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Plastic Surgery Focus: Business & Practice Management

Working Smarter, Not Harder: Using Data-Driven Strategies to Generate Front-End Cost Savings through Price Negotiation and Supply Chain Optimization

Reece, Edward M. M.D., M.B.A.; Davis, Matthew J. B.S.; Abu-Ghname, Amjed M.D.; Castanon, Joe M. C.M.R.P.; Voris, Matthew B.A.; Hoxworth, Ron M.D., M.B.A.; Winocour, Sebastian M.D., M.Sc.; Buchanan, Edward P. M.D.

Author Information
Plastic and Reconstructive Surgery: June 2022 - Volume 149 - Issue 6 - p 1488-1497
doi: 10.1097/PRS.0000000000009121

Abstract

The health care system in the United States has the highest per-capita cost in the world.1,2 As hospital systems attempt to better control costs without sacrificing patient care standards, administrative motivation to implement cost saving interventions is derived largely from payer structures.3 Pediatric hospitals are especially motivated to find more economic approaches to high-quality health care delivery, as more than half of hospitalized pediatric patients are funded by Medicaid.4,5 A number of initiatives have been put forward with the goal of simultaneous cost saving and quality maintenance, including reimbursement models that take quality of care and patient satisfaction into account, and programs encouraging physicians to pursue additional business education.6–11 A perhaps lesser known option to achieve significant cost savings is to optimize the supply chain. Because supply chain optimization through changes in contract use and negotiation leads to front-end savings, these interventions have a direct, one-to-one impact on hospitals’ bottom lines.12,13 In addition, the cost savings achievable through supply chain negotiations are far from trivial: one 2019 study reported that U.S. hospitals spend approximately $161 billion on medical supplies each year, and that supply chain expenditures account for 15 to 50 percent of a health care organization’s budget.14,15 As such, for large hospital systems and small private practices alike, supply chain optimization has been found to represent a major potential opportunity to minimize expenses.3

A supply chain is defined as the complex series of events that occur between the decision to purchase an item, the actual purchase, and the subsequent replenishment of that item.16 Functionally, the day-to-day realities of supply chain involve monitoring and maintaining inventory, analyzing cost efficiency, strategically planning sourcing events, and (re-)negotiating contracts. Items purchased through a supplier can be obtained either based on a contract, which usually includes a negotiated discount, or without a contract, which tends to be more expensive. Optimizing a supply chain through increasing the percentage of items from all suppliers that are under contract (herein called “increasing contract use”) and/or negotiating higher discounts has been shown to provide hospitals with significant cost savings without compromising patient care.16,17 This cost-saving approach is especially useful for surgical practices, as the costs of maintaining an operating room depend largely on the negotiated prices of stocked materials and implants.18–21

The aim of this study is to characterize the financial impact of the supply chain at our institution to examine how different contract negotiation strategies can affect a hospital’s revenue stream, with an emphasis on cases relevant to plastic surgery. Using these data, we will then discuss how to develop a systematic approach for successful supply chain optimization that is generalizable and relevant to all plastic surgeons (Fig. 1).

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Fig. 1.:
Summary figure demonstrating the potential effects of increased contract use and supply chain optimization.

PATIENTS AND METHODS

Study Setting

This study was conducted at Texas Children’s Hospital, a large, multidisciplinary children’s hospital located in Houston, Texas. Affiliated with Baylor College of Medicine, Texas Children’s Hospital employs approximately 140 pediatric-focused surgeons and 140 surgical physician assistants who perform approximately 50,000 operative cases annually.

Study Population

We examined all patients at Texas Children’s Hospital who were taken to the operating room for either a facial fracture or a hand fracture during fiscal year 2018 (October of 2017 to September of 2018). Facial and hand trauma cases were chosen based on the ubiquity of these cases and the assumption that the materials and hardware required for these operations both tend to be consistent between cases and will likely be at least remotely familiar to nearly all plastic surgeons. The CPT codes used to identify facial and hand fracture patients are listed in Table 1. We acknowledge that institution-specific regulations will determine which service cares for patients presenting with hand and facial trauma; our goal was to include all CPT codes that could involve both plastic surgery and supply chain–negotiated supplies/implants in these specific trauma settings.

