In this month’s column, I will demonstrate another example of jumping into action without alignment at the far end of the care chain—the hospital system. This month you’ll meet “Boomer,” who is more interested in landing the best price from a supplier than considering the greater cost to the organization and ultimately, the care chain. The old saying, “If I had a dollar for every time I have seen this…” has never been more applicable than in the scenario I am about to illustrate. The concept of landed price versus the cost of landing that price has far-reaching implications for both organizations and patients.
This month’s featured film example is not “Star Wars,” “Jurassic Park,” or even “City Slickers,” but rather “Jerry Maguire.” This film accurately reflects what many supply chain representatives—specifically sourcing professionals—hear almost daily in their jobs: “Show me the money!” In that movie, lead character Jerry Maguire (a sports agent portrayed by Tom Cruise) is hounded by his star football athlete Rod Tidwell (played by Cuba Gooding Jr.) to show him the money. It is truly a “must watch” and ties directly to Boomer, and a hospital sourcing initiative I like to call “Operation Jerry Maguire.”
But first—a formal introduction. Meet Boomer, a hospital sourcing person who thinks he is as slick as Jerry Maguire, a.k.a., Tom Cruise. Both his approach and style in showing the money to management is arrogant and mostly careless. We all know someone like this, don’t we? Boomer manages the total spend of a major hospital system and is now under pressure to “show the money” to top-level executives in response to new Affordable Care Act (ACA) regulations.
A game-changing ACA regulation, known as the Readmissions Reduction Program (HRRP), requires the Centers for Medicare and Medicaid (CMS) to reduce payments to IPPS hospitals with excess re-admissions. Combined with ACA’s Value Based Purchasing Initiatives (VBP), these directives have had a devastating impact on hospitals and the entire healthcare system. In many cases, it has caused hospitals to fight for survival. Proponents argue both measures have forced hospitals to look everywhere for savings—a beneficial practice in today’s cost-conscious healthcare landscape. Without becoming embroiled in the debate over the regulations’ merits (which I could write a book about), I will simply use the ACA rules as an example that started the ball rolling toward an all too common “landed cost” fiasco.
Boomer’s hospital system introduced a cost savings initiative called “Operation Jerry Maguire” as a reactive measure to the ACA. The plan required all of the hospital’s functional groups to “show the money” by reducing costs. Naturally, the effort was spearheaded by the hospital’s CEO, who demanded that all actions “be in the best interest of patients and shareholders.” I’ve launched many cost-savings programs myself over the years, and while it certainly is a worthwhile endeavor, I have always made sure my teams understood the care chain decisions they were making and discouraged them from ever doing anything in a silo.
Boomer decided to outsource his sourcing organization (i.e., eliminate it) and simply manage a select few Group Purchasing Organizations (GPOs). At one point in my career, someone suggested I do this very same thing. And for reasons I will soon explain, I politely declined. Boomer ran a GPO bidding process that awarded orders to players based solely on price. He implemented an electronic portal, organized a GPO leadership team town hall meeting, showed attendees “Jerry Maguire” film clips, and danced around while shouting “Show me the money,” through the electronic portal.
Let’s hone in on one of Boomer’s failed product decisions—specifically, pitting the price of a pure disposable against the value of a capital-driven system play. These concepts are not the same. Capital is never deployed for the sake of simply selling capital. Conspiracy theorists might think that medical device companies sell capital just to sell capital, but I have never experienced this during the more than 30 years I have worked in the industry.
Most medical device firms start with the disposable and determine whether a disposable by itself will be sufficient. When it is inadequate, a company will create the capital to drive the disposable, which typically yields the intended patient outcome. It is a case-by-case scenario, but more times than not, capital drives better care because it does things a disposable can’t do by itself. Simply put—you can snorkel and tread water very inexpensively. This method works fine in most instances. I do it all the time. You can also deploy capital and do things below the surface that you could never do without a regulator and oxygen. On vacation, this is an option that affects enjoyment level. In healthcare, however, this choice can significantly impact patient outcomes.
Thanks to his auction, Boomer received prices on a wide range of products—everything from disposable gloves to disposable gastroenterology devices. Consequently, on his very extensive spreadsheet, all the items looked the same (product identification, description, volume, price, etc.). For caregivers, the price of one item doesn’t compare to the value or landed cost/benefit of the other. But when the focus is only on the price portion of the care chain, like supply chain sourcing, failure is inevitable.
Boomer took the output of his electronic bidding exercise and strutted over to the finance office, one of the leading advocates (and scorekeeper) of the “show me the money” initiative. Boomer and the hospital’s financial gurus scoured the spreadsheet from the portal based on price and highlighted the items they would authorize. Since Boomer was in a hurry to show the money, he didn’t take the time to pull together a care chain group like a therapy committee, to determine whether his decisions were best for the hospital and its patients. He treated the exercise without giving any credence to products. From his perspective, if a product is being sold to accomplish a certain task, and the U.S. Food and Drug Administration has approved it for that purpose, it must be good enough.
