Internal Customers, Physician Preference Items, and Standardization

Physicians are both participants and customers of the health care supply chain. 1 While the patient is the ultimate recipient of hospital products, the physician, or clinician decides which product to use. 1 Physicians; because of their strong preferences, create up to 61 percent of total supply chain expenditures, and drive 80 percent of hospital expenditures. 1, 2 Physicians possess a lot of power, and at times do not align with hospital management in respect to curtailing rising specialty supply costs. Instead, it has been noted that physicians are more aligned and have stronger relationships with vendors.

3 As such; hospital supply chain management has been forced to seek cost-effective strategies that can decrease the ever-rising costs of physician preference items (PPI). Product standardization efforts that take into consideration value-based decision-making techniques are proposed as a method to increase supply chain management efficiency, as well as, maintaining quality and safety of care. Physicians provide services for their patients in hospitals, and utilize resources that the hospital supplies. In fact, the hospital has even been described by economist Mark Pauley as the “doctor’s workshop”.

1 Individual physicians have specific preferences for devices that are generally high-cost, high-quality items. 3 These devices or supplies are termed physician preference items (PPI), and are concentrated in cardiovascular, orthopedic, and surgical departments. These items are very costly to hospitals, and also account for a large percentage of hospital revenues and earnings. 3 Thus, management of device and supply choices is central to the hospital’s supply-chain efficiency and financial well being. 3 While the physician decides which device to utilize, he is often not aware of, nor concerned with the economic effects of his choice.

3 Physicians are more concerned with other factors. Price and hospital contracts rank low on the list, while clinical results, reproducing results, ease of use, familiarity with product, instrumentals, and representative services are more important to physicians and the choices they make. 1,4 (Table 1) Physicians exert great control over hospitals because they are generally unwilling to allow constraints to be imposed upon them or their decision-making. 5 Physicians are also able to take their patients to competing hospitals if another hospital applies constraints to their autonomy.

These options produce a competitive disadvantage for the hospitals and their supply chain managers. Vendors have a definite advantage over hospitals. They have been influencing physician/surgeon preferences as far back as their residency training. 5 Hence, physicians/surgeons have become very loyal to their vendors and suppliers. Perhaps physicians/surgeons also have collaborated with specific manufacturers to develop new and innovative technology. 3 This then creates an incentive to the collaborating physician as he may receive financial remuneration for the use of this new product.

Another advantage that vendors’ possess is their physical presence during procedures that allow direct influence over the specific use of a particular physician preference item. 3 Indeed, vendors many times are present for scheduled or emergent cases in the surgical or procedural suites. All of these vendor or manufacturer specific measures have helped to influence physician’s decisions. Device vendors have successfully divided the alignment of physicians and hospitals and created a competitive advantage for themselves.

The relationship between physicians, hospitals, and vendors has created a situation where it has been difficult to control the costs of physician preference items. Achieving price uniformity over a range of products or narrowing the range of products utilized for specific procedures will enable standardization and possible cost savings for the supply chain. 1 Ultimately, reducing the number of suppliers and/or physician preference items will help the supply chain management negotiate friendlier prices. 1 Standardization has the potential to reduce costs for hospitals, and thus patients.

Other benefits include reduced errors by clinicians, fewer contracting and product choice decisions day-to-day for materials management, and improved safety and outcomes for patients. 1 (Exhibit 1) Two strategies that have been proposed to foster standardization include the Formulary Model and the Payment Cap Model. Using one of these models, in conjunction with a value analysis team, a hospital system can facilitate the standardization process. The formulary model essentially creates a list of accepted devices or preference items that a surgeon/physician is permitted to utilize for a given procedure.

2 The ideas behind this model are (a) volume commitments to a particular supplier result in lower prices; (b) the chosen supplier will have a sufficient product variation to satisfy physician needs for their patients; (c) there are genuinely sufficient numbers of product equivalencies on the market; and (d) patient safety is assured through product familiarity by clinicians. 2 A potential down fall of this model is that it limits or restricts physician choice, and may not be well accepted by these clinicians. 4 The payment cap method, on the other hand, restrains manufacturer influence and preserves physician choice.

2, 4 This method restricts the prices paid by the hospital for particular physician preference items. 2, 4 Basically, hospitals set a price ceiling for similar products across a particular category. 2, 4 A competitive environment is thus created between manufacturers of similar products and their prices. 2, 4 However, vendors could decide not to agree on the set price ceiling. Physicians would then discover they are unable to acquire specific preference items. 2, 4 The burden would then be thrust back upon the physician to change their preference.