Table 1. - CPT Codes Used to Identify Facial and Hand Fracture Patients
CPT Codes
Facial fractures
 21310-40
 21343-48
 21355-66
 21385-408
 21421-23
 21431-36
 21450-70
Hand fractures
 26600
 26605
 26607-8
 26615
 26645
 26650
 26665
 26720
 26725
 26727
 26735
 26740
 26742
 26746
 26750
 26755-6
 26765

Data Collection

For the total operating room cost data and the accounts payable/accounts receivable portions of this study, we examined Texas Children’s Hospital–wide data for fiscal year 2018. Operative details collected included service performing operation, total operating room and anesthesia costs, supply costs, implant costs, total costs, and total collections to date. Billable versus nonbillable costs were identified. Operating room costs were manually corroborated by an operating room manager for accuracy.

For the materials costs portion of this study, because we observed minor variation in data collection practices between Texas Children’s Hospital–associated hospitals, our material cost analysis focused exclusively on the facial and hand trauma cases performed at the Texas Children’s Hospital main campus.

Materials Costs

To isolate the materials cost effect of negotiating contracts for supply chain items, the included facial and hand trauma cases were examined to identify all items with distinct Supply Chain Information Management (Alkmaar, The Netherlands) numbers. Items were identified as either under contract or not under contract. Additional data points collected included item list cost, item cost to Texas Children’s Hospital, and total number of items used during fiscal year 2018. Actual cost savings were calculated. Potential cost savings based on predicted potential average discounts and contract use room were calculated using the BillOnly calculator (BillOnly, Phoenix, Ariz).22 This freely available calculator can be used to estimate the effects of contract use room on cost savings and profit reductions. (See Link, Supplemental Digital Content 1, which links to the BillOnly calculator, https://links.lww.com/PRS/F87.) National average data were calculated based on previous reports by Long et al.23 Contract use estimates of 70 and 90 percent were based the assumption provided by one of the authors (J.M.C.) that the industry standard for use is 70 to 84 percent, 85 to 90 percent would be considered a high performance, and greater than 90 percent would be considered industry-leading. Average negotiated discounts of 30 and 40 percent were based on the assumption, also provided by one of the authors (J.M.C.) and corroborated by a 2009 study, that directly negotiated contracts for physician preference items tend to generate discounts of 35 to 55 percent.24 Please note that many of these estimates are institution-specific, and they would need to be calculated for the surgical practice being studied for this methodology to be generalizable.

RESULTS

During our study period, 353 patient charts across all Texas Children’s Hospital locations were included based on relevant CPT codes. Plastic surgery performed 151 (42.8 percent) of these cases. Total operating room costs for all 353 cases, including room costs, supplies, implants, anesthesia, and postanesthesia care unit totaled $4,612,450 (range, $3700 to $90,093 per case). Institutionwide data are summarized in Table 2.

Table 2. - Facial and Hand Trauma Cases Performed across All Texas Children’s Hospital Campuses in Fiscal Year 2018*
Characteristic Value (%)
Total no. of cases 353
No. of cases performed by plastic surgery 151 (42.8)
Total OR costs $4,612,450
OR, operating room.
*All prices in U.S. dollars.

Material Costs

Because of minor variation in data collection practices between Texas Children’s Hospital–associated hospitals, our material cost analysis focused exclusively on the facial and hand trauma cases performed at Texas Children’s Hospital main campus. Data are summarized in Table 3. During fiscal year 2018, a total of 140 cases were performed—77 facial trauma cases and 63 hand trauma cases. The average cost per facial trauma case was $16,192, totaling $1,246,786 over fiscal year 2018. Collections to date for these cases total $511,390, 41 percent of total costs. The average cost per hand trauma case was $14,469, totaling $911,555 over fiscal year 2018. Collections to date for these cases total $352,690, 39 percent of total costs. Narrowing our focus to the elements of operating room costs most directly affected by supply chain, we found that on average, billable supply costs per case accounted for 1 percent of total costs per case, and billable implant costs accounted for 15 percent of the total costs per case.

