This document summarizes challenges in contracting for physician-preferred medical products between hospitals and suppliers. It discusses the many stakeholders that influence product choice, including surgeons, hospital purchasing departments, and group purchasing organizations. Price inconsistencies and lack of coordination between clinical and administrative interests have increased tensions. The summary proposes starting negotiations where local interests are, establishing trust through transparency, and focusing on performance outcomes rather than prices to improve collaboration between all parties.

1. Winter 2004 Vol 1 No. 1
How One GPO
Is Helping IDNs
Enhance Revenue
John Bardis and Rand Ballard
of MedAssets
5445 Triangle Parkway
Suite 170
Norcross, GA 30092
CONTRACTING FOR PHYSICIAN
PREFERENCE ITEMS..........................................page 14
IDNs LOOK TO LLCs AS AN ALTERNATIVE
TO TRADITIONAL GROUP CONTRACTS ................page 22

2. Lead Story
Contracting for
Physician-Preference Items
Aligned objectives are a must on the part of all stakeholders.
By Bill McIlhargey
The term “physician-preferred products” is as broad implants, let’s first agree on (or at least acknowledge) the
as the number of physicians in this country. For our fragmentation of buying influences in the typical acute-
purposes, they are products that physicians believe will care hospital. Clearly, the traditional and still dominant
ultimately produce a higher quality of life for their player is the orthopedic surgeon (who, as mentioned
patients. They typically call for specialized training on before, also shoulders the liability associated with the
the part of the surgeon, and frequently represent some product). However, a host of additional influences have
kind of liability risk associated with their use and arisen during the past decade, including hospital purchasing
expected outcomes. (Because my background is in orthope- departments, regional offices (including everything from
dic medical devices, I will focus on them.) IDN administration to proprietary cor-
I would be remiss if I didn’t draw porate offices and/or state or regional
a distinction between products that affiliations for community centers)
represent true technological break- and, of course, national group purchas-
throughs and those that provide only ing organizations.
incremental advantages. This is a With the advent of prospective
contentious issue with those who keep payment in the 1980s, hospitals turned
their eye on cost/outcome ratios, and their attention to reimbursement in
one that won’t be resolved in this the form of diagnosis-related groups, or
article. However, I recognize the simi- DRGs. An early profit winner for hospitals
larities of both products and their need was DRG 209 – Major Joint and Limb
for a platform of high-profile surgeons Reconstruction. This was true despite
to expound upon their virtues. this DRG’s complexity in terms of
How can physician- instrumentation, surgeon
preference products be pur- training, product materials
chased by hospitals in a “If there’s one thing we’ve and, of course, supplier loyal-
manner that accommodates learned in 25 years of national ties. Charged with managing
clinical and financial influ- contracting, it’s that healthcare is, supplies, hospital purchas-
ences, yet still satisfies indeed, a local business.” ing departments initially
The Journal of Healthcare Contracting/Winter 2004
responsible supply-side eco- seemed satisfied securing
— Bill McIlhargey
nomics? Contracting plays a from their vendors the
key role. But here’s the rub: gratis use of implant
If there’s one thing we’ve learned in 25 years of national con- instruments (which typically cost between $20,000 and
tracting, it’s that healthcare is, indeed, a local business. It is $50,000).
influenced by unique processes and relationships, which, in Later, emboldened by their success in lowering their
turn, reflect local differences in infrastructures, business costs for medical commodities, purchasers gave renewed
strategies and utilization patterns. For buyers and sellers, attention to orthopedic implants, whose price increases
these differences provide opportunities and frustrations. exceeded yearly inflationary standards. However, now
Nowhere is this truer than in the area of orthopedic implants. these economic buyers were more imaginative in their
efforts to curtail costs associated with DRG 209.
