Robert McDavitt with Outpatient Healthcare Strategies discusses eight strategies to improve relationships between surgery centers and supply vendors and implement a cost containment program.
1. Model the behavior you expect. Mr. McDavitt says working with vendors should always be an honest transaction. "I've noticed that some administrators and materials manager deal unethically with their supply vendors," he says. "They'll basically tell one vendor another vendor's price, and I've heard them misrepresent the truth to vendors before."
He says this kind of behavior may net the ASC a lower price initially, but will ultimately damage the relationship with the vendor and make future contracting far more difficult. On the other hand, vendors and sale representative typically will recognize sincerity and honesty in negotiation and will reward a good attitude with fair pricing. "If you demonstrate integrity and good ethics, you have the right to expect it from your vendors," he says.
A crucial rule for dealing with sales representatives and vendors is to never share pricing, Mr. McDavitt says. He explains that in a negotiation, the first person to volunteer a number generally will not come out on top. If a company is $2.00 higher than the competitor and you tell them that, they may come back and match the pricing, or even beat it by five cents. Despite feeling like you've won in this situation, you may not realize they have the authority to lower the price by a total of $2.25 or and an additional 25 cents. If you disclose the competitor's price, the vendor will not lower any more than necessary because they now know the number to beat. Ultimately, the best scenario is to ask the vendor to give you their best negotiation; if they are not low enough they will lose the business. That won't happen frequently, as sales representatives depend on your business for their livelihood.
Mr. McDavitt has also spoken with enough representatives to understand the close relationships between vendor reps and physicians. He says representatives will share what you do with physicians, and if you misrepresent the truth, that fact will ultimately get back to the physician. This is critical because even though you may be negotiating to give the physician the best profit margin, they will often not view it that way. "If I deal with vendors unethically, that will get back to physicians and destroy my credibility," he says. "I can't say, I misrepresent the truth to the sales reps, but you can trust me, you cannot have it both ways.
2. Have a cost containment plan. Mr. McDavitt says most centers want to save money on medical supplies, but they never institute a formal cost containment plan — a crucial step to save the most money. He says there are several ways to approach cost containment for supplies:
• Utilization. If a center is performing 400 cases a month and using 600 blankets per month, then every other patient is receiving two blankets, Mr. McDavitt says. A center should look at how many items are used per month or year by pulling the information from a practice management system where staff members enter supplies used. He says if you don't have a practice management system, or that information is not currently tracked through the practice management system, then the information can also be requested from your vendors. He says the best benchmark for utilization can be your own history — are you using more or fewer lactated ringers this month than last month, and does it correlate to your volume? Are the nurses capturing all the supplies used accurately?
• Cost per unit. Another methodology for analyzing cost is on a per unit measurement. This methodology looks at how much you're paying for an individual unit of each supply item. "This is bar none the most accurate, if not the most difficult, of methodologies," Mr. McDavitt says. Cost per unit analysis should focus on "every patient" products, or items that are used on every patient 99 percent of the time. (Examples include IV fluids, IV catheters, IV tubing, IV start kits and electrodes for ECG).
Evaluating your highly purchased items and finding more cost effective solutions will reduce your overall cost per case. Your surgery center can also annualize the savings by switching to the lower cost item, providing a clearer picture of how you can achieve savings by making small changes. For example, if you are able to obtain a supply item for 50 cents less than the product you are currently using, but you use that item 200 times a month, this will equate to a $1,200 in annual savings. Annualizing the potential savings makes the number seem more significant.
• Inventory reduction/just-in-time ordering. "Every item sitting on the shelf is a dollar worth of distribution less to your owners," Mr. McDavitt says. He says inventory reduction can be a very sensitive subject, since many nurses have been trained to stock up on items in case of a shortage. "Every RN has a story about how they ran out of an item and the physician was unhappy, so in an attempt to compensate they hoard items," he says. "They are hiding items in an effort to ensure that they never run out." He says it's important to change the culture of your ASC's materials management and nursing personnel from "just in case" ordering to "just in time" ordering. He says "just in time" ordering can be very effective if you keep an eye on utilization and determine when you'll need specific supplies.
"Look at your numbers every week — how many do you need to have on the shelf to cover the cases you have scheduled," Mr. McDavitt says. "It is extremely important to be aware of cases that are added to ensure you have appropriate supplies on hand to cover the additional case volume. A well-run surgery center will turn the value of 100 percent of their inventory every 30 days." Additionally, administrators should not allow standing orders to take place. The argument that you will eventually use the all the items is not sufficient justification to order more supplies than necessary.
He indicates that a well-organized ASC storage area will greatly enhance the turnover of inventory. All supply items should be placed in the same spot every time and should be clearly labeled so they can be tallied quickly. Your manager should be working from a cost per case budget or on inventory level, so that the manager is motivated to manage the inventory without being penalized for differences in volume over time.
Mr. McDavitt further cautions that managers should not be incentivized based on a reduction of supplies, as this will lead to an insufficient number of supplies in stock. The manager should be incentivized based on the savings generated from finding and initiating more cost-effective supplies for the center.