Without a commitment from physicians to agreed upon equivalencies, if their preferred item is not available, the payment cap method will not be effective. 2, 4 The payment cap approach appears to be a generally more accepted method to standardization rather than limiting the numbers and types of preferred clinician items. In implementing an approach to standardization, whether using the formulary model or the payment cap model, utilizing a value analysis team (VAT) approach has been found to be successful. These teams are responsible for analyzing and evaluating new technology devices and supplies.

They then will make value based judgments that might or might not justify their purchase. Value analysis teams are similar to Pharmaceutical and Therapeutic committees and are designed to evaluate products based on outcomes, safety and relative costs. 4 Once the evaluations are carried out, the information obtained is then leveraged to make contracting and other tactical decisions in regards to product equivalencies. 4 Specific factors considered by value analysis teams include: technical properties and performance, efficacy and effectiveness, economic attributes, and potential for standardization.

1 (Exhibit 2) Team members might include senior management, physician representatives, nurses, and other allied health personnel. A hospital value analysis team can be effective at assessing products internally and enabling the hospital to achieve greater standardization. Physicians are uniquely positioned in the supply chain of hospitals. They can affect supply costs either negatively or positively. Hospitals, rather, are challenged to provide physicians with the tools necessary to provide quality and safe care, while at the same time keeping supply costs down.

Hospitals also find themselves competing with a myriad of vendors who are leveraging their close relationships with particular physicians to ply their devices or goods. Thus, hospitals find themselves at a disadvantage when trying to keep costs low through standardization efforts of high cost physician preference items. Value analysis teams that take either a formulary or price cap approach can be an effective strategy towards standardization and cost savings for the hospital. References 1. Schneller, ES, and Smeltzer, LR. 2006. Strategic Management of the Health Care Supply Chain.

San Francisco: Jossey-Bass. 2. Montgomery, K, Schneller, ES. Hospitals’ strategies for orchestrating selection of physician preference items. Milbank Q 2007; 85(2): 307-335. 3. Robinson, JC. Value-Based Purchasing for Medical Devices. Health Affairs 2008; 27(6): 1523-1531. 4. Ventola, CL. Challenges in Evaluating and Standardizing Medical Devices in Health Care Facilities. P&T 2008; 33(6): 348-359. 5. Burns, LR, Housman, MG, Booth Jr. , RE, Koenig, A. Implant vendors and hospitals: Competing influences over product choice by orthopedic surgeons. Health Care Management Review 2009; 34(1): 2-18.

Appendix Table 1 Rank| Factor Considered| 1| Clinical Results| 2| Ability to Reproduce Results| 3| Ease of Use| 4| Familiarity with the Product| 5| Instrumentals| 6| Representative services| 7| Price| 8| Hospital Contracts| Schneller, ES, and Smeltzer, LR. 2006. Strategic Management of the Health Care Supply Chain. San Francisco: Jossey-Bass, p. 77. Exhibit 1 Beneficiaries and Benefits of Standardization| Clinicians| 1. Error reduction| 2. Improved clinical outcomes| 3. Improved safety and reduced risk| 4. Improved quality| 5. Reduced risk from litigation| 6.

Less time spent on decision making on a day-to-day basis| | Materials management| 1. Fewer contracting and product choice decisions day-to-day| 2. Engage in strategy rather than transactions| 3. Higher organizational status and leadership| 4. Reduced staff| 5. Increased ability to manage risk| | Patient benefits| 1. Improved outcomes| 2. Improved safety| 3. Reduced levels of uncertainty| Schneller, ES, and Smeltzer, LR. 2006. Strategic Management of the Health Care Supply Chain. San Francisco: Jossey-Bass, p. 73. Exhibit 2 Factors Considered by Value Analysis Teams| 1. Technical properties and performance|.

2. Safety and risk to patients and health care workers| 3. Efficacy and effectiveness| 4. Economic attributes| 5. Acceptability to patients and clinicians (comfort, ease of use, utility)| 6. Risk of liability| 7. Potential for standardization| 8. Impact on market share and competitiveness| 9. Requirements for facility modification and work flow| 10. Manufacturer reputation and support| 11. Capacity of vendor to provide sufficient and reliable supply| Schneller, ES, and Smeltzer, LR. 2006. Strategic Management of the Health Care Supply Chain. San Francisco: Jossey-Bass, p. 82.

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