The Struggle to Control PPI Costs in Healthcare

Supply costs range from 25-30% of a hospital’s operating budget, and PPI, or Physician Preference Items, account for up to 60% of that supply spend. Physicians are the face of the hospital, and the products they choose to use in surgery are synonymous with a rock star’s guitar or a baseball player’s bat. It’s no wonder that management can find it difficult to reduce costs in this area. However, with the growing need to offset declining revenues in the healthcare industry, PPI is a common target within the supply chain. The following article will discuss some approaches to cost reductions for PPI and how hospitals have applied these approaches successfully.

One approach that hospitals use is to standardize the PPI purchases by manufacturer. This is done by setting up a preferred manufacturer list from which the physicians have to select products. The advantage in doing so allows the hospital to drive additional volume through that set of vendors, thus receiving deeper discounts. The downside to this approach is that physician’s choice is limited. While the selected manufacturers may have excellent quality products, it is important to maintain the physicians’ privileges to choose what is best for their patients. In order to make any cost reduction program a success, especially with PPI, hospitals need to preserve solid relationships with their physicians.

“You need to empower physicians to be a participant in the selection process, especially when they are most interested–when they come back from a meeting with a product or idea they’re excited about,” says Eugene S. Schneller, PhD, professor, School of Health Management and Policy at Arizona State’s W.P. Carey School of Business, who is founder and co-director of the Health Sector Supply Chain Research Consortium.
“Physicians need to understand that, while there may be a process, in the end they will be the choosers,” says Schneller. “The best systems are committed to never giving a physician a product he or she doesn’t want to work with.”

Another approach involves putting a price ceiling on the product category regardless of the vendor. This approach allows the physicians to still have their vendor choice but limits their spending to some extent. Physicians then have to revisit their buying methods because, in many cases, they are more concerned with the quality of the product rather than the cost, and justifiably so. However, there needs to be some consciousness on the physicians’ behalf when considering the cost of these products.

This method can be made more efficient through research and benchmarking data to perform comparative analyses on products in different price tiers. The key to reducing costs in PPI may be as simple as educating the physicians on alternate products for lower costs and similar quality. In the same respect, purchasing and finance need to be sensitive to the needs of the physicians to administer a quality product to their patients.

“New York-Presbyterian Hospital (NYP), for example, saved more than $10 million per year in each of the last two years sourcing clinical products — the majority of which were physician preference items, according to Dr. Anand Joshi, director of clinical procurement for NYP. The secret to the hospital’s success? Not falling into the trap of automatically viewing the relationship between hospital supply executives and physicians as adversarial.”

It all comes down to collaboration and finding a common ground on which both parties can agree for the long term benefit of the hospital. Ensuring that all of the right stakeholders are involved in every step of the process is vital to the success of any PPI purchasing program.

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