

APPROACHES CONSIDERED or TAKEN to IMPROVE PROFITABILITY

• Enhancing collaboration with physicians in supply standardization and expense reduction

• Identifying appropriate metrics to benchmark the organization’s supply chain performance

• Decreasing direct/off-contract ordering

• Initiating a value analysis process

• Achieving minimum total expense for specialty/physician preference supplies (e.g., stents)

AHRMM Survey 2008

’08: Improving Profitability By Supply Chain

C-Suit

eSC E

xecs

1 1

2 5

3 6

7 2

6 3

PREPARING FOR HEALTH CARE REFORMRECOMMENDATIONS FOR ACTION

1. Read the actual law in a PDF format and search for terms that are relevant to materials management like value-based purchasing.

2. Draw out a timeline of when specific provisions impact your work.

3. Develop a concrete action to address each provision outlined the health care bill.

4. Identify your stakeholders by formulating a stakeholder map and ask the question: How will the healthcare law impact our key stakeholders?

5. Formulate at least three scenarios for your materials management function including the following:

A. The Ideal CaseB. The Most Probably CaseC. The Nightmare Case

RECOMMENDATIONS FOR ACTION

6. View your action plan as a change management initiative using Kotter’s Model of Change.

7. Be sure that materials management is positioned not only as a cost-center but also as a center of value.

8. Innovate your organizational structure, work processes, administrative processes, supply chain processes, and business model.

9. Persuade the CEO to have a board committee on strategic supply chain.

10.Enlist clinicians to advocate for the value of materials management but be prepared to give up some control for enlisting clinicians.

KOTTER’S CHANGE MODEL

• 1) Establishing a sense of urgency• 2) Creating the guiding coalition• 3) Developing a vision and strategy• 4) Communicating the change vision• 5) Empowering broad-based action• 6) Generating short-term wins• 7) Consolidating gains and producing more

change• 8) Anchoring new approaches in the

culture

DO YOU HAVE CAREER INSURANCE?