Who’s on First? Partnering with hospital staff, they developed protocol
To understand the buying and selling of orthopedic Continued on page 18 ➝
14

3. Lead Story
Physician-Preference Contracting
➝ Continued from page 14 between the cost and volume of physician-preference
standards, capped procedural payments, elaborate items, particularly, orthopedic implants.
demand utilization schedules and volume-related • Because materials managers fail to understand the
price matrices. value that suppliers can provide to clinicians, they resist
For the most part, these efforts fell short of their suppliers being present during (orthopedic) procedures.
intended purpose. In fact, they merely inflamed the • Purchasing professionals are frustrated with the com-
natural rift between administrative and clinical factions. plexity of national GPO agreements and the inability
On the one hand, hospitals tried to limit the surgeon’s of GPOs to effectively implement standard pricing.
product choice in order to attract competitive bids. At What’s more, they know that GPOs have devoted
the same time, surgeons quickly tired of economic minimal resources to support the roll out of national
credentialing and getting questioned about their agreements for these difficult agreements.
relations with vendors. So they searched for options they
felt would give them more control over the delivery of Now consider the purchasing process from the
care, including aligning themselves with nearby perspective of the supplier:
hospitals viewed as more friendly to their practices, or • Distribution channels have always been geared to
moving their practices to emerging specialty hospitals in supporting procedural delivery and surgeon training.
which they might have financial involvement. Suppliers view attention to purchasing and economic
value as a non-productive, inefficient use of their
Pricing Inconsistencies sales forces.
Despite the fact that orthopedic devices (as well as • For the most part, suppliers believe that hospitals
cardiology and spinal devices) might be considered the frequently misstate their financial position vis-à-vis
last bastions of clinically controlled supplies in the DRG 209 and that, in fact, they make money on the
hospital, one should not construe that clinicians are procedure. They believe that inefficient cost accounting
oblivious to the cost of the goods they use. In fact, those clouds the issue. The bottom line is that suppliers
hospitals with a focus on DRG 209 do, indeed, receive feel unjustly targeted for their hospital customers’
discounts. The problem is, these discounts are inconsis- unprofitable procedures. Of course, their sales reps
tently applied, controlled in large part by local sales share that mistrust with the surgeons, further
managers operating under the premise of “what the strengthening the surgeon/supplier relationship.
market will bear.” • Suppliers feel that economic buyers refuse to recog-
Local discounts routinely reflect the vendor’s local nize the financial contributions that suppliers make
market share, the depth of the vendor’s exposure within to hospitals, including providing instrumentation free
the facility, the vendor’s relationships with clinicians of charge, providing products on consignment, and so
and the facility’s commitment to national or regional on. Suppliers believe hospitals have little interest in
The Journal of Healthcare Contracting/Winter 2004
contracts. The inconsistency of these discounts has trying to understand the suppliers’ costs associated
frustrated purchasing professionals and broadened the with supporting clinical procedures.
gulf between them and the vendors. • Suppliers are disappointed with national GPOs’
Consider the purchasing process from the perspective efforts to contract for physician-preference items,
of the economic buyer: believing that national contracts provide neither sales
• Held accountable by administration for supply costs, efficiencies nor incremental volume. In many suppliers’
the materials manager is put in the uncomfortable minds, national contracts have done only one thing –
role of merely facilitating the payment for products establish a new (lower) pricing framework from which
chosen by the surgeons. local hospitals can benchmark their efforts.
• Tight surgeon/supplier relationships undermine the It’s not surprising that the natural buyer/seller
ability of the materials manager to obtain discounts tension has grown over the years, driving sellers to
based on volume. In fact, there’s little correlation Continued on page 20 ➝
18

4. Lead Story
Physician-Preference Contracting
➝ Continued from page 18 • Establish a reciprocal platform with the benefit
intensify their relationships with clinicians. Nor is it of knowledgeable, third party insight, whether
surprising, as noted before, that the rift between the from affiliated GPOs, supplier/buyer corporate offices
clinical and administrative functions within the hospital or outside consultants. It’s important that this third
has only grown wider. party is credible and that it possesses a full
So what’s the bottom line regarding pricing understanding of industry frustrations.
inconsistencies? • Develop a quid pro quo early in the process.
• Minimal impact on the cost of orthopedic implants. Enough of holding the cards close to the vest. Buyers
• Increased frustration on the part of clinicians and and sellers know what has failed to work in the past,
administrators. so stop wasting time building higher barriers. Instead,
• Closer supplier/surgeon relationships. put the cards on the table early. Doing so almost
• An increased credibility gap between buyers and sellers. certainly requires assistance from an outside source.
