Orthopedic physicians and hospitals are developing new procedures and processes to better select and procure surgical implants for hip and knee pain, spine care, and joint replacement.
This article appears in the October issue of HealthLeaders magazine.
As the need for devices for implants and other orthopedic procedures soars against falling reimbursements in a growing service line, hospital and health system leaders are imposing more aggressive measures to oversee quality and cost controls for orthopedic implants, whether they are for hip and knee pain, spine care, or joint replacement.
Hospitals and physicians sort through an array of devices with a range of prices and weigh input from vendors and medical providers, trying to find the best product at the best price. Many hospitals are assembling special teams to evaluate costs, keep track of purchases through real-time reviews, and align with physicians to monitor wasteful spending. Among the areas they examine is the prospect of imposing spending caps, with some health professional teams saying there is a "gaming of the system."
A host of variables, uncertainties, pricing issues, and overtreatment concerns about devices plague the providers who offer hip and knee replacements, spine surgery, and other procedures. At the same time, hospital officials and government authorities are stepping up monitoring of devices because of overutilization and overtreatment. Hospitals are trying to have greater control over physicians in implant procedures.
"We see significant 'tweaks' in these devices that are very expensive to rationalize and very expensive to digest," says Gene Kirtser, president and CEO of ROi (Resource Optimization and Innovation), an integrated supply chain company founded and owned by Mercy Health System, a 32-hospital system based in Chesterfield, Mo.
"There's a lot of marketing glitz from all the manufacturers, the latest and greatest tweaks to their devices. And there's not enough clinical evidence to show that it leads to better outcomes," he says.
For many health systems, "we end up believing sales representatives' pitches to the detriment of our cost position and so it's a never-ending struggle within providers to adopt technology at the right rate," Kirtser adds. "No one wants to retard the growth of technology if it truly has an impact on patient care."
A counterbalance to all this concern is the fact that the devices have improved dramatically, paving the way for procedures that have resulted in improved outcomes, with patients spending less time in the hospital.
Reimbursement challenges
Orthopedics has traditionally been a prosperous service line, and implants are a big part of that. There has been increasing demand for implants, but there are also reimbursement challenges, prompting hospitals to retool for greater efficiencies. An extensive American Academy of Orthopaedic Surgeons study published in December 2012 describes a "negative gap" in practice and operational costs compared to reimbursements that has "progressively worsened" over 18 years, from 1992 to 2010, the period that was reviewed.
An example, the report stated, included the reimbursements for total knee arthroplasty. In 1992, the national Medicare physician reimbursement rate for that orthopedic procedure was $2,100. By 2010, the reimbursement was $1,470. An "apples-to-apples" comparison through inflation, the report stated, showed the 2010 reimbursement was equivalent to $666.58 in 1992 dollars—a "drop of 68%," the report stated.
Hospitals themselves have a significant role to play in orthopedics costs. There is a "significant variation" across the country in how services are charged for a given inpatient stay, according to the Department of Health and Human Services. In a federal report released in May this year, the average inpatient charges a hospital may provide in connection with a joint replacement ranged from $5,300 for a hospital in Ada, Okla., to a high of $223,000 for a hospital in Monterey Park, Calif.
The wide range of implant costs also has fiscal impact within the healthcare organization. "The cost of a knee implant could range from $2,500 to $3,800 depending on the vendor," says William Martin, PharmD, administrative director for sourcing, purchasing, and value analysis at Beaumont Health based in Troy, Mich., which includes three hospitals. That's why hospitals should have physicians engaged in the process, and Martin consistently urges doctors in his organization: "You should be getting a good price mix."
Reimbursement concerns also can undercut innovation, Martin says. While Beaumont is trying to gain a niche for reverse shoulder replacement procedures because its staff includes a top specialist, the estimated $7,000 cost for the procedure is not reimbursed any differently than a less complicated $4,000 shoulder operation, he says. "CMS governs the amount of DRG [diagnosis-related group] payment. We don't get any more reimbursement for the reverse shoulder. That's a big challenge when you want to be on the leading edge of technology. A problem is that CMS reimbursement lags behind any new technology introduction. We end up paying a premium for innovation."
As orthopedic implant costs rise, hospital leaders are finding it essential to work more closely than ever with orthopedists to ensure that devices are purchased in a manner that reduces expenses, despite doctors' long-term personal preferences for certain devices, companies, or sales representatives.