• Physician preference items. At a bare minimum of standardizing supplies is pricing the preference cards Mr. McDavitt says. "It is absolutely critical that an administrator understand how much a procedures costs, and the only way to have that information is to know what each of your preference cards generate as it relates to cost," Mr. McDavitt. "You'd be surprised at how many centers haven't priced their preference cards." Once you've priced the cards, he recommends identifying your surgeon outliers and talking to them about why they're using particular high-cost items.
He says in some cases, the physician may have a reasonable explanation for using an expensive supply. He does however, encourage administrators to dig deeper than the surface. If a general surgeon, for example, is using lidocaine for every hernia operation and incurring extra costs, dig deeper. In this example, when Mr. McDavitt spoke to the surgeon, he explained that the lidocaine was used to flush out the patient's abdomen, which the PACU nurses confirmed greatly reduced discomfort.
Make sure the improvement in patient quality is supported by a reduction of pain medication usage or improved pain scores reported by patients. Appropriate peer review and quantifiable data should be used to standardize the claims, in order to limit a facility's liability if an untoward event occurs due to deviation from the standard of practice.
• Global strategies. "It is my experience that you should never buy 100 percent from any particular distributor," Mr. McDavitt says. Maintain a healthy level of competition among vendors to ensure the center obtains best opportunity for the lowest pricing. He also recommends looking very closely at GPO contracts to determine what the GPO requires from you. For example, he says some GPOs require that surgery centers only buy 5 percent of items off-contract, so ASCs must look very carefully at contracted items to make sure they cover the ASC's needs.
3. Communicate your plan to everyone. Mr. McDavitt says it's essential to communicate your improvement plan throughout the ASC, as well as with vendor representatives. "A vendor once told us we were using a particular forecep compared to one that was two dollars less expensive," he says. The vendor should be working to obtain your business; if your supply vendors are not making recommendations as to how you can reduce your cost, they are only in the relationship to benefit themselves.
He says introducing a cost containment plan can inspire staff members to save money even without changing policy. "We didn't change anything about our linen policy; we just went to staff and said we needed to look at linen use," he says. "Almost immediately, our linen costs went down."
Mr. McDavitt is senior vice president of operations at Outpatient Healthcare Strategies. Outpatient Healthcare Strategies is a management consulting firm that specializes in operational efficiencies for ASC and Hospital Outpatient Departments. For more information regarding the material covered here, please contact him at Robert@OutpatientHCS.com or the company website at www.OutpatientHCS.com.
More Articles on Surgery Centers:
9 Expectations for ASC Orthopedics in 2012-13
6 Advantages Surgery Centers Afford Physicians
8 Steps to Build a Cash0Pay Program at Surgery Centers
1. Model the behavior you expect. Mr. McDavitt says working with vendors should always be an honest transaction. "I've noticed that some administrators and materials manager deal unethically with their supply vendors," he says. "They'll basically tell one vendor another vendor's price, and I've heard them misrepresent the truth to vendors before."
He says this kind of behavior may net the ASC a lower price initially, but will ultimately damage the relationship with the vendor and make future contracting far more difficult. On the other hand, vendors and sale representative typically will recognize sincerity and honesty in negotiation and will reward a good attitude with fair pricing. "If you demonstrate integrity and good ethics, you have the right to expect it from your vendors," he says.
A crucial rule for dealing with sales representatives and vendors is to never share pricing, Mr. McDavitt says. He explains that in a negotiation, the first person to volunteer a number generally will not come out on top. If a company is $2.00 higher than the competitor and you tell them that, they may come back and match the pricing, or even beat it by five cents. Despite feeling like you've won in this situation, you may not realize they have the authority to lower the price by a total of $2.25 or and an additional 25 cents. If you disclose the competitor's price, the vendor will not lower any more than necessary because they now know the number to beat. Ultimately, the best scenario is to ask the vendor to give you their best negotiation; if they are not low enough they will lose the business. That won't happen frequently, as sales representatives depend on your business for their livelihood.
Mr. McDavitt has also spoken with enough representatives to understand the close relationships between vendor reps and physicians. He says representatives will share what you do with physicians, and if you misrepresent the truth, that fact will ultimately get back to the physician. This is critical because even though you may be negotiating to give the physician the best profit margin, they will often not view it that way. "If I deal with vendors unethically, that will get back to physicians and destroy my credibility," he says. "I can't say, I misrepresent the truth to the sales reps, but you can trust me, you cannot have it both ways.
2. Have a cost containment plan. Mr. McDavitt says most centers want to save money on medical supplies, but they never institute a formal cost containment plan — a crucial step to save the most money. He says there are several ways to approach cost containment for supplies:
• Utilization. If a center is performing 400 cases a month and using 600 blankets per month, then every other patient is receiving two blankets, Mr. McDavitt says. A center should look at how many items are used per month or year by pulling the information from a practice management system where staff members enter supplies used. He says if you don't have a practice management system, or that information is not currently tracked through the practice management system, then the information can also be requested from your vendors. He says the best benchmark for utilization can be your own history — are you using more or fewer lactated ringers this month than last month, and does it correlate to your volume? Are the nurses capturing all the supplies used accurately?
