Catholic Healthcare West Shifting Fiscal Gears with Premier Contracting

Despite its status as one of the nation's largest Roman Catholic health systems and the largest not-for-profit hospital network in California, Catholic Healthcare West (CHW; San Francisco) hasn't been immune to the financial ailments affecting many of industry's facilities. Most troubles can be traced to hospital-owned physician groups, which have become too expensive to operate; the Balanced Budget Act (BBA) of 1997, which reduced Medicare reimbursement; and HMOs negotiating tougher provider agreements with little or no increases in reimbursements.
To deal with declining revenue, CHW has been cutting costs by selling two recently acquired unprofitable facilities in southern California and laying off workers in its struggling Sacramento operation. The company also has been working smart business deals and signing new contracts that should offer some aid to the system. In October 1999, CHW announced a five-year pharmaceutical and medical/surgical supply distribution agreement with Cardinal Health Inc. (Dublin, OH). Valued at $1.5 billion, the agreement also includes automated dispensing systems, information systems and consulting services, and is expected to save CHW more than $20 million.

The hospital system also changed group purchasing organizations (GPOs) recently, leaving Health Services Corporation of America Inc. (Cape Girardeau, MO) and signing an agreement to become a member and part owner of Premier Inc. (San Diego). In an exclusive interview, Keith Callahan, business leader for Catholic Healthcare West Shared Business Services (CHW SBS; Phoenix), talked about the transition to the new GPO. The Arizona business is a CHW subsidiary founded in 1997 that supports specific business services on behalf of CHW's regional operations, particularly in the supply chain arena.

NEIL: When was the decision made to move to Premier, and more importantly, why?

CALLAHAN: The decision has been a process of review, but we joined Premier as one of their owners, effective October 1, 1999…Basically, using a very detailed analysis…what CHW SBS is transitioning to by moving to Premier -- besides the large Premier economies of scale and their contracts, which represent about 30% of the hospitals in the U.S. -- is their philosophy, which involves a committed approach to purchasing that also is being implemented here at SBS and CHW.

NEIL: Can you define in dollars or volume the size of this deal?

CALLAHAN: Well, just on pricing and supply standardization, we'll achieve in excess of $13 million a year in savings. As we move down the line and into the clinical preference and utilization areas, you're talking about annual savings, across-the-board, that are very significant. We measure ourselves on supply costs, and we can benchmark not only within our system, but across other hospital systems. So we know exactly what our measures are, and our objective is to be the best we can as benchmarked in similar facilities, and that's what we will move to.

NEIL: You're currently in the process of changing to Premier's system. How long will that take to complete?

CALLAHAN: We have a 100-day transition period for what we call the Premier price migration items, and we are moving quickly (to adapt) Premier contracts. Then we will move into standardization, which is the beginning of our implementation of our committed purchasing. Here at SBS we use clinical councils (from) the various disciplines within a hospital. This would be pharmacies, materials managers, med/surg, etc., that help us implement the contract and the committed approach, and what SBS does besides the analysis of the contract -- assuming that there are no hidden items -- is basically lay out the value. Then we implement the contract and facilitate it to achieve a certain committed volume.

NEIL: Who decides the level of commitment?

CALLAHAN: Premier has certain levels, and then our hospitals (have certain levels) based on the analysis. So, our job is to facilitate the analysis by the hospitals or the regions within CHW -- and because of the structure at CHW, it's basically by regions…Premier, under its committed contracts, requires a 90% compliance, and from our system recording -- from the work we do in terms of implementing -- we will be at a 90% compliance in accordance with the agreement and the philosophy we have embraced by joining Premier.

NEIL: Do you mean you'll be at 90% compliance after the 100-day transition period?

CALLAHAN: The 100-day period is for the very easy things, but basically in our 18-month implementation plan we will be achieving that 90% compliance within their committed contracts…and there's a difference between committed contracts and preferred contracts. And we are doing nothing more than implementing the Premier philosophy.

NEIL: How are you going about standardizing products?

CALLAHAN: What we are doing is price migration for the first 100 days, which has already been extremely rewarding, particularly with our Cardinal and Allegiance contracts. And price migration basically (involves things) we're already buying, but under a different contract, or under an additional pricing arrangement…Since we're already buying those particular products, we're just taking advantages in step-downs in pricing. That's very easy, and obviously no one can complain about that, because if you're already buying it, and you can get a lower price, (the hospitals) think the world of you. Our second step is to begin standardization, which is where our clinical councils, our facilities, and our regions provide the implementation and the decision process. SBS supports that decision process through analysis and…as we present analysis that shows positive savings, (CHW) makes business decisions, and again we have to use these clinical councils because there are things that are unique to institutions and regions that we at SBS may not be aware of.

NEIL: Along with standardization, utilization is extremely important to a hospital or hospital system. How does SBS's utilization analysis help CHW and its medical staff in the decision-making process?

CALLAHAN: Utilization is obvious where there will be significant physician involvement at the clinical preference level, and the utilization is where you really get into care delivery issues. That's where the physicians and the medical staff are the key component and where the use of data is absolutely critical in the decision process. And we provide information not just on price, but on usage. It's not just a price decision or price data only. It is all the components of that data that go into that decision process with the clinician. It is outcome driven…The typical example given is a certain item that may reduce an infection rate which, ultimately, as you add up the total number of cases -- hopefully with less infections -- you'll see reduced drug costs, reduced patient impact and, ultimately, better outcome.

NEIL: Where are you now in this step-by-step process?

CALLAHAN: Currently, we are moving through the 100-day plan and the 18-month plan, where we go from price migration, then commodity standardization, into clinical preference. Then on the long term, as we gather the data and really have the ability to demonstrate on all aspects of the data -- outcome, price, usage across all lines -- we can then get into utilization.

GPO change no fiscal ‘cure-all'
CHW's move to Premier won't be a cure-all for the hospital company's financial woes -- fiscal 1999 operating losses came to $310 million, or $85 million more than anticipated -- however, a connection to one of the industry's most powerful GPOs aids the system's turnaround efforts. In the last three years, CHW has grown into one of the major players in California's competitive healthcare market, and the affiliation with Premier is a natural step in the hospital system's progression.