Transparency and benchmarking

The key to cost cutting: Stepping in where competitive markets don’t deliver

Late last year, at the German Hospital Procurement Congress in Berlin, we met with Durral R Gilbert, President of the US firm Premier Supply Chain Services, who was presenting cost-cutting strategies that reach far beyond reducing consumables and equipment prices – strategies that might also help hospitals in Europe.

Photo: Transparency and benchmarking

Premier is a provider-owned performance improvement alliance of 2,700 hospitals and 90,000-plus nonacute care providers. ‘Lending has loosened a bit in the US over the past year, after a very difficult situation in the preceding two years,’ Durral Gilbert observed, when asked about the US hospital financing situation. ‘However, debts have to be serviced, which is where the issue of liquidity comes in. In the context of reimbursement cuts, American hospitals face the challenge of cutting cost and optimising profitability and cash flow.

How is Premier’s alliance positioned to help hospitals and health systems?

Gilbert: ‘At Premier, we understand that the issue reaches well beyond procurement. We focus on two major concerns. One is driving out unnecessary cost; this is not just about supply chain cost, but includes eliminating any unnecessary waste, inefficiencies and human capital costs, such as benefits. The second focus is on increasing quality of care. For a long time, the belief was that achievements such as reducing length of stay, minimising complications and hospital-acquired infections, as well as improving mortality rates, were impossible in the context of cost savings. Premier and our alliance of hospitals have demonstrated, at a national level, that improved quality can indeed help cut cost by, for example, reducing readmissions.

How was this has achieved?

‘Transparency is a core aspect in this context. It requires being able to compare one’s financial and clinical performance to that of peers – hospitals that are similar or which are located in the same region, to identify influences by geography. ‘Reducing supply chain cost is another key aspect. Direct sourcing helps cut excessive cost by taking links out of the supply chain. For example, in lieu of specifications that manufacturers come up with, we have clinicians in our member hospitals who define specifications exactly for the gloves, isolation gowns, etcetera, that they require. Premier then sources products that meet the demand of the hospitals. We cut out the intermediaries that add unnecessary cost to the supply chain.

‘Savings can exceed 30 to 40 percent on commodity items. You’d think margins would have already been whittled out for those kinds of products, but this has not been the case. We provide transparency regarding real cost of products and of getting them to each hospital.’ Asked for more information about Premier’s benchmarking strategy, he said, ‘Selected member hospitals provide us with blinded patientlevel data. We are able to capture information on length of stay for specific ICD-9 and DRG codes, with and without complications. We benchmark this information across hospitals. In combination with the cost on the supply side, we can look at the total cost of a procedure. ‘Over-utilisation of imaging, for example, is a big cost driver, as are lab analyses and pharmaceuticals. Information on utilisation of all these products helps hospitals figure out where they stand and what potentials for reductions in consumption are.

What is the influence of differing payment models?

‘There may be a great diversity of payers in the US – national and regional payers, federal payers, and private pay – but there is a noticeable trend towards standardisation of models in the context of reform. Premier is involved with the evolving accountable care delivery models, which will also drive change.

Why does the USA pay a higher price for equipment than Europeans?

‘For one, there is a deeply ingrained system of reps over here, who all take their margins, and there is an added cost associated with increased advertising addressing end customers – the consumers. ‘The standard of living is higher in many regions of our country, and device manufacturers have seemed to feel that US care providers can afford to pay higher prices. Things may be changing. While broadening patient coverage, the Affordable Care Act is putting cost pressure on providers and manufacturers. But whereas providers have endured billions in reimbursement cuts and more, some manufacturers are attempting to pass on the newly introduced medical device tax – a Federal Excise tax addressing classes II and III devices, as well as pharmaceuticals – to hospitals.

‘Premier has been a leader throughout the design and implementation of this tax in working aggressively to protect our members from having this tax passed on to them. This tax is the responsibility of the manufacturers. ‘Healthcare reform rests on the principle of shared sacrifice - hospitals are not responsible for absorbing this tax, simple and plain.’

Can Americans learn from Europe and/or vice versa?

‘Innovation in care will be required regardless, and the US may be a leader in that respect, which in turn may drive costs up. However, players on both sides can learn about the values of a free market. Premier strongly believes in a highly competitive market for goods and services in the healthcare segment; in niches where we perceive excess margins that are not eliminated by the market, we’ll go in and eliminate those excess margins through direct sourcing – stoking the fire of competitiveness. ‘There are some very good models in Europe for patient care, reimbursement and for patient empowerment. In the US, not many citizens own their health yet, while in Europe many will bike to pursue a healthy diet. Improvements in lifestyle could help prevent disease – it will be exciting to see how the US and Europe will learn from each other’s models.


Speaking at the German Procurement Congress late 2012 – Durral R Gilbert President of supply chain services with Premier, a USA-based provider-owned performance improvement alliance of 2,700 hospitals and 90,000-plus non-acute care sites. A graduate from the University of North Carolina at Chapel Hill, where he was inducted into the prestigious Order of the Golden Fleece, and Duke University’s Fuqua School of Business, where was selected for the distinction of Executive Fellow, his present role involves overseeing the company’s core supply chain operations, as well as Premier’s emerging services businesses of specialty pharmacy, pharmacy benefit management, and direct sourcing.


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