Blog Post

Hospital CFOs get tougher on contracting: What it means for you

October 11, 2017

    Whether your company directly works with health system CFOs or not, the CFO influences every supplier. Our CFO "black book" contains an update of the major market forces influencing CFO decision-making, an overview of their overarching goals, and more than 40 strategies they're using to achieve them.

    Based on extensive quantitative research and interviews with leading CFOs, our Financial Leadership Council identified three priorities for finance executives:

    1. Redouble efforts to improve revenue cycle performance through a multi-stakeholder approach;
    2. Develop a proactive Medicare risk strategy; and
    3. Craft a cost reduction strategy that includes both tactical near-term savings and longer-term cost restructuring.

    Let's focus on No. 3. From the supplier and service provider perspective, much of the effort is focused on finding mutual efficiencies and affordable care improvements as part of a cost reduction strategy. In particular, let's take a look at three CFO initiatives that have a major impact on how suppliers can work with providers.  

    1. Prevent unnecessary surgical supply waste

    • Rating: Slam dunk for hospitals
    • Timeline: Near-term results
    • Savings potential: Moderate
    • Annual savings for 300-bed hospital: $1.5 million

    Hospitals waste millions of dollars in surgical supplies annually. They go unused but are discarded in the OR once the package seal is broken. CFOs are working with supply chain colleagues to reduce waste by monitoring and analyzing discarded supplies and color-coding procedure preference cards and surgical trays to avoid opening certain supplies until requested by the surgeon. Suppliers can discuss customized tray selection and product use best practices with provider staff to prevent waste. 

    2. Minimize physician preference item (PPI) contract savings leakage

    • Rating: Slam dunk for hospitals
    • Timeline: Near-term results
    • Savings potential: Moderate
    • Annual savings for 300-bed hospital: $2.0 million

    CFOs, supply chain leaders, and suppliers share an interest in ensuring contract compliance. Currently, CFOs are encouraging Chief Medical Officers (CMOs), supply chain leaders, and physician champions to share unblinded cost and quality data with physicians to encourage use of high-quality and cost-effective supplies. Leaders are also limiting the upselling opportunities of vendor representatives present in the operating room to ensure their hospitals can meet the terms of compliance agreements. Suppliers should expect physicians to be held to their contract terms, which could be a benefit or a detriment depending on whether the supplier is on contract.

    3. Contract directly for clinical preference items

    • Rating: Worth the effort for hospitals
    • Timeline: Medium-term results
    • Savings potential: Moderate
    • Annual savings for 300-bed hospital: $1.0 million

    Clinical preference items that are costly but not necessarily physician-preference items (e.g., bone cement, certain electrodes) account for 40% of total supply expense. Hospitals tend to over-rely on group purchasing organizations (GPO) for these items. CFOs are currently trying to determine the items for which direct contracting makes financial sense. Supplier teams should focus on determining a strategy to support customers who want to source these products directly from suppliers.

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