Table 3. - Fiscal Year 2018 Material Costs at Texas Children’s Hospital Main Campus for Face and Hand Trauma*
Face (%) Hand (%) Total (%)
No. of cases 77 63 140
Average cost/case $16,192 $14,469 $15,417
Average collections/case $6641 $5598 $6172
Total cost $1,246,786 $911,555 $2,158,340
Collections to date (% of total costs) $511,390 (41) $352,690 (39) $864,079 (40)
Average billable supply cost/case $208 (1) $104 (1) $175 (1)
Average billable implants cost/case $2934 (18) $975 (7) $2346 (15)
*All prices in U.S. dollars.

Examining all facial and hand trauma cases by Supply Chain Information Management number, a total of 330 items were used. The total list cost for all 330 items was $114,253, and Texas Children’s Hospital contracts saved a total of $9151 (8 percent) on these items, bringing the actual cost to $105,102. Considering each individual item by distinct Supply Chain Information Management number, 70 distinct items were used during fiscal year 2018, with list prices varying from $2.19 to $7450. Texas Children’s Hospital had negotiated contracts for 33 of 70 of these items (contract use, 47 percent), with an average negotiated discount of 49 percent. The largest negotiated discount per items was $373 from a 22 percent discount negotiated for an item listed at $1661. Contract use data are summarized in Table 4.

Table 4. - Fiscal Year 2018 Texas Children’s Hospital Main Campus Contract Use Summary for Face and Hand Trauma*
Characteristic Value
Total no. of items used 330
Total list cost of all FY18 items $114,253
Total TCH cost of all FY18 items $105,102
TCH cost savings attributable to contract use $9151 (8%)
No. of distinct SIM numbers 70
Range of item list price $2.19–$7450
No. of items on contract 33 (contract use, 47%)
National average discount on contracted items 17%
TCH discount on contracted items
 Average 49%
 Range 22–70%
Largest (dollar amount) discount negotiated/item $373 (22% discount on $1661 item)
FY18, fiscal year 2018; TCH, Texas Children’s Hospital; SIM, Supply Chain Information Management.
*All prices in U.S. dollars.

Strategy Development: Aggregate Average Estimates

To develop strategies that can guide future contract negotiation, the BillOnly material cost calculator was used to generate hypothetical cost savings based on Texas Children’s Hospital’s fiscal year 2018 data. Assuming all contracted items were negotiated to our current average 49 percent discount, potential cost savings because of contract negotiation were estimated to be $56,348. At our current 47 percent contract use, net savings were estimated to be −4 percent, a net loss, but 32 percent better than if Texas Children’s Hospital had instead negotiated the national average discount of 17 percent for these items. We estimated that Texas Children’s Hospital would need to increase its current level of contract use to 70 percent to achieve a net savings of 19 percent, and to 90 percent to achieve a net savings of 39 percent (Table 5 and Fig. 2).

Table 5. - Annual Materials Cost Projection Based on BillOnly Calculator Estimates for Single Variable Manipulation*
TCH FY18 Average U.S. Hospital Estimate
TCH FY18 with 70% Contract Use TCH FY18 with 90% Contract Use
Total list cost $114,997 $114,997 $114,997 $114,997
Average discount for contracted items 49% 17% 49% 49%
Use of contracted items 47% 47% 70% 90%
Potential cost savings attributable to contract use§ $56,348 $19,549 $56,348 $56,348
Dollars lost by purchasing noncontracted items§ $60,833 $60,833 $34,499 $11,500
Net savings attributable to supply chain optimization −$4,485 (−4%) −$41,284 (−36%) +$21,849 (+19%) +$44,848 (+39%)
TCH, Texas Children’s Hospital; FY18, fiscal year 2018.
*All prices in U.S. dollars.
Estimate of net savings of average U.S. hospital with same contract use.
Estimate of net savings TCH could have achieved in FY18 with increased contract use.
§These estimates were computed using the BillOnly materials calculator.

