Dr. John Cherf

Data and evidence anchor healthcare’s financial renaissance

April 05, 2021
By Dr. John Cherf

Even as brighter days appear to lie ahead for healthcare providers, COVID-19 continues to strain our healthcare system. Postponements of elective procedures, as well as a steep decline in the volume of emergency department and urgent care visits, caused revenue deficits for the majority of hospitals and health systems in the U.S. The American Hospital Association estimates $323.1 billion in financial losses for U.S. hospitals and healthcare systems in 2020. These losses, coupled with increasing supply and labor costs, are cause for concern to hospital leaders responsible for their organization’s financial viability. It is important that healthcare providers prepare for the post-COVID-19 era now.

The challenge that faces healthcare providers is not simply navigating the pandemic’s ongoing financial impact, but simultaneously forging a path to recovery. In response, many hospital leaders have accelerated cost reduction initiatives to meet financial targets. Prior to the pandemic, a study published in JAMA found the cost of waste in the U.S. healthcare system ranged from $760 billion to $935 billion annually, accounting for 25% of total healthcare spending annually.

Controlling product variation represents one of the greatest financial opportunities in the months and years ahead, yet few hospitals have a thorough understanding of where that variation lies. Thriving in a post-COVID environment will be contingent on how well an organization uses data and evidence to fully understand cost-per-case, cost-per-discharge, and patient encounters. This insight will enable healthcare providers to establish process improvements that will optimize savings while maintaining the highest level of patient care.

Data to draw upon
Thankfully, we have an abundance of data in healthcare, from product and price to use, performance and outcomes. Better yet, we can put that data and clinical evidence to use to tackle a sensitive and personal cost issue: physician preference items (PPI). Today, up to 60% of a hospital’s total supply spending comes from PPI. In healthcare, we have learned that variation is often unwarranted, drives up costs and can even affect the quality of care we deliver. Most other industries have effectively managed variation or standardization for decades. It’s time for similar advances in healthcare.

The aim to rein in this spend isn’t uniformity; it’s standardization. Standardization reduces costs and improves outcomes. Physicians are empiricists by nature. While patient care remains paramount, physicians are beginning to understand the financial pressures facing hospitals, which have only been exacerbated by COVID-19. Data and evidence can facilitate the right conversations between supply chain, financial and clinical teams to reduce variation and standardize products without sacrificing quality of care, the imperative for physicians.

For example, during the peak of COVID-19 lockdown, a large health system in the mid-Atlantic region used the “downtime” to achieve reduction goals that would help offset the pandemic’s financial impact. The supply chain team initiated vendor reduction strategies as a cost saving method. They first targeted high-spend orthopedic categories, including hip, knee and shoulder replacements. The team shared real-time data that drilled down into device utilization, cost-per-case variation and outcomes. Access to this information helped engage surgeons in the product and vendor decision-making process. Together, the teams selected a single vendor for joint replacement implants. The standardization then opened the door for additional contract negotiation with the vendor resulting in significant price cuts due to volume. The collaboration resulted in more than $12 million in annual savings. The supply chain and clinical teams then used the same approach for breast reconstruction surgery. Data and clinical evidence along with surgeon insight allowed them to identify a single source for two categories (mesh and implants). By reducing the number of vendors from four to one for these categories, the team was able to cut the organization’s annual spend for these items in half - a net saving of $3 million. Furthermore, there is no high-level research evidence suggesting these sourcing changes will have any impact on clinical outcomes.

Evidence and data can also help us identify situations in which a technology or device no longer has meaningful impact. Not long ago, use of Continuous Passive Motion (CPM) machines following lower extremity surgery was a mainstay of post-operative care. Clinical literature has since proven CPM machines don’t have a meaningful impact on successful rehabilitation or postoperative function. The same is true regarding the use of antibiotic loaded cement to prevent against postoperative infection in reconstructive joint surgery. Clinical evidence now indicates antibiotic cement should only be used in cases that produce higher risk of infection or on patients who present a high-risk of infection, not all joint replacement patients.

Healthcare’s road to financial recovery will be a group effort and the first place to start is around reducing wasteful spending to help us recover millions of dollars. Hospitals and health systems can draw insights from the marriage of supply chain, financial and clinical data teams to source supplies that demonstrably deliver the best quality care at the lowest cost. Forward thinking physicians will welcome these conversations and become active participants when provided accurate data and reliable clinical evidence.

About the author: Dr. John Cherf, MD, MPH, MBA, is the chief medical officer at Lumere.