Posts Tagged Value-Based Purchasing

by Gunter Wessels

Part 1: Suppliers, Hospitals and the Means-Ends hazard. 

The hospital industry has been compared by some to the airline industry. Suppliers like Boeing, Airbus and GE all make money, while the airlines (except Southwest) lose money regularly. In most of the hospital marketplace, it’s virtually the same. Insurance companies, imaging vendors, GPOs, physicians, pharmaceutical companies and other suppliers enjoy profits, while the hospitals sustain operating losses. 

With the increasing focus value in healthcare, quality and efficiency (lower cost) is top of mind. So what about the suppliers? Shouldn’t the folks making a profit help?  Or are they part of the problem? 

In my view, healthcare suppliers can improve healthcare value, and they have both an obligation and an opportunity to contribute to the value discussion. Even so, viewed in isolation, the price of a pill or a CT scanner does not determine value in healthcare. The outcome of the care episode, and the overall cost to deliver that outcome, should be the focus. 

In this entry I’m going to focus on the first of the two dimension of the problem: the Means-Ends hazard. In another entry I will discuss the second hazard, Value-opacity. 

What is the Means-Ends hazard?

Here’s the problem. The supplier-hospital sales-purchasing process is like a tango where both parties are trying to lead. In this quasi-adversarial dance, each party takes turns bruising each other without noticing that they suffer from a common problem. As a result, suppliers and hospitals inadvertently evade potential value by having a Means-End focus on the unit cost of the goods that are consumed in the course of delivering Healthcare. 

Focusing on the unit cost of goods is important and rational, since supplies typically consume around 17% of a hospital’s operating revenue. Focusing on the unit cost is also easier than designing a framework to evaluate how the good in question, whether a bandage or a stent or a lab analyzer, contributes to the value of the episode of care.

The Means-Ends Hazard for Suppliers

Generally speaking, suppliers have a dual market orientation: sales revenue growth and competition for market share. Suppliers achieve competitive advantage through innovation, maintaining GPO contracts, and brute force marketing and sales effort. Suppliers want more of hospitals’ shelf space, “mind-share,” and physician preference. 

As a society, we want them to have this orientation because they provide good jobs with higher than average pay and rather generous benefits (just ask a pharmaceutical rep). Furthermore, we can tax their profits, and we can invest in the equity of these organizations and benefit from their profitable growth. It’s a good thing to have profitable suppliers. 

However, within the bounds of regulatory, legal, and ethical considerations, suppliers need to grow sales revenue in any way, as fast as possible. In a competitive environment they need to employ the allowable Means necessary to get the Ends their shareholders demand. 

The dark side of this goal is there is no practical reason to avoid lobbying for preference based on relationship with the rep/brand/company. Preference creates the habit that drives continued preference. This is normal. People learn to use a system, and they justifiably don’t want to change just because the hospital can save a few bucks. Change, as we are witnessing in Washington, is difficult. However, as General Shinseki said, “If you don’t like change, you’ll like irrelevance even less.” 

Of course, some bad actors in good companies have gained the power of habit through questionable (see http://content.nejm.org/cgi/content/full/356/17/1742)  unethical (http://www.miamiherald.com/business/nation/story/1162508.html) and sometimes illegal means, including kickbacks and bribery (see convenient examples http://www.nytimes.com/2008/01/22/business/worldbusiness/22siemens.html , http://policymed.typepad.com/files/law-suit-filed-july-08—targeting-physicians.pdf ) This sort of activity is fortunately the exception, not the norm. 

Usually, however, the comfort of the familiar is sufficient to continue with the status quo, whether the actors are physicians or nurses or hospital executives. Change is disruptive, and many times the change is overhyped and underperforming in the end. 

The Means-Ends hazard causes suppliers to ask a question: If it ain’t broke, why fix it? Why go through the trouble of basing our entire value proposition on the value to the healthcare system, when the “deciders” can direct the purchase of our stuff based on their preference?

The Means-Ends Hazard for Hospitals

Hospitals have their own Means-Ends hazard. Physicians need supplies to treat patients, and hospitals need physicians to generate revenue. Which supplies to buy, how much to buy, and and how many different vendors to have for similar goods is a perpetual conundrum. As a result, hospitals focus on how to acquire the necessary supplies (the Means) at a defensible (if not best) price (the Ends).

The Means-Ends hazard is the pragmatic solution to increasing complexity. Even specialized buyers in purchasing are significantly challenged to keep track of the myriad versions of supplies being sold or marketed to them. Given the complexity of managing pricing, contract terms, GPO compliance, rapidly changing technology and physician preference, coupled with the Means-Ends-driven behavior of salespeople, it is easy to see how things get out of control. One well-known healthcare executive describes the hospital as the parasitic host to the rest of the healthcare industry. 

So, because hospitals bear the logistical and financial consequences of (physician and other personnel’s) preference, they have embarked on a vendor registration initiative to attempt to limit salespeople’s access to decision makers. Why many hospitals are contracting for this function with third parties is puzzling. Purchasing departments that use these companies may not have properly considered the potential conflicts of interest, contingent liabilities, and inducement components of third party vendor registration services, much less the associated abrogation of control. Additionally, this screening process privileges the largest companies who can send wave after wave of salespeople into the fray; small companies that may have meaningful innovations are disproportionately kept out by the huge “rep-filter.” 

Hospitals have also ramped up the utilization of value analysis committees (VACs). The VACs’ role is to guide organizational purchasing policy for things like preference items in order to limit the influence of suppliers’ marketing and sales reps on physicians and staff. This is also a good thing. Many sales calls amount to little more than distractions with lunch. 

VAC’s do good work and regularly execute their mission, but they often fall prey to a beguiling part of the Means-Ends hazard: substitute-ability by consensus versus comparative effectiveness. The myopia induced by substitute-ability results from treating everything like a commodity. After all, all four-inch gauze pads are the same, right? Well, not all preference items are the same. Many services, devices, and most equipment choices have massive trade-offs. These trade-offs are hard to identify completely or quickly. 

Partly because consensus dominates decisions in these committees, they can often miss important elements of the effects certain supplies can have on the overall organization’s Clinical Utility needs, Operational Efficiency goals, and Financial Performance. Consensus is often the sum of individual preferences, weighted by the number of “preferrers.” In the end, the VAC often defaults to recommending the one brand that will anger the least number of people, if not the brand that is most defensible – no one gets fired for recommending McKinsey. Justification is relatively easy because standardization provides some level of price-per-unit savings. However, we know that price-per-unit is not perfectly related to outcomes and the lowest cost of the care pathway.

Avoiding the Means-Ends Hazard

Suppliers and hospitals can avoid the Means-Ends Hazard by focusing on the Clinical Utility, Operational Efficiency, and Financial Performance (C.O.F.) of a supply item. Suppliers and hospitals should consider each C.O.F. element with equal weight in assessing the product development and marketing of each supply category, as well as the purchasing decision making process. A relentless focus on C.O.F. throughout the supply chain will inevitably lead to improved healthcare value because intangibles like brand perception and subjective physician preference will have limited effect in purchasing.