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Reining in Hospital Supply Costs and Physician Preference Item Spending

Supply costs are a primary target of healthcare organizations looking to optimize their operations. Unlike labor and overhead expenses, medical and surgical supply spending is more discretionary and has less immediate impact on clinical care or capacity. In addition, supplies are an increasingly large component of healthcare spending, with the Association for Healthcare Resource & Materials Management predicting that supply costs will exceed labor as hospitals’ greatest expense by 2020. While group purchasing initiatives, streamlined distribution, and better inventory management can produce meaningful savings, recent studies suggest that providers can play an equally important role when they have the right information to make cost-effective decisions.

Healthcare Providers can influence the cost of any given procedure or care episode in a variety of ways, such as through the accuracy of their diagnosis and the relative effectiveness of their prescribed treatments. The devices, supplies, and tools they use during each care episode can also seriously affect costs. Supply costs can be relatively standardized or minimal for some fields, like family medicine, but vary widely among others, such as surgery, because some procedures rely heavily on a device, like a spinal implant or pacemaker insertion. The reason for the variation isn’t always provider skill, but his choice of supplies, a category in hospital supply chain circles known as physician preference items (PPIs). PPIs, as the name suggests, are devices used in medical procedures at the discretion of the physician. While intended as a way to ensure physicians use the most suitable device for the patient, PPIs may be more expensive than alternatives with the same clinical effectiveness, and may even be associated with worse outcomes. Some physicians may favor a particular device brand simply due to long-term use. Various reports have estimated that PPIs constitute anywhere between 40% and 60% a hospital’s total supply costs.

Top 10 Hospitals with Highest Supply Cost Ratio

Hospital Med/Surg % of Operating Expenses Med/Surg Supply Costs (M) Operating Expenses (M) Salaries (M)
 Northwest Hills Surgical Hospital  59.3%  $15.7  $26.5  $5.3
 Methodist Hospital For Surgery  59.2%  $64.9  $109.6  $13.9
 Mount Carmel New Albany Surgical Hospital  59.2%  $49.0  $82.9  $14.7
 Baylor Medical Center at Trophy Club  58.7%  $31.5  $53.6  $9.5
 Pine Creek Medical Center LLP  58.1%  $34.2  $58.8 $10.8
 Baylor Surgical Hospital at Las Colinas  56.8%  $20.3  $35.7  $7.1
 Arizona Spine And Joint Hospital  54.8%  $13.2  $24.1  $6.0
 Oklahoma Spine Hospital  54.5%  $27.9  $51.2  $12.5
 Doctors Hospital LLC  54.2%  $10.6  $19.6  $2.4
 The Orthopedic And Spine Inpatient Surgical Hospital  54.2%  $34.3  $63.4  $12.0

Source: Definitive Healthcare

Rather than eliminate physician PPIs altogether, healthcare organizations have experimented with other ways to get providers to reduce supply costs. A December 2016 study appearing in JAMA Surgery found that surgeons, given proper information and incentives, could reduce supply costs over time. The surgeons in the study, who worked at an unidentified academic medical center, were given a financial incentive to reduce costs by five percent. One group was provided with scorecards detailing monthly costs, high-price items used, and rankings of other surgeons’ costs for the same procedure, while the other received no extra information. Over a one-year period, median supply costs for the scorecard group fell 6.5 percent, while the median expenses for the control group rose by nearly 7.5 percent. The trend remained even when compensating for case mix index. Researchers identified two factors responsible for the positive results: better awareness of supply costs, and a willingness to emulate high-performing surgeon peers. While surgeons in the study agreed that it was their responsibility to help reduce costs, those who used the scorecard system had a far better idea of how their preference items and supply requests affected overall spending. As a result, it was much easier for them to adjust their supply choices accordingly and choose more cost-efficient items and devices.

A similar program was tested at University of California at San Diego in 2015. Though it had no financial incentives, it still provided surgeons with a detailed account of their spending for each surgical procedure. In some cases, there were product costs for items that surgeons never actually used, items that nurses had prepared in anticipation for a procedure but were unnecessary and represented an unnecessary expense. With improved communication and more reliable cost data, providers were able to cut spending on 18 of 34 procedures, representing total savings of more than $60,000 over a four-month period. In addition, feedback on procedure time also helped surgeons better estimate their OR booking and utilization, improving workflow.

Cost awareness is only one component of any strategy to rein in supply costs. The clinical effectiveness of any medical device is just as important, but isn’t as easy to calculate, especially for smaller organizations that don’t have the case volume or analytics capability to assess thousands of procedures and outcomes. As a result, many hospitals and even larger health systems turn to third parties that specialize in comparative effectiveness research. In 2013, UnitedHealth Group, Baylor Health, Dignity Health, and Advocate Health Care created SharedClarity, a joint-venture company that identifies the best-performing stents, defibrillators, heart valves, and other high-cost implantable devices. By combining each health system’s patient data, analysts can determine how each brand of device compares in any clinical situation and share the results with member organizations. Premier Inc, one of the country’s largest GPOs, has a similar program known as the Partnership for the Advancement of Comparative Effectiveness Review (PACER). The initiative saved members an estimated $8.1 million in cardiac stents and surgical mesh from 2014 to 2016, according to Premier.

Cutting supply costs isn’t as simple as finding the lowest price. As the studies suggest, real improvements require a dedicated effort in which supply chain staff, providers, and administrative personnel can share information and determine a medical device’s actual impact on outcomes and spending. Due to the rate of technological and clinical advances, it’s also a long-term effort. But because of the growing pressure to improve efficiency in healthcare, it’s something healthcare organizations cannot afford to ignore.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our facility profiles include detailed current and historical financial information for hospitals, health systems, skilled nursing facilities, and more.

March 28, 2017
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