The Journal of Healthcare Contracting

Putting Pen to Paper
IDNs and GPOs work to validate contract savings.

In the old days, when anyone in the Chicago city government was accused of chicanery or financial hanky panky, the late Mayor Richard J. Daley, father to current Chicago Mayor Richard M. Daley, would defiantly ask, "Where’s the proof?" (In Daleyspeak, it was, "Wherezdaproof?") With some exceptions, the matter was usually closed.

Likewise, as today’s hospital and integrated delivery network (IDN) executives scrutinize group purchasing relationships, they too are asking, "Where’s the proof?" They want more than rosy projections of savings. They’re looking for dollars-and-cents proof that participation in a group purchasing organization (GPO) is paying off. What they’re finding is that the best place to look for proof is right within their own shops.

"I used to have quite a bit of skepticism in the numbers GPOs put forward," says one supply chain executive. "They appeared to be marketing numbers, not based on fact or detail. But I don’t point the finger at the GPOs. I think they were doing the best they could, given the fact that members had different information systems and hence [the GPOs] couldn’t monitor compliance." What’s more, he says IDNs "lacked an ethic of compliance and used the GPO contracts to negotiate something better on their own."

This isn’t to say that GPOs aren’t putting forth good-faith efforts to help members quantify potential and actual savings associated with contracts. It is to say, however, that even the GPOs’ best efforts will probably fall short of what a well-informed IDN or hospital can accomplish.

Accountability and metrics
Trinity Health is a 45-hospital IDN headquartered in Novi, Mich. A Consorta shareholder, Trinity is one of several IDNs for which the Schaumburg, Ill.-based GPO negotiates custom contracts on an ongoing basis.

"Accountability and metrics are part of any operation," says Lou Fierens, senior VP for supply chain and capital projects management. "We’re focused on measuring what we do." That’s not always easy.

"We had a tremendous challenge walking in, knowing that each of those 45 hospitals was for the most part on a totally different (information systems) platform," says Fierens. Each used different item and vendor masters, "which means they were calling things by totally different names," he says. Given that, it’s no surprise that Trinity’s supply chain department had a tough time profiling the IDN’s utilization and compliance patterns.

Fierens says that was a problem, because without good baseline data on consumption, a provider couldn’t accurately measure the projected or actual savings from any contract.

Long-range, there’s only one solution: Convert the entire IDN to a common materials management information system with common item and vendor masters. Indeed, Trinity has embarked on that task. It’s a two-and-one-half-year project, with the first hospital scheduled to go live in February 2005.

But in the meantime, the IDN has devised a checks-and-balances system to give the system a good idea of current usage patterns (see sidebar at right). "Although it’s a manual system, it’s extremely rigorous," says Trinity’s director of strategic sourcing, Craig Killingbeck.

"We’re taking three different data points and trying to establish what the number is," Killingbeck says.

For its efforts, Trinity gets a pretty good handle on how much it spends on a given product and, hence, how much it can expect to save by taking advantage of a Consorta or custom contract. (Trinity does some self- contracting, but primarily for non-medical-surgical, non-supply areas, such as purchased services.)

Naturally, Trinity can’t pour all these efforts and resources into every product area being considered for a contract. "That’s partly why we built a relationship with the GPO we did," says Fierens. "Our theory is that there are some commodity-related items that you won’t do appreciably better or appreciably worse than the GPO, no matter how much effort you put into it."

In addition, if the IDN doesn’t spend much money on a given product area, its purchasing staff will limit the amount of time it spends laying the groundwork for a contract. However, if Trinity’s supply chain team feels it can muster up clinicians’ support for a contract in a high-cost, clinically sensitive product area, it considers the time taken to establish a baseline to be well spent.

Cross-reference data
Like Trinity, Wheaton Franciscan Services Inc. in Wheaton, Ill., takes its GPO relationship seriously. (Wheaton is also a Consorta shareholder.) In fact, the IDN has assigned several people on its staff to analyze the potential impact of new Consorta contracts. They do so with the GPO’s help.

In most cases, when Consorta signs a contract, it gives its shareholders, such as Wheaton Franciscan Services, cross-reference tables, explains Joe Volpe, Consorta’s VP of supply chain. The Wheaton Franciscan Services materials team then cross-references the IDN’s existing products to the new ones, projecting the financial impact of the contract.

The Consorta cross-reference data helps Wheaton Franciscan Services prioritize where it will spend its time and effort. "If it’s a contract for something we spend $50,000 a year on, we won’t spend as much time as we would on a contract for something we spend $5 million on," says Volpe.

In fairly stable product areas, such as wound care, Wheaton Franciscan’s Services’ initial impact analysis "is a pretty good indication of where we’ll be at the end of the day," says Volpe. But projecting the financial impact of contracts can be much hairier when the products involved - or the medical procedures in which they are used - are undergoing change.

Hard numbers bring credibility
As Trinity and Wheaton Franciscan Services have discovered, hard numbers bring credibility and (most IDNs hope) greater compliance to contracts.

"When we get into clinically sensitive areas, the purchasing department won’t perform a numbers analysis without consulting the clinicians," says Volpe. "We have a value analysis function, which is actively engaged with clinicians. In some cases, we actually sit down with the surgeons and say, ‘Here’s the financial scenario; here’s the market scenario. What concerns and questions do you have? Are you OK moving forward with the conversion?’ We always try to do that cost-impact analysis. Clinicians are stretched tighter than ever. We don’t want to engage them in a conversion if it would be of no benefit to anyone."

The fact is, numbers can make or break a potential product conversion.