• Polarization of each party’s position, with little move- • Pursue extended opportunities. Given that price-
ment by sellers, surgeons or economic buyers. for-volume has failed to work in this arena, attention
should be paid to the underlying values, strengths
What’s To Be Done? and weaknesses of all parties to determine what
Is this the status quo? Can suppliers of orthopedic devices drivers are required to satisfy these values.
continue to operate their businesses based on demographics • Create a simplified agreement. Restrict your con-
and expanding relationships with surgeons? Can tract language to intent and measurable performance.
economic buyers continue to ignore the impact that Don’t get bogged down in clauses that limit the intent
suppliers of physician-preference items can have on the of your agreement, but do include milestones that can
quality of care? Can surgeons continue to move their be evaluated regularly.
practices in order to get the products they want? • Establish performance evaluations. Agree to review
Improvement in the way physician-preference your milestones and regularly evaluate performance.
products are bought and sold can only come about when • Don’t lose sight of the clinical interest. Although
all parties understand the needs and value of the others. we’ve focused on the business process, there’s little
Yes, it’s conceivable that buyers and sellers could to sustain without addressing the result of this
shrug off their distrust of each other. But it’s highly collaboration. Performance outcomes, knowledge
unlikely they will do so without outside help. The key is transfer and physician supply chain frustrations are
to establish a collaborative platform between them. This all plausible areas to develop, and will perform an
can only be done by taking the time to identify the ongoing service to both hospital and surgeon.
underlying values and barriers residing on all sides. Those of us in the contracting arena have an
The following tips are offered to help coach the opportunity with physician-preference products. As
The Journal of Healthcare Contracting/Spring 2004
process and generate momentum for its acceptance: students of the contracting process, we should recognize
• Start where the action is. This doesn’t mean that when and where we need to “adjust our sights” and
arm’s-length influences could not be part of the solution, dismantle the cloak of distrust.
but rather, that values, opportunities and perceptions Our job is to find a way to say “yes” and not encourage
reside locally and need to be resolved there. the barriers of “no.”
• Throw away standard buying/selling models.
Line item benchmarking, cross-reference evaluations and Bill McIlhargey consults suppliers and
SKU pricing are not the tools we’re looking for here. buyers in the area of physician-preference contracting.
Realize that understanding and innovation are the keys He spent the last 12 years developing strategies and
to success, and that they can only exist after both sides teams for national accounts with DePuy and Smith &
strip away their egos and place their strengths and Nephew. He can be reached at 978/500-9666
weaknesses on the table for collaborative leverage. or dodmcilhargey@comcast.net.
20

5. Lead Story
Contracting for
Physician-Preference Items
Aligned objectives are a must on the part of all stakeholders.
By Bill McIlhargey
The term “physician-preferred products” is as broad implants, let’s first agree on (or at least acknowledge) the
as the number of physicians in this country. For our fragmentation of buying influences in the typical acute-
purposes, they are products that physicians believe will care hospital. Clearly, the traditional and still dominant
ultimately produce a higher quality of life for their player is the orthopedic surgeon (who, as mentioned
patients. They typically call for specialized training on before, also shoulders the liability associated with the
the part of the surgeon, and frequently represent some product). However, a host of additional influences have
kind of liability risk associated with their use and arisen during the past decade, including hospital purchasing
expected outcomes. (Because my background is in orthope- departments, regional offices (including everything from
dic medical devices, I will focus on them.) IDN administration to proprietary cor-
I would be remiss if I didn’t draw porate offices and/or state or regional
a distinction between products that affiliations for community centers)
represent true technological break- and, of course, national group purchas-
throughs and those that provide only ing organizations.
