Physicians As Cost Accountants: What does it mean for hospital suppliers?

February 28, 2013 — Leave a comment

buisnessThe story by the Cleveland Clinic CEO, Dr. Toby Cosgrove, in Time Magazine tells it all. In order to help identify cost-saving opportunities, the Clinic asks physicians to deconstruct the costs of their top three procedures. Physicians count devices and supplies. They also look at things like anesthesia time and inventory. It helps them identify where to cut costs. Physicians are also involved in the supply purchasing process and weigh-in on the merits of certain products.

This cost deconstruction shines a light on costs. Yet, it also provides insights into value and utilization. By better understanding the costs of goods and services used to treat patients, physicians are able to make trade-off decisions that consider cost. Should they use a $5 suture or a $400 staple to close a wound? Obviously, they want to do what is right for the patient and what is supported by evidence. With a clearer understanding of costs, they can at least decide if the $400 staple is worth it based on the available clinical evidence. It’s a very clever approach.

The story reminded me of my first job out of college. Long ago as an entry-level financial and reimbursement analyst at a hospital, I performed a related function. We regularly provided physicians with data that showed their use of supplies and services relative to their peers for similar procedures. These analyses highlighted inpatient costs, which included items like laboratory tests, radiology services, and supply costs. We also provided benchmark information on length of stay and ICU costs.

The goal of these benchmark comparisons was not to tell physicians how to practice medicine. Rather, the studies provided some transparency to the resources that were consumed and comparisons to other physicians. Once the data was adjusted for known anomalies, not surprisingly, it often showed a wide variation in the consumption and use of goods and services. Much of this variation in costs and utilization appeared to be unexplainable.

So, the idea of bringing transparency to costs in a hospital isn’t new. The Cleveland Clinic has a more detailed and accurate approach to cost accounting than the one I described above. It will likely be much more effective since it directly engages the physicians, and is done in a more accurate way. However, beyond the difference in approach, there is one big difference today compared with twenty-years ago when I did cost accounting in a hospital.

The big difference is the fact that the environment is finally better aligned with using the cost data for decision-making and change. Physicians and hospitals are becoming more aligned through employment trends, gain-sharing programs, and other incentives. Also, new reimbursement schemes like accountable care organizations, bundled payments, and value-based purchasing are creating better alignment and focus on costs and quality. Finally, reimbursement cuts are creating much stronger motivation to drive supply cost savings.

For hospital suppliers, the story about the Cleveland Clinic’s clever approach to driving cost savings is yet another sign of what’s coming. The old days of selling primarily based on relationships, product features, and marginal clinical improvements are quickly coming to an end. According to academic scholars, hospital purchasing has historically been under-managed and is ripe for improvement. With physicians now becoming “cost-accountants”, suppliers with poor pricing practices, weak value propositions, or unprepared sales teams are in for trouble.

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