AVOID this advice at all COSTS!

cost-avoidance.jpg

The comment comes up regularly… “cost avoidance isn’t actual savings…” In its most rudimentary form the statement appears true, but it is a disingenuous dismissal of the competent and necessary work effort needed to avoid unnecessary inclusion of premium products or utilization. This effort requires skillful clinical collaborations and physician engagement and we need to celebrate our successes in keeping unnecessary costs competently out of the system or we risk the deleterious effect of discounting the effective efforts of our clinical stakeholders and value analysis professionals.

Instead we can positively communicate the more genuine value of managing proposed product and utilization changes expressed as managing medical supply inflation relative to a simple marketplace index… Enter the Clinical Utilization Acceleration Index.

Background

To get some context, lets quickly look at a simple example of how medical supply products behave during budget planning, specifically in terms of inflation.

In Example 1, we have the customary 12-month historical medical supply run rate (in our hypothetical example $100M). Also shaded in blue, are the inflation drivers. Same store growth is the planned change when a new service is opened or when a current service is tooled up to accept increased volume. The management challenge is the “budget plug” given to supply chain as an expense reduction target. Often applied to top-line supply expense as a negative value to inflation. Benchmark inflation can be driven by various forward-looking reconnaissance such as annual budget planner white papers published by the GPOs, AHRMM, HFMA, or simply historical inflation to the expense line as known to the organization budget analysts. ‘Changes in clinical utilization’ is an estimation based on historical experience for organic drifts in product utilization, and changes in unit price that reflect known contract price escalators.

In the example we see a hypothetical budget year planned out to reflect the behaviors of these inflationary (or contra-inflationary) elements. Planned, contingent, and experiential behaviors are accented for and can lend great transparency to value analysis teams working diligently to help manage appropriate cost. These cost behaviors can be the focus of data mining to develop a compelling data driven story of how we successfully manage the medical supply budget line.

Example-1.jpg

Evolving the Clinical Utilization Acceleration Index

First collect at least 100 items to participate in the index. Select top 50 SKUs from Ortho, Spine, and CRM. Then choose 25 SKUs from Suture, Endomechanical, Trocar, and adhesive products. Finally, 25 commodity medical products, and any other medical supply for which there is strategic interest and 12 months of mature utilization.

With the list of index-participating SKUs you will determine a baseline analysis of the total 12-month utilization from the date that the budget was finalized, then analyze to the monthly average. This will give you the baseline data. Each month the amount the new utilizations shows to be greater or less than the average is expressed a percentage and becomes the new Clinical Utilization Acceleration Index. This index will be affected by changes in organic baseline utilization as well as the planned same store growth, and can help describe how these factors contribute to inflation.

In Example 2 we see a Q1 trend to the aggregate Clinical Utilization Acceleration Index expressed as 6%. Our “normal” aggregate rate has a lower control limit of 2.4% for estimated clinical utilization acceleration inflation, and 12.4% upper control limit with the additive effect of the planned same store growth. In this example the supply chain leader communicating the trend would make note of what the significant driver of the sharp increase was… Perhaps it was the planned growth of supplying a new service location.

Example-2.jpg

Value analysis teams now have a communications alternative that better describes what has been traditionally called “cost avoidance” and quickly dismissed. If you have logged an aggregate net savings against budget run rate of $400,000 and have declined $100,000 in new product requests, you are communicating a “savings of $400k to budget, and other favorable contribution to the Clinical Utilization Acceleration Index of $100k.”

 

Example-3.jpg

In Example 3 we see a communication chart where the index is behaving within expected limits, and although the aggregate forward-looking trend appears unfavorable, predictive budget analytics still indicate the performance will maintain within upper and lower control limits.

The next months will either start to correct the trend line or the management challenge will need to step up to be a more aggressive corrective influence on the index.

With the Clinical Utilization Acceleration Index, communication about avoiding incremental new expense is on a positive note and supportive of the heavy lift that stakeholders in clinical value management undertakes when clinicians are asked to review their peers as supplicants to the new product request process. Contribution to favorable performance against a utilization index is much more compelling to future collaboration than dismissing work as ‘cost avoidance.’

I hope this advice inspired you to work through setting up an index approach to communicating the effective work your teams and stakeholders do to keep medical supply expenses in check and behaving as planned for in the budget process.

As always, until next we meet, I appreciate all you do to fill the hands that heal!

TH

 

Please visit my OutSideIn blog for a discussion on how the Internet of Things is delivering an unprecedented interconnectedness, and how healthcare Supply Chain leaders better get comfortable with it.

Stop by the N=5 Supply Chain Blog to participate in discussions on, CCJR – 5 paths Supply Chain can take to support success, demonstrating fiscal accountability, and how to stop doing stupid stuff.

Thank you

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