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Fig. 2.:
Estimate of potential net savings with increased contract use (Table 5). TCH, Texas Children’s Hospital; FY18, fiscal year 2018.

Assuming that increased contract use would result in a lower average discount for contracted items, we also estimated the effect of these hypothetical situations using the BillOnly calculator (Table 6 and Fig. 3). We found that at a 30 percent average discount and 70 percent contract use, Texas Children’s Hospital would break even. If contract use increased to 90 percent, Texas Children’s Hospital would have a net savings of 19 percent if the average discount were negotiated to 30 percent, and a net savings of 39 percent if the average discount were negotiated to 40 percent.

Table 6. - Annual Materials Cost Projection Based on BillOnly Calculator Estimates (Multiple Variable Manipulation)*
TCH FY18 Estimate
30% Average Discount with 70% Contract Use 30% Average Discount with 90% Contract Use 40% Average Discount with 90% Contract Use
Total list cost $114,997 $114,997 $114,997 $114,997
Average discount for contracted items 49% 30% 30% 40%
Use of contracted items 47% 70% 90% 90%
Potential cost savings attributable to contract use $56,348 $34,499 $34,499 $45,999
Dollars lost by purchasing noncontracted items $60,833 $34,499 $11,500 $11,500
Net savings attributable to supply chain optimization −$4485 (–4%) $0 (0%) +$22,999 (+20%) +$34,499 (+30%)
TCH, Texas Children’s Hospital; FY18, fiscal year 2018.
*All prices in US dollars.
Estimate of net savings TCH could have achieved in FY18 with decreased average discounts but increased contract use.
These estimates were computed using the BillOnly materials calculator.

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Fig. 3.:
Estimate of potential net savings with increased contract use and resulting changes in average negotiated discount (Table 6). TCH, Texas Children’s Hospital; FY18, fiscal year 2018.

Strategy Development: Texas Children’s Hospital–Specific Estimates

To better understand how to go about strategically negotiating individual contracts for items not under contract in fiscal year 2018, we returned to the Texas Children’s Hospital main campus data for facial and hand trauma cases. The five most expensive items had an average list price of $2861, but were only used nine total times in fiscal year 2018. The five most used items had an average list price of $172.46, but were used 166 total times in fiscal year 2018. A comparison of the potential cost savings based on different levels of negotiated discounts are summarized in Tables 7 and 8. We found that an average of 1 percent additional savings could be achieved by exclusively targeting the most expensive items, but that negotiating with either strategy would result in significant, comparable levels of cost savings.

Table 7. - Comparison of Potential Cost Savings Based on Different Negotiation Strategies*
Five Most Expensive Items Five Most Used Items
Average list cost/item $2861 $172.46
Total no. of times these items used in FY18 9 166
FY18, fiscal year 2018.
*All prices in U.S. dollars.

Table 8. - Comparison of Potential Cost Savings Based on Different Negotiation Strategies*
Discount on These Items Potential Total Savings (%) Potential Total Savings (%)
17% $15,678 (14) $15,183 (13)
30% $20,669 (18) $19,795 (17)
50% $28,348 (25) $26,891 (24)
*All prices in U.S. dollars.

DISCUSSION

For all hospitals and clinics, and especially for those with a surgical practice, supply chain optimization offers practitioners and administrators the ability to save money through front-end negotiations with suppliers.3,13–17,25 To realize revenue improvements based on this approach, the actual execution of supply chain negotiations must be conducted systematically, using a combination of historical hospital data and predictive tools to plan strategic negotiations and to analyze market trends. At Texas Children’s Hospital, our supply chain executives use a seven-step strategic sourcing process to plan successful sourcing events (Fig. 4). Sourcing events are interactions between hospitals and suppliers during which contracts are executed and discounts are negotiated. We will outline our data’s significance within this seven-step process to provide an overview for executing successful supply sourcing. Notably, although our data are coming from a large, academic setting with full-time supply chain executives on staff, this seven-step process could be used at any scale to dynamically analyze material needs and optimize contract use and discount negotiations.

