In July 2002, when Blaine Douglas assumed the role of Vice President of Operations at Wellmont Health System, he found a scenario all too familiar in the integrated delivery network (IDN) world. Wellmont, a regional health system of four hospitals in Northeast Tennessee and Southwest Virginia, was functioning as four separate hospitals with four separate supply chains, rather than taking advantage of the economies that come with an IDN-wide strategic supply cost management program. Especially troubling was the financial impact of a non-integrated approach to purchasing advanced medical devices, also known as physician preference items. Wellmont had not, in the past, been successful at addressing physician preference item costs, causing the system to pay close to retail or “list” price for most items.

At the time, Wellmont spent $38 million annually on physician preference items. However, Douglas was confident that the system could reduce this expenditure by renegotiating vendor pricing. The challenge was making the case to physicians. 

Fact-based “selling” – getting buy-in from physicians
Douglas enlisted Aspen Healthcare Metrics, a MedAssets company, to help engage physicians in a process to reduce costs and provide a framework for negotiation strategies for Wellmont going forward. One of Aspen’s key recommendations: preserve physician choice. Initially, Douglas had planned to move to fewer primary vendors who could provide larger volumes and better pricing, a strategy that typically works on the med-surg side of the business.

Instead, “We came back and said, ‘OK, we’re going to get the best pricing we can and allow as many players as we can to play the game,’” Douglas said. That approach was welcomed by the physicians and allowed an open dialog between the health system and these doctors. “The pricing we were getting from some of our vendors was so bad that when we presented the first round of fact-finding that Aspen had undertaken, the physicians didn’t believe us. The physicians had been told, or at the very least assumed, that Wellmont was getting preferred (or best tier) pricing. Our analysis showed that simply wasn’t the case.”

The turning point came when one physician who had initially taken issue with the process educated himself with the help of Aspen and their nationwide benchmarking data. The physician then understood Wellmont’s dilemma, accepted the facts and became actively involved. “His viewpoint helped influence the rest of the staff at his hospital,” said Douglas, “and it reminded us that physicians are scientists at heart, and when you share with them reliable, conclusive data, they’ll not only be convinced, but will also become your strongest ally. The process simply will not work without physician buy-in.”

Douglas also faced initial opposition from vendors, who each wanted to be Wellmont’s sole supplier. Finally, vendors were told they had to decide whether to be a part of the new multi-source arrangement or to opt out. Wellmont’s suppliers responded to this ultimatum in a variety of ways, but only one vendor left the negotiations.

Wellmont reached an agreement with one of its major vendors prior to the established deadline, which put pressure on the other vendors to cooperate. Eventually even the vendor that initially left the negotiations returned, and Wellmont was able to retain all of its vendors while getting the same products at significantly lower costs.

One in-house process change that resulted from Wellmont’s work with Aspen was the practice of comparing purchase orders with the correct pricing to make sure vendors charged the health system correctly. According to Douglas, this process catches incorrect pricing on invoices several times per month. “Medical device pricing is complicated – we’ve got some 20,000+ active items in our master item file. But if you have the technology tools in place, you can catch these errors pretty easily. And in healthcare, every dollar you save can go straight into better patient care. So we have a real mission around pricing accountability.”

“Overall, we’re out-performing where we thought we would be,” Douglas said. Process changes also enabled the system to save several hundred thousand dollars in freight costs and, due to a spin-off project, reduce the number of coding errors in the billing process.

“This opened my eyes to how intertwined the supply chain and revenue cycle really are. As you look at your high-dollar supply items, look at the entire process and not just the raw cost of the supply item. Good supply chain practices and understanding the entire supply/charge relationship can have a tremendous impact on revenue enhancement,” he said. “Because proper coding ensures timely reimbursement (and of course proper compliance) we are seeing a significant revenue improvement impact as well.” 

PPI Category	Savings Achieved
Orthopaedics	$855,178
Spine	$725,409
CV Surgery	$211,942
Cath Lab	$927,270
Rhythm Management	$386,589
Trauma	$92,321
TOTAL	$3,198,709

Douglas said that Wellmont’s work with Aspen has also improved the IDN’s communication with doctors. Physicians want to provide the best care to their patients and need the ability to select the appropriate products to do so; however, they sometimes do not have an understanding of the market for medical devices, or simply feel that cost negotiations are the responsibility of the hospital. Negotiations regarding physician preference items are a delicate balance between the three parties—the hospital, the doctor and the sales representative. When the hospital and physicians are aligned, the ability to work out an agreement that is reasonable for all three parties is greatly enhanced. Furthermore, by increasing the communication between the system and its doctors, Wellmont has increased the likelihood of successful price negotiations in the future.

According to Douglas, it is necessary to stay vigilant with ongoing price negotiations, especially in the area of new technologies and on-going product changes to ensure Wellmont receives a fair price. New products are introduced at a very high rate, so having a process to evaluate the myriad of clinical and financial impact is very important. The key is making well informed decisions and maintaining the health system’s savings. He believes that there is more opportunity for Wellmont to save on physician preference items and continues to work with Aspen to further decrease the IDN’s expenditures on these medical devices.