Evaluation of Physician Spending

A healthcare organization’s primary goal is to provide quality care to its patients.  In order to accomplish this goal the organization must remain profitable, and in order to remain profitable an ongoing evaluation of spending must take place. Funding is absolutely necessary to support the operation of large complex facilities like hospitals. If the spending of a healthcare organization is not evaluated and adjusted appropriately, it will negatively affect the ability of the organization to provide quality care to its patients year after year.
Hospitals are faced with supply costs that continue to escalate at rates that have never been seen before, making the challenge of providing affordable quality patient care even more difficult.  According to a study by the Association for Healthcare Resource & Materials Management, supply costs will exceed labor as hospitals’ greatest expense by as soon as 2020 (https://blog.definitivehc.com/reigning-in-hospital-supply-costs-and-physician-preference-item-spending). Hospitals do not have the option to be spectators in the face of such trends.
Supply chains in healthcare have built a reputation for lagging behind other industries in how efficiently they are managed. A growing reason for this includes multiple reports estimating that “Physician preference Items (PPIs) constitute anywhere between 40% and 60% of a hospital’s total supply costs” (https://blog.definitivehc.com/reigning-in-hospital-supply-costs-and-physician-preference-item-spending).
With Physician Preference Items making up such a large portion of hospitals’ supply costs, it would prove beneficial to spend time analyzing how these items are purchased and how a hospital might benefit from addressing this area of spending. PPIs can be defined as devices or supplies used in medical procedures that are purchased and used at the discretion of the physician. The issue arises because while physicians determine what items are purchased, the hospitals are the entities that actually pay for the products.
The concept of PPIs began with hospitals’ efforts to give surgeons the ability to choose supplies that they deemed most appropriate for a particular patient with a particular need.  Unfortunately, this has led to an unprecedented rise in costs for these items. Manufacturers and vendors know how to make a profit. They also know that we are creatures of habit, and surgeons are no exception. If a surgeon has grown comfortable with a particular device, supply, or even sales representative, it can become extremely difficult to convince a surgeon of the benefits of using a similar or even superior product at a better price. PPIs are often more expensive than alternatives that have shown similar clinical outcomes – some studies have even shown worse outcomes for procedures using the more expensive PPIs (https://blog.definitivehc.com/reigning-in-hospital-supply-costs-and-physician-preference-item-spending).
While some have suggested eliminating PPIs altogether, it must be noted that surgeons often have valid, even life-saving, reasons for using particular supplies that they believe most appropriately serve a patient’s needs.
Hospitals must not blindly jeopardize quality care and best clinical outcomes in the name of saving money. Click To Tweet
Instead, healthcare organizations must focus their efforts on process improvement, better resource utilization, data continuity between information systems, and product visibility. All of these, in addition to partnering with physicians, will enable a hospital to improve the efficiency of its supply chain.
A JAMA Surgery study from December 2016, showed how partnering with physicians and providing them with data and financial incentives led to a 6.5% decrease in median supply costs over a one year period. The median supply costs for the control group that was not given data and financial incentives actually rose 7.5% over that same year. This study magnifies the costly difference between actively engaging supply chain stakeholders and taking a passive approach by doing nothing.
A 2015 study at the University of California in San Diego did not include financial incentives but gave surgeons detailed data regarding cost and OR start times. By providing more reliable data and better communication with surgeons, this program led to a savings of over $60,000 in a four-month period (https://blog.definitivehc.com/reigning-in-hospital-supply-costs-and-physician-preference-item-spending).
Regardless of these in-hospital approaches, hospitals across the country differ in their ability to negotiate prices for medical supplies. This is not a new problem. A study done as far back as 2006 revealed that one New York City Area hospital paid $8,000 more than a competitor paid for the same artificial hip (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2690325/).
What can hospitals do about this discrepancy? We’ll cover that in part two of this series!