incremental advantages. This is a With the advent of prospective
contentious issue with those who keep payment in the 1980s, hospitals turned
their eye on cost/outcome ratios, and their attention to reimbursement in
one that won’t be resolved in this the form of diagnosis-related groups, or
article. However, I recognize the simi- DRGs. An early profit winner for hospitals
larities of both products and their need was DRG 209 – Major Joint and Limb
for a platform of high-profile surgeons Reconstruction. This was true despite
to expound upon their virtues. this DRG’s complexity in terms of
How can physician- instrumentation, surgeon
preference products be pur- training, product materials
chased by hospitals in a “If there’s one thing we’ve and, of course, supplier loyal-
manner that accommodates learned in 25 years of national ties. Charged with managing
clinical and financial influ- contracting, it’s that healthcare is, supplies, hospital purchas-
ences, yet still satisfies indeed, a local business.” ing departments initially
The Journal of Healthcare Contracting/Winter 2004
responsible supply-side eco- seemed satisfied securing
— Bill McIlhargey
nomics? Contracting plays a from their vendors the
key role. But here’s the rub: gratis use of implant
If there’s one thing we’ve learned in 25 years of national con- instruments (which typically cost between $20,000 and
tracting, it’s that healthcare is, indeed, a local business. It is $50,000).
influenced by unique processes and relationships, which, in Later, emboldened by their success in lowering their
turn, reflect local differences in infrastructures, business costs for medical commodities, purchasers gave renewed
strategies and utilization patterns. For buyers and sellers, attention to orthopedic implants, whose price increases
these differences provide opportunities and frustrations. exceeded yearly inflationary standards. However, now
Nowhere is this truer than in the area of orthopedic implants. these economic buyers were more imaginative in their
efforts to curtail costs associated with DRG 209.
Who’s on First? Partnering with hospital staff, they developed protocol
To understand the buying and selling of orthopedic Continued on page 18 ➝
14

6. Lead Story
Physician-Preference Contracting
➝ Continued from page 14 between the cost and volume of physician-preference
standards, capped procedural payments, elaborate items, particularly, orthopedic implants.
demand utilization schedules and volume-related • Because materials managers fail to understand the
price matrices. value that suppliers can provide to clinicians, they resist
For the most part, these efforts fell short of their suppliers being present during (orthopedic) procedures.
intended purpose. In fact, they merely inflamed the • Purchasing professionals are frustrated with the com-
natural rift between administrative and clinical factions. plexity of national GPO agreements and the inability
On the one hand, hospitals tried to limit the surgeon’s of GPOs to effectively implement standard pricing.
product choice in order to attract competitive bids. At What’s more, they know that GPOs have devoted
the same time, surgeons quickly tired of economic minimal resources to support the roll out of national
credentialing and getting questioned about their agreements for these difficult agreements.
relations with vendors. So they searched for options they
felt would give them more control over the delivery of Now consider the purchasing process from the
care, including aligning themselves with nearby perspective of the supplier:
hospitals viewed as more friendly to their practices, or • Distribution channels have always been geared to
moving their practices to emerging specialty hospitals in supporting procedural delivery and surgeon training.
which they might have financial involvement. Suppliers view attention to purchasing and economic
value as a non-productive, inefficient use of their
Pricing Inconsistencies sales forces.
Despite the fact that orthopedic devices (as well as • For the most part, suppliers believe that hospitals
cardiology and spinal devices) might be considered the frequently misstate their financial position vis-à-vis
last bastions of clinically controlled supplies in the DRG 209 and that, in fact, they make money on the
hospital, one should not construe that clinicians are procedure. They believe that inefficient cost accounting
oblivious to the cost of the goods they use. In fact, those clouds the issue. The bottom line is that suppliers
hospitals with a focus on DRG 209 do, indeed, receive feel unjustly targeted for their hospital customers’
discounts. The problem is, these discounts are inconsis- unprofitable procedures. Of course, their sales reps
tently applied, controlled in large part by local sales share that mistrust with the surgeons, further
managers operating under the premise of “what the strengthening the surgeon/supplier relationship.
market will bear.” • Suppliers feel that economic buyers refuse to recog-
Local discounts routinely reflect the vendor’s local nize the financial contributions that suppliers make
market share, the depth of the vendor’s exposure within to hospitals, including providing instrumentation free
the facility, the vendor’s relationships with clinicians of charge, providing products on consignment, and so
and the facility’s commitment to national or regional on. Suppliers believe hospitals have little interest in
The Journal of Healthcare Contracting/Winter 2004
contracts. The inconsistency of these discounts has trying to understand the suppliers’ costs associated
frustrated purchasing professionals and broadened the with supporting clinical procedures.
gulf between them and the vendors. • Suppliers are disappointed with national GPOs’
Consider the purchasing process from the perspective efforts to contract for physician-preference items,
of the economic buyer: believing that national contracts provide neither sales
• Held accountable by administration for supply costs, efficiencies nor incremental volume. In many suppliers’
the materials manager is put in the uncomfortable minds, national contracts have done only one thing –
role of merely facilitating the payment for products establish a new (lower) pricing framework from which
chosen by the surgeons. local hospitals can benchmark their efforts.