• Cost per unit. Another methodology for analyzing cost is on a per unit measurement. This methodology looks at how much you're paying for an individual unit of each supply item. "This is bar none the most accurate, if not the most difficult, of methodologies," Mr. McDavitt says. Cost per unit analysis should focus on "every patient" products, or items that are used on every patient 99 percent of the time. (Examples include IV fluids, IV catheters, IV tubing, IV start kits and electrodes for ECG).
Evaluating your highly purchased items and finding more cost effective solutions will reduce your overall cost per case. Your surgery center can also annualize the savings by switching to the lower cost item, providing a clearer picture of how you can achieve savings by making small changes. For example, if you are able to obtain a supply item for 50 cents less than the product you are currently using, but you use that item 200 times a month, this will equate to a $1,200 in annual savings. Annualizing the potential savings makes the number seem more significant.
• Inventory reduction/just-in-time ordering. "Every item sitting on the shelf is a dollar worth of distribution less to your owners," Mr. McDavitt says. He says inventory reduction can be a very sensitive subject, since many nurses have been trained to stock up on items in case of a shortage. "Every RN has a story about how they ran out of an item and the physician was unhappy, so in an attempt to compensate they hoard items," he says. "They are hiding items in an effort to ensure that they never run out." He says it's important to change the culture of your ASC's materials management and nursing personnel from "just in case" ordering to "just in time" ordering. He says "just in time" ordering can be very effective if you keep an eye on utilization and determine when you'll need specific supplies.
"Look at your numbers every week — how many do you need to have on the shelf to cover the cases you have scheduled," Mr. McDavitt says. "It is extremely important to be aware of cases that are added to ensure you have appropriate supplies on hand to cover the additional case volume. A well-run surgery center will turn the value of 100 percent of their inventory every 30 days." Additionally, administrators should not allow standing orders to take place. The argument that you will eventually use the all the items is not sufficient justification to order more supplies than necessary.
He indicates that a well-organized ASC storage area will greatly enhance the turnover of inventory. All supply items should be placed in the same spot every time and should be clearly labeled so they can be tallied quickly. Your manager should be working from a cost per case budget or on inventory level, so that the manager is motivated to manage the inventory without being penalized for differences in volume over time.
Mr. McDavitt further cautions that managers should not be incentivized based on a reduction of supplies, as this will lead to an insufficient number of supplies in stock. The manager should be incentivized based on the savings generated from finding and initiating more cost-effective supplies for the center.
• Physician preference items. At a bare minimum of standardizing supplies is pricing the preference cards Mr. McDavitt says. "It is absolutely critical that an administrator understand how much a procedures costs, and the only way to have that information is to know what each of your preference cards generate as it relates to cost," Mr. McDavitt. "You'd be surprised at how many centers haven't priced their preference cards." Once you've priced the cards, he recommends identifying your surgeon outliers and talking to them about why they're using particular high-cost items.
He says in some cases, the physician may have a reasonable explanation for using an expensive supply. He does however, encourage administrators to dig deeper than the surface. If a general surgeon, for example, is using lidocaine for every hernia operation and incurring extra costs, dig deeper. In this example, when Mr. McDavitt spoke to the surgeon, he explained that the lidocaine was used to flush out the patient's abdomen, which the PACU nurses confirmed greatly reduced discomfort.
Make sure the improvement in patient quality is supported by a reduction of pain medication usage or improved pain scores reported by patients. Appropriate peer review and quantifiable data should be used to standardize the claims, in order to limit a facility's liability if an untoward event occurs due to deviation from the standard of practice.
• Global strategies. "It is my experience that you should never buy 100 percent from any particular distributor," Mr. McDavitt says. Maintain a healthy level of competition among vendors to ensure the center obtains best opportunity for the lowest pricing. He also recommends looking very closely at GPO contracts to determine what the GPO requires from you. For example, he says some GPOs require that surgery centers only buy 5 percent of items off-contract, so ASCs must look very carefully at contracted items to make sure they cover the ASC's needs.
3. Communicate your plan to everyone. Mr. McDavitt says it's essential to communicate your improvement plan throughout the ASC, as well as with vendor representatives. "A vendor once told us we were using a particular forecep compared to one that was two dollars less expensive," he says. The vendor should be working to obtain your business; if your supply vendors are not making recommendations as to how you can reduce your cost, they are only in the relationship to benefit themselves.
He says introducing a cost containment plan can inspire staff members to save money even without changing policy. "We didn't change anything about our linen policy; we just went to staff and said we needed to look at linen use," he says. "Almost immediately, our linen costs went down."
Mr. McDavitt is senior vice president of operations at Outpatient Healthcare Strategies. Outpatient Healthcare Strategies is a management consulting firm that specializes in operational efficiencies for ASC and Hospital Outpatient Departments. For more information regarding the material covered here, please contact him at Robert@OutpatientHCS.com or the company website at www.OutpatientHCS.com.
More Articles on Surgery Centers:
9 Expectations for ASC Orthopedics in 2012-13
6 Advantages Surgery Centers Afford Physicians
8 Steps to Build a Cash0Pay Program at Surgery Centers