"Clinicians tend to be data-driven," says David Klumpe, senior VP of enterprise accounts for Broadlane Inc. in San Francisco. "They’re very analytical. They want data to help support the decision-making process. They tend to be skeptical of opportunities to lower costs until they are convinced that you’re presenting an accurate representation of what products are currently being used in various clinical practices, and that you’re reflecting the correct baseline." Only then will clinicians listen to what the materials team is advising them to do, such as convert a product line.

The rub, of course, is that accurate numbers are hard to come by in most hospitals and IDNs. "There are a lot of reasons why hospitals struggle with their purchasing data," says Klumpe. Acquiring good baseline data on what the IDN currently spends on a given product area often calls for the materials or purchasing team to painstakingly dig through data in the hospital’s procurement system. More often than not, the team will encounter serious roadblocks along the way.

The reason is that when blanket orders are used, the IDN almost never collects catalog-level details. According to Klumpe, it’s not unusual for hospitals or IDNs to make as many as 30 percent to 40 percent of purchases through blanket purchase orders. "But blanket purchase orders are like a blank check," he says. "So you may really have a couple of hundred purchasers throughout the facility who have the authority to spend the hospital’s money." And each of those purchasers has a great deal of latitude over the vendors with whom he spends those dollars.

"If the hospital isn’t doing a good, thorough job of building its database in the purchasing application and issuing purchase orders in that level of detail, it will be next to impossible to measure with a great deal of granularity what it can actually save (on a given contract)," says Klumpe. "You can make some kind of projection, but it’s not based on really accurate data."

To get that kind of data, the IDN must build a detailed item master and then use it. "When a requesting department wants to buy certain things, it’s critical that purchasing has the discipline to build out very discrete purchase orders with very descriptive lines, so everyone know what they’re buying," says Klumpe.

Verifying savings
Accurately identifying potential savings before signing contracts is a good thing. But monitoring actual savings over the life of the contract is better - essential, even.

Broadlane helps its clients do just that, says Dennis Robb, VP of neuroscience for the Health Alliance of Greater Cincinnati (Ohio), a Broadlane customer. In addition to his duties in neuroscience, Robb serves as the IDN’s executive liaison to Broadlane.

The vast majority of the Health Alliance’s $247 million in annual spending on materials is spent through contracts written by Broadlane, which has served as the IDN’s primary GPO for over two years. The IDN has an especially close tie to Broadlane, having outsourced its purchasing function to the GPO. In other words, the Health Alliance’s purchasing staff is actually composed of Broadlane employees. (Many are former Health Alliance employees.)

On a quarterly basis, Broadlane analyzes the IDN’s accounts payable data and presents an electronic report to the Health Alliance detailing its purchases, the contract prices paid and the savings. The IDN’s internal audit department then does some spot-checking of its own, and gives a thumbs-up or thumbs-down to Broadlane’s analysis. "We give a pretty high level of scrutiny to verifying savings," says Robb.

Broadlane isn’t alone in sharing its members’ concerns about monitoring and validating savings. Consorta, for example, has made validated savings an integral part of newly created shareholder value improvement plans, designed to help shareholders measure the value of participation in Consorta. According to Consorta VP Jake Groenewold, the plans are drawn up by Consorta and each of its shareholders, and are based on four components:

The IDN’s supply chain objectives
The IDN’s supply chain initiatives
Initiatives on which the IDN and Consorta have agreed to work together to accomplish
Various metrics, including total volume of purchases made through Consorta contracts, rebates and patronage dividends, and validated savings.

"This last one came out of our board saying, ‘We want to know what our members are saying their validated savings are,’" says Groenewold.

Plans call for the Consorta team to sit down with each shareholder at the end of the year to measure the last year. "And we’ll visit those scorecards over the course of the year," says Groenewold.

Not all dollars and cents
Although hard data on potential and actual savings can drive a contract, the fact is a contract - particularly one for clinically sensitive items - won’t get off the ground unless the materials department and clinicians enjoy a good working relationship, according to those with whom JHC spoke. In other words, data will earn you only so much buy-in.

That’s why successful IDNs encourage ongoing communication between materials and clinical folks.

The Health Alliance of Greater Cincinnati, for example, has six clinical advisory groups whose jobs are to ensure the IDN stays on top of new technology. Groups represent such clinical areas as cardiac surgery, medicine and pharmacy. Commodities are separated from truly innovative medical technologies. In many cases, national data from Broadlane, which regularly surveys members’ clinicians on such issues, is drawn upon.

"When you dig into this, you find that there are significant opportunities in identifying commodities," says Robb. And as every IDN and GPO executive knows, where there’s a commodity, there’s a potential contract.

Trinity Health also goes to great pains to ensure the buy-in of clinical end users. For example, so-called "category sourcing managers" accompany clinicians to trade shows to walk the floors with them and look at new products.

In addition, Trinity created a Sourcing Operations Steering Team, comprised of a representative from each of the IDN’s 45 hospitals. Included are CEOs, COOs, CFOs, VPs of patient care services, materials managers and others. Each was selected by his hospital’s executive team based on the following:

An ability to interact with end users and feed information back to Trinity about the organization’s priorities and opinions about sourcing initiatives and
An ability to help implement a contract once a course has been set.

Trinity also writes up annual business plans for new contract implementation. "We assign every contract that will expire, as well as any other spend we decide to tackle, to someone in our organization," Killingbeck says. "Then we set an implementation date and savings target." The Sourcing Operations Steering Team has the final say on the business plans.

Fierens says healthcare has grown up as a cottage industry. At best, most GPOs are loose confederacies or holding companies. "There aren’t a lot of operating company models, particularly on the non-profit side," he says.

But Fierens believes that Trinity Health’s systematic approach to contract implementation is helping the IDN change its corporate ethic regarding group purchasing. "Committed volume is key. When you sit down and negotiate with a vendor, you have to be able to say what you’re going to do, then do what you say."

That’s the plan.