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Fig. 4.:
Texas Children’s Hospital’s seven-step strategic sourcing plan.

Data Collection

The first step of developing a sourcing strategy is data analysis. Our Texas Children’s Hospital–wide fiscal year 2018 findings (Table 2) that nearly $5 million in total operating room costs were generated by facial and hand trauma cases alone, and that 42.8 percent of these cases were being performed by plastic surgery, indicate that successful negotiation of supply chain costs has the potential to generate significant cost savings for plastic surgeons. For example, at the Texas Children’s Hospital main campus alone during fiscal year 2018, 8 percent overall savings were achieved with 47 percent contract use and an average 49 percent discount negotiated on contracted items (Table 4). Extrapolating an 8 percent overall savings to the 42.8 percent of plastic surgery cases performed across all Texas Children’s Hospital sites, our data suggest that supply chain use for items used in facial and hand trauma cases saved Texas Children’s Hospital approximately $158,000 during fiscal year 2018.

Although the actual data presented above emphasize the actual effects of supply chain negotiation, equally important is hypothetical data analysis to inform which negotiation strategies will likely prove the most financially beneficial. Tools such as the BillOnly materials calculator can be used to analyze the effects of different combinations of contract use and discount negotiation. For example, based on fiscal year 2018 data, the BillOnly calculator suggests that Texas Children’s Hospital is performing approximately 32 percent better than the average U.S. hospital (4 percent net loss versus 36 percent net loss) because of its high average discount negotiation on contracted items, and that a higher level of contract negotiation could result in significant improvements in net savings (Table 5 and Fig. 2). Assuming that higher levels of contract negotiation would result in an average discount closer to the national average of 17 percent, the BillOnly calculator still suggests that significant savings in net cost savings could be made by increasing contract use (Table 6 and Fig. 3).

As with any estimate, the numbers generated by the BillOnly calculator and other similar tools are based on assumptions and should not be used to project actual cost savings—note the discrepancy between net cost savings estimate in Table 5 and actual fiscal year 2018 cost savings in Table 3. However, these tools provide invaluable relative data that can direct overarching negotiation goals, such as the goal of increased contract negotiation with minimal decreases in average negotiated discount suggested by our data.

Market Analysis

Following institution-specific data collection and analysis, the next step in strategic sourcing is market analysis. Information can come from a combination of group purchasing organization contract data and available online tools, including Medpricer (Guilford, Conn.), Info-tech (London, Ontario, Canada), Ecri (Plymouth Meeting, Pa.), Gartner (Stamford, Conn.), and MD Buyline (Dallas, Texas).26–30 At this step, potential vendors have their projected market share assessed based on scope, service levels, and contract structuring. This information is then combined with the data analysis to develop the overall sourcing strategy.

Strategy Development

Successful sourcing is achieved by entering negotiations with a single, data-supported goal that is agreed on by all interested parties. Data analysis can be used to decide on these goals. For example, our fiscal year 2018 data suggest that a sourcing event aimed at reducing billable implant costs would result in far greater savings than one aimed at reducing billable supply costs, as 14 percent more costs are generated by implants (1 percent versus 15 percent) (Table 3). Data can also guide which specific items should be the target of negotiation. At Texas Children’s Hospital during fiscal year 2018, for example, negotiating contracted discounts for the most expensive items not under contract would result in approximately the same cost savings as negotiating discounts for the most used items (Tables 7 and 8). Thus, either (or both) avenues could serve as promising goals for contract negotiations. If the data suggested that targeting one area would lead to significant cost savings compared to targeting another, though, then this information would be crucial to setting a worthwhile sourcing event goal. These goals can then be combined with the market analysis to determine whether they are reasonable based on market trends and to determine which companies’ goals align most with those of the hospital.

