Implant Cost Control
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| As orthopedic implant prices rise, it is imperative that materials managers work more closely than ever with physicians to ensure devices are purchased through the proper channels. Though gaining physicians’ trust isn’t easy, collaboration can be achieved through different avenues such as capitated pricing and negotiating discounts with implant vendors. Other methods include engaging physicians in the decision-making process, which includes providing incentives, as well as creating a value-analysis team. |
More and more, people are turning to joint replacement surgery as a way to alleviate pain and improve mobility.
According to a study released earlier this year by the American Academy of Orthopaedic Surgeons (AAOS), Rosemont, Ill., demand for artificial knees will jump 673 percent and demand for artificial hips will increase 174 percent in the next 25 years.
This increasing demand for orthopedic procedures will have a major impact on hospitals, which are seeing skyrocketing orthopedic prices and decreasing reimbursement rates.
For example, from 1991 to 2006, the average list price for coated hip implants increased 171 percent, while Medicare payment to the hospital during this time increased only 19 percent.
However, helping a hospital decrease its orthopedic spend is not a simple task. One of the challenges is that orthopedic surgeons select the orthopedic implants, while hospital materials managers have to contract for and purchase those implants.
This can lead to selecting and purchasing items that fall outside of the group purchasing organization (GPO) contract, eroding hospitals’ efforts to standardize product selection.
The good news is there are a number of steps materials managers can take to help a hospital control orthopedic costs, while ensuring that it continues to provide the highest level of clinical quality for patients.
Leverage the portfolio
One of the easiest ways to help save money on orthopedic spend is by leveraging existing GPO contracts for orthopedic products.
In addition, some GPOs can provide orthopedic assessment reports that help hospitals identify opportunities to save on their total orthopedic implant spend. Ensuring that the contracted price is the price being paid is a way to start monitoring this high-spend area.
For example, hospital officials might think they’re paying $3,500 for a knee implant, but when they actually run the numbers, they find out that they’re paying $4,300 for the implant, due to add-ons and service fees.
Once they really know what they’re paying, they’re in a better position to identify cost-savings opportunities and take other steps to negotiate better pricing.
Materials management should consider hiring a contract manager to focus solely on orthopedic devices. Methods used by contract managers are to:
- Streamline/enhance contracts
- Conduct pricing audits
- Evaluate capitated agreements and compliance
Capitated pricing
Another way to save money on orthopedic implants is by using a capitated pricing model. To do this, establish a maximum price for the implants used in a given procedure, and this price remains constant every time the procedure is performed. The challenge is that, unlike cardiac and vascular devices, there are thousands of different orthopedic products that can be used in a variety of combinations. As a result, there are numerous opportunities for products to be used in combinations that fall outside of the contract parameters. Unfortunately, if these capitated agreements are not monitored carefully, the hospital may not realize the projected savings.
The most important thing to do when arranging these agreements is to understand surgeons’ product use on the front-end and put process controls on the backend to make sure suppliers and surgeons understand the capitated price agreement.
One example of such controls is checking every purchase order manually in cardiovascular, orthopedic and spine against the contracted price and ensuring that the contract states that the vendor will provide a monthly list of every item the hospital used and paid for.
Everyone must understand current and anticipated future product use so you can manage the capitated price. Unfortunately, most hospitals do not have the in-house knowledge or focus to manage this complexity.
Once again, this situation calls for hiring or assigning a staff person to ensure that capitated pricing agreements are being used properly and that agreements keep up with new products or shifts in use.
Discount agreements
A simpler way to manage orthopedic costs is by negotiating discount agreements with suppliers; for example, a supplier asks for a purchase volume or market share commitment to provide a discounted price point. Under this tiered pricing structure, discounts may increase with greater volume or higher market share. However, the final prices paid need to be benchmarked to ensure that a true discount has been obtained. These types of agreements are easier to enforce because even if a new product is introduced, it should be automatically sold at a discounted rate.
Engaging physicians
One of the best things your hospital can do to save money on orthopedic costs is to develop a closer relationship with orthopedic surgeons. Because they may have direct relationships with sales representatives, physicians should be involved in any effort to reduce costs. Without their support, it will be nearly impossible to implement any sort of cost reduction or standardization effort.
The first step in this process is to identify key stakeholders and tell them what you see as the challenges and what you are planning to do. Instead of scheduling a meeting, arrange to talk to physicians in their own environment, such as division meetings or even at the scrub sink.
One way to encourage physicians to become involved in cost-cutting efforts is to tap into their competitive instincts. Physicians want to practice good quality care and they are sensitive to the cost of care because they see it in their own practices. Presenting physicians with clinically relevant data that shows how their care of patients is the same or different from their colleagues will help lead to discussions about quality improvement. One good, but often overlooked source of data, is the decision support or quality department.
In addition to this clinical data, it is important to provide them with data about supply costs, utilization and outcomes so they have the information they need to make informed decisions.
Another way to get physicians involved is to identify specific actions and solutions that motivate them. This could include using a portion of the savings to buy new equipment for their department; hiring extra departmental support staff; offering block scheduling, etc.
The important thing is to show this is a team effort and that you are willing to work with them to recognize their efforts to improve the hospital’s financial and clinical performance.
Product review committee
Hospitals also must consider establishing a new technology or product review committee to manage the flow of new products into the hospital. This will help ensure that materials management is involved in the purchasing of all physician preference items, including new technology and is able to proactively negotiate pricing of a new implant before it is used clinically.
It is important that the committee have a rational process that considers both clinical and economic returns on investment, including:
- Evaluating emerging technologies
- Approving clinically appropriate technologies
- Ensuring that costs of medical equipment reflect the value obtained from its purchase and use
- Defining what is truly new technology and defining a timeline for decreasing the premium paid for technology as it becomes less “new.”
Hospitals may want to consider limiting the number of persons who have purchasing authority. Some hospitals allow surgeons and physicians to work directly with suppliers to purchase the equipment they need. However, this can be a problem because physicians are not always aware of product prices and existing contracts and neglect to inform materials management of their purchases. As a result, materials managers sometimes only learn that an implant has been selected after the device has been implanted and materials management receives the bill.
Value analysis counts
One of the best ways to manage high-cost device prices is to implement a clinical value-analysis program.
This is an interdisciplinary decision-making team that selects products and services that are cost-effective, safe and provide quality patient care. For the team to be successful, it must have both executive and physician support and must truly become part of the way a hospital does business.
Ideally, the chief medical officer or vice president of medical affairs will be the champion of the value-analysis team. However, other successful models have been led by personnel from clinical departments, finance and materials management. The important thing is to have clinicians, business managers and administration together to make decisions in the best interests of patients and the hospital.
A critical element of a successful value-analysis team is assigning data mining and analysis to one individual.
If this responsibility is shared, the information your team reviews may be inconsistent and lead you to make less than sound business decisions.
Peggy Naas, M.D., is the vice president, clinical supply chain solutions, VHA Inc., Irving, Texas.
This article first appeared in the October 2007 issue of Materials Management in Health Care.
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