• Tight surgeon/supplier relationships undermine the It’s not surprising that the natural buyer/seller
ability of the materials manager to obtain discounts tension has grown over the years, driving sellers to
based on volume. In fact, there’s little correlation Continued on page 20 ➝
18

7. Lead Story
Physician-Preference Contracting
➝ Continued from page 18 • Establish a reciprocal platform with the benefit
intensify their relationships with clinicians. Nor is it of knowledgeable, third party insight, whether
surprising, as noted before, that the rift between the from affiliated GPOs, supplier/buyer corporate offices
clinical and administrative functions within the hospital or outside consultants. It’s important that this third
has only grown wider. party is credible and that it possesses a full
So what’s the bottom line regarding pricing understanding of industry frustrations.
inconsistencies? • Develop a quid pro quo early in the process.
• Minimal impact on the cost of orthopedic implants. Enough of holding the cards close to the vest. Buyers
• Increased frustration on the part of clinicians and and sellers know what has failed to work in the past,
administrators. so stop wasting time building higher barriers. Instead,
• Closer supplier/surgeon relationships. put the cards on the table early. Doing so almost
• An increased credibility gap between buyers and sellers. certainly requires assistance from an outside source.
• Polarization of each party’s position, with little move- • Pursue extended opportunities. Given that price-
ment by sellers, surgeons or economic buyers. for-volume has failed to work in this arena, attention
should be paid to the underlying values, strengths
What’s To Be Done? and weaknesses of all parties to determine what
Is this the status quo? Can suppliers of orthopedic devices drivers are required to satisfy these values.
continue to operate their businesses based on demographics • Create a simplified agreement. Restrict your con-
and expanding relationships with surgeons? Can tract language to intent and measurable performance.
economic buyers continue to ignore the impact that Don’t get bogged down in clauses that limit the intent
suppliers of physician-preference items can have on the of your agreement, but do include milestones that can
quality of care? Can surgeons continue to move their be evaluated regularly.
practices in order to get the products they want? • Establish performance evaluations. Agree to review
Improvement in the way physician-preference your milestones and regularly evaluate performance.
products are bought and sold can only come about when • Don’t lose sight of the clinical interest. Although
all parties understand the needs and value of the others. we’ve focused on the business process, there’s little
Yes, it’s conceivable that buyers and sellers could to sustain without addressing the result of this
shrug off their distrust of each other. But it’s highly collaboration. Performance outcomes, knowledge
unlikely they will do so without outside help. The key is transfer and physician supply chain frustrations are
to establish a collaborative platform between them. This all plausible areas to develop, and will perform an
can only be done by taking the time to identify the ongoing service to both hospital and surgeon.
underlying values and barriers residing on all sides. Those of us in the contracting arena have an
The following tips are offered to help coach the opportunity with physician-preference products. As
The Journal of Healthcare Contracting/Spring 2004
process and generate momentum for its acceptance: students of the contracting process, we should recognize
• Start where the action is. This doesn’t mean that when and where we need to “adjust our sights” and
arm’s-length influences could not be part of the solution, dismantle the cloak of distrust.
but rather, that values, opportunities and perceptions Our job is to find a way to say “yes” and not encourage
reside locally and need to be resolved there. the barriers of “no.”
• Throw away standard buying/selling models.
Line item benchmarking, cross-reference evaluations and Bill McIlhargey consults suppliers and
SKU pricing are not the tools we’re looking for here. buyers in the area of physician-preference contracting.
Realize that understanding and innovation are the keys He spent the last 12 years developing strategies and
to success, and that they can only exist after both sides teams for national accounts with DePuy and Smith &
strip away their egos and place their strengths and Nephew. He can be reached at 978/500-9666
weaknesses on the table for collaborative leverage. or dodmcilhargey@comcast.net.
20