Sourcing Selection

With the previous steps completed, the actual sourcing event can be conducted with confidence. This step will involve requesting a sourcing proposal, contract qualifications and information, stating the hospital’s intent for a bid, and negotiating discounts. Initiating sourcing selection for an item already under contract could be done to increase the negotiated discount, while initiating sourcing selection for an item not yet under contract would help to increase contract use.

Negotiation

Negotiation and finalization of the contract hinges on presenting a single goal and a united front. Vendor tactics often involve separately contacting a number of involved parties and attempting to identify and/or create fractions between supply chain executives and product end users. For example, if the supply chain team’s goal of a sourcing event is to achieve lower pricing from the same supplier, but the supplier contacts the physician and is told erroneously that the physician is interested in seeking a new supplier, negotiations may be compromised. As such, involvement of the end users during strategy development is crucial for successful negotiation and finalization of contracts.

Implementation and Integration

Once a contract is finalized, the supply chain must take care of onboarding any new vendors, converting from any old products to new products, and coordinating the training of end users by vendors.

Benchmarking and Tracking Results

Finally, and completing the circle of successful sourcing, the results of a sourcing event must be tracked through data collection, including item price, vendor compliance with contract terms, and service level provided. Unfortunately, suppliers often use duplicitous tactics to increase their profits, such as discounting the most common items a certain hospital purchases but then raising the prices of less commonly purchased items. Hospitals must therefore track data on all price changes. These data will provide the foundation for future sourcing negotiations.

Supply Chain: The Big Picture

There is more to supply chain optimization than strategically planning and executing sourcing events. For any plastic surgeon looking to decrease front-end costs and increase profits, we have designed an overview schematic that can be used as a guide (Fig. 5).

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Fig. 5.:
Overview schematic of supply chain negotiation.

LIMITATIONS

In addition to the fact that estimates with the BillOnly calculator provide relative data and cannot be used to project actual cost savings, this study has a number of other limitations. These results are particular to a single, pediatric institution during a single fiscal year, and many data points are only relevant to facial and hand trauma—as such, the specific data generated have limited generalizability to other plastic surgery contexts. Although the principles presented in this introductory study are relevant to all plastic surgeons, given its grounding at a large academic institution with full-time supply chain executives, these results are less relevant to smaller, physician-owned practices, for whom supply chain negotiations would require a significant time burden. By focusing on facial and hand trauma cases, which typically use standardized hardware, we acknowledge that the data presented will be more simplistic than the data that supply chain analysis of a more complex, diverse operation would generate. This study also fails to capture the intricacies of supply sourcing negotiation and does not address specific tactics for aligning surgeon and administrator preferences, and our overview of successful strategic sourcing is not comprehensive. A prospective follow-up study that implements our proposed approach to negotiating supply contracts/discounts would be needed to demonstrate the viability and success of the proposed negotiation methods and provide concrete data on actual savings. However, the data and level of discussion in this article should be sufficient to impress on the reader the potential impact of supply chain optimization on a practicing plastic surgeon’s bottom line.

CONCLUSIONS

Using representative facial and hand trauma data from Texas Children’s Hospital for 1 fiscal year, this study suggests that supply chain optimization offers plastic surgeons the potential for significant cost savings. As illustrated by the seven-step process our institution’s supply chain executives use to organize sourcing events, unity in goal between surgeons and administrators is central to achieving cost savings through supply chain negotiations. Ultimately, we hope that by familiarizing academic and private practice plastic surgeons with the importance and potential impact of supply chain optimization, collaboration can be achieved between surgeons and administrators. By deciding on common sourcing goals together without modifying the quality of products obtained, surgical costs can be decreased while maintaining surgical quality.

ACKNOWLEDGMENTS

The authors would like to acknowledge the invaluable assistance of Larry H. Hollier, M.D., in the preparation of this article. They also received significant contributions regarding methodology and calculations from Peter Thompson, co-founder of BillOnly; revenue data retrieval and computation from Carolyn Smith at Texas Children’s Hospital; and operating room data retrieval from Allen J. (A.J.) Orr at Texas Children’s Hospital.

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