Boomer made another mistake by solely looking at price. He awarded the vast majority of spend to the GPO that sold the disposable system at the best price. Because that GPO consistently had the best disposable product price, it was awarded much of the hospital’s spend across the board. Since Boomer eliminated his sourcing team, he had to rely on what the GPO was offering him. He assumed all GPOs were the same—if they had the products he needed at the best price, they would receive most of the spend. I am in favor of fewer GPOs having significant volume. But someone—perhaps that sourcing team Boomer fired—must vet out the offerings beyond price.
Let’s fast-forward six months. The product being used without a capital-driven piece of equipment was now being used within the hospital system, and on the surface looked to be saving money. The hospital CEO attended an update meeting about the Jerry Maguire initiative and was thrilled with Boomer because he was “showing the money.” Boomer received the Jerry Maguire award and everyone chanted, “Show me the money.” Boomer sashayed out of the meeting high-fiving everyone.
About three days later, the CEO attended a patient outcome review meeting within the hospital to review readmission data that would soon be reported to CMS. For some reason, readmissions were rising. And, the cost associated with those incidents were accelerating, which negatively impacted the hospital’s overall finances. The CEO wanted to drill down to the specific incidents to determine the reasons and causes of these readmissions. Care to guess what he found? That’s right: The culprit was Boomer and the cost savings he orchestrated. Surely, you’ve seen that movie before—the one where Peter gets rewarded for robbing Paul.
The CEO pulled together a subgroup of players into a special emergency session; those in attendance included finance executives, Boomer, and leaders of the therapy committee who determine the types of therapies to use within the hospital. The therapy committee was led by Dr. Told Yaso. Flabbergasted, the CEO asked, “How did this happen? How could the right hand in this organization not know what the left hand is doing? Not only have we caused pain/suffering for our patients, we have incurred expense that is crippling us.”
The look on Dr. Told Yaso’s face could have melted the room. He replied, “It’s simple. Our zeal to save money through operation Jerry Maguire encouraged Boomer—or Jerry over there—to focus on price without considering the landed cost of his actions. The reason we always used the capital equipment piece of equipment to drive the use of the disposable was because it easily regulated what the disposable did, which prevents the patient from getting infected. If someone would have asked us this, we would have told him.” Almost immediately, the finance person chimed in, “Yeah, what were you thinking Boomer? We’re not reimbursed for infections that we cause.”
At that point, the CEO stood up and calmly said, “Boomer, hand me that Jerry Maguire award I just gave you. You’re fired.”
I have changed the names in this column to protect the guilty, but the situations I described are based on true events that fortunately, have not occurred in the same organization. There are many teachable moments in this column that affect all of us in many ways—be on the lookout for Miss Alignment and Boomer in everyday situations. They won’t be hard to spot.
Boomer and Miss Alignment, actually, could have been brother and sister. Neither considered the outcome of the care or value chain, and focused only on the pricing portion of the supply chain. Boomer fell victim to what I referred to in my March MPO column as the tug of war between the supply chain and the care chain. If you haven’t already done so, I suggest you read that column. To accentuate where Boomer failed, I took Figure 2 from that column and note where Boomer made decisions in a vacuum; I also explained how the ultimate cost of those decisions would come back to haunt him, patients, and ultimately, the entire hospital system.
Some pivotal lessons to be learned from Boomer’s mistakes:
- The CEO and other executives should ensure either themselves or their sourcing teams are not launching Jerry Maguire-like activities that encourage Peter to rob Paul.
- Hospital sourcing officials should always think twice before switching to a pure disposable play because they are implying that the reason for the capital is no longer valid. Be sure about the switch—any uncertainty may cause patients to suffer in the name of cost savings. Additionally, think long and hard before firing a sourcing team that is responsible for ensuring the value chain is being sourced correctly. Make sure the sourcing team secures the
- organization’s needs from the most appropriate supply channels and not simply one GPO, unless that GPO meets all needs of all parties.
- Professors of supply chain programs or leaders interviewing possible sourcing personnel for a job should ask this simple question: What is the difference between price and landed cost? The answer might provide insight on whether that sourcing person is a Boomer, a Miss Alignment, or yours truly.
The bottom line is the difference between price and cost is directly related to the amount of analysis and alignment that is done across the care chain; it is almost linear. The more a person follows an aligned way of thinking that links all parties across the care chain together, the more price and cost will be the same. On the contrary, siloed-based decisions within any part of the care chain will likely result in a potentially expensive landed cost. Never give Dr. Told Yaso the chance to echo his most famous phrase: “I told ya’ so…”
Chris Oleksy is founder and CEO of Oleksy Enterprises and Next Life Medical. He can be reached at email@example.com or firstname.lastname@example.org.