Q&A: Achieving quality, cost savings with category management hinges on internal goal alignment
When Allen Passerallo joined Vizient in February as vice president of category management, he brought with him a wealth of experience in supply management and operations, including stints at two of the nation's top healthcare institutions.
What he also brings is an open mind (and plenty of data) to every decision he and his team make to help providers better manage their spend. After all, conversations around goal alignment, governance structure and physician engagement to achieve cost savings and standardization aren't always easy. But in an industry where care delivery excellence is a non-negotiable, Passerallo is committed to advancing contracting strategies that bring value to providers and their patients — all while mitigating the mounting margin pressures healthcare organizations currently face.
"Subject matter expertise enables the category team to design contracting strategies that meet providers' goals around quality and cost while also creating opportunities for improved operations through contract terms and conditions that support improved operations," he said. "We optimize bidirectional value for providers and suppliers, fostering opportunities for both."
Here, Passerallo discusses some key questions around category management, including how providers can achieve better internal goal alignment.
Why is category management such an important topic for providers right now, especially in the current financial environment?
Providers are still facing significant challenges post-COVID. The benchmark typically is 90 days' cash on hand. It doesn't seem like a big number, but average days cash on hand is down about 3.5% to 4%, which is significant in the grand scheme of things.
Operating costs associated with managing a hospital also have changed significantly. Along with that, Medicare and insurance companies are trying to save money themselves, so they're allowing and actually pushing surgical cases that are typically done in the inpatient setting to the outpatient setting where the reimbursement is lower.
That environment means we have to look at contracting and purchasing of implants and med-surg supplies associated with cases a little bit differently than in the past because 37% of a hospital's expenses is medical supplies and 54% on average is labor. Nobody wants to cut labor. So, we're looking at the next largest spend category, which is going to be those medical devices and specifically high-cost implants.
In your recent Vizient Medical Device Tech Watch article, you write about the importance of internal goal alignment in category management. Can you outline some of the short- and long-term strategies that will help providers who want to achieve better internal alignment?
Goal alignment is unique to every organization. But two of the more common goals are financial viability and retaining physicians. So, leaders of organizations have to determine what's important to them. Is it cost reduction or is it physician engagement and satisfaction? That all must be factored into how they're going to approach their budgets, and it needs to be cascaded down. Then there must be accountability that's shared by the clinical team and the administrative team. Saying it's the administrator's job to manage financial challenges is almost impossible without the coordination and engagement of clinicians in that process.
Say, for example, the orthopedics department has a $5 million goal against its $20 million budget. To say that you have to cut $5 million out of your $20 million budget is unrealistic. However, the goal of the exercise is to allow surgeons within orthopedics to not just reduce their cost in the $20 million budget, but to assist the surgery department in lowering costs, including on implants. Whatever savings is achieved from reducing the cost of implants is credited back to the orthopedics department.
Internal culture is so important. One organization had an aggressive contracting strategy and went from two vendors for spine to one, which is something a lot of hospitals can't do. But it's all driven by the leadership of the institution educating themselves on the hospital's finances and healthcare economics, and then marrying that information with their target budget and creating a process for accountability.
For providers who are looking to standardize vendors that offer similar products, are there specific strategies they should consider?
Look at high dollar spend areas and the disparity within market share. Can you standardize with just a little bit of market share movement or is it going to require a lot? Margin is another one. As a hospital, if you're in the negative, you must be more aggressive, especially if it is a high-volume procedure. Designing contracting strategies that drive more value, such as a reduction in suppliers, can significantly lower costs without impacting quality negatively, leading to improved procedural margins. And always look at data to help guide your decisions.
I'm adamant that physicians are involved in assessing the opportunity and designing the contracting strategy to make sure we're aware of important information about technology or outcomes data. That's key to guiding your path for healthcare providers.
Do you feel there are any major misconceptions about category management?
I've heard this from a couple of physicians: "You're all about savings." My answer is, "Help me understand objectively why we can't standardize."
Again, I think dispelling those misconceptions goes back to internal goal alignment. Administrators should share information and ask physicians for their contributions to the process. Anonymized data also can help physicians select among multiple vendors.
What opportunities in category management are you most excited about?
We're advancing various contracting strategies, and it's not all about going to a single vendor. That's an optimal way of achieving maximum financial value, but we know that doesn't fit every category of spend or every organization. We also are focused on stewardship, which is advancing the appropriate use of medical devices, and we're always looking at clinical research and data and bringing forward opportunities for discussion.
There are plenty of opportunities to reduce cost by what we call demand matching, which is the "right product for the right patient" criteria. It's about ensuring that we're matching the right criteria to the technology, regardless of cost.
The category management structure supports maximizing every dollar a provider spends. Our focus at Vizient is value-based care — always quality over cost. As long as the quality is there, then we should be looking at opportunities to reduce cost structure through a variety of contracting efforts. So, we engage with physicians to understand what is important from a clinical standpoint and ensure that when we design a process, we're able to present the objective technical and clinical data to them. That way, they feel comfortable with selecting devices or implants based on the criteria they established upfront.
Learn how Vizient can help deliver customized value in clinical and physician preference item service lines like cardiovascular, orthopedics, spine and neuroscience, and read the latest edition of Medical Device Tech Watch.