"The demand for orthopedics is projected to climb at a significant rate, with the aging baby boomers," says Gary Botimer, MD, chairman of the department of orthopedic surgery at the 789-bed Loma Linda (Calif.) University Medical Center, part of Loma Linda University Health, which reported about $1.8 billion in net revenue in 2012. "The best way for hospitals to reduce costs is to follow what all other successful industries have done to provide products at affordable rates—elimination of unnecessary expenses in their processes."
Gaining physician trust isn't easy, and sometimes contentious relationships arise, but hospitals are making inroads by establishing programs that include physician leadership, negotiating discounts with implant vendors, and capitated pricing.
"One of the most important things is you want engagement and alignment of surgeons from the get-go," says Michael R. Jablonover, MD, MBA, FACP, president and CEO for the 144-licensed-bed University of Maryland Rehabilitation & Orthopaedic Institute in Woodland, just outside of Baltimore. He acknowledges the great variation in device expenditures, but emphasizes the need for multidisciplinary team approaches to properly evaluate them, including physician input. The institute is part of the University of Maryland Medical System, a 12-hospital system of academic, community, and specialty hospitals that reported $2.29 billion in net patient revenue in 2012. The hospital specializes in advanced rehabilitation services and orthopedics, such as joint replacement surgery.
As they evaluate medical devices, hospitals are weighing different options, ranging from restricting the number of implant devices considered and ranges of acceptable costs, says Fred McQueary, MD, an orthopedic surgeon, senior vice president of clinical integration for Mercy health system, and president of the system's Mercy Clinic–North Central Communities. Mercy health system has operating
revenue of $4.6 billion.
Mercy's supply chain company, ROi, plays a role in improving relationships and reducing costs for implant devices, McQueary says. "There is a huge benefit to make these chain links tighter."
Beaumont Health System developed an implant purchasing management program "to track our implants by patient, by product, and by physician, for any moment in time," says Martin. "I know by end of that day what is happening, and I don't have to wait a month for data."
Revision procedures are becoming more necessary with aging and replacement implants needing to be evaluated, says Alan Wilde Jr., vice president of system services for the 1,032-bed University Hospitals health system based in Cleveland.
"What's happening is the stuff we put into patients 10 or 15 years ago is wearing out. For patients who are still active in their 60s and 70s, the implants are wearing out," Wilde says.
Quality will be the ultimate determinant for orthopedic care, says Wilde. For patients, "it will be like going to a good mechanic or a bad mechanic."
By 2014, device companies will be required to collect data about payments, gifts, and other transfers of value they provide to physicians. It will give hospitals and physicians an added incentive to reduce conflicts of interest or the appearance of questionable relationships.
Success key No. 1: The team approach
When it comes to selecting medical devices, physicians often rely on their favorite vendors or tools. That can be costly for hospitals, many of which are trying to rein in docs through negotiations to lower costs. Physician engagement and responsibility is one of the most important aspects of reducing a hospital's medical device costs.
The Beaumont Health System involves physician leadership on teams who evaluate the costs of medical devices. By strictly monitoring physician relationships with vendors and eliminating devices deemed too expensive, the system reported a nearly 20% reduction—more than $6 million—from $35 million budgeted for implants, says Martin, the administrative director for sourcing and value purchasing.
Beaumont's value analysis teams are considered central components of the health system's work toward reducing costs and engaging in cooperative agreements with purchasing organizations. The group focuses on implants, especially for knees, hips, and spines.
Physician involvement has been a key component of the teams, says Martin. The VATs work with a group purchasing organization and vendors to eliminate items they do not want to buy, and to get the best price and quality for the items they will use. Team members include physician leaders and an administrative representative with supply expertise, management engineers, and an RN. An oversight committee for the shared savings program is headed by a CMO.
"How do you align physicians? We struggled with that at the beginning," Martin says. "For the physicians, we said, 'What's good for the hospital is good for you.' We knew we were asking them to make a change. The physicians have to support it; the physicians can't come back saying, 'This is the device I want to use.' "
The hospital spurred physician involvement by establishing a program where members of the orthopedics team would receive incentives under a shared savings program whenever they reduce costs for medical devices, says Martin. Over time, the hospital increased the amount of money that physicians could use for training, education, and clinical work once they achieved savings, he adds. Initially the shared savings program allotted 20% for physician projects, and later it increased it to 50%.
The shared savings program "has been a great way to provide incentives for the department," Martin says. "The strategy centers on reducing the number of vendors in the space and changing market shares."
Success key No. 2: Collaboration with other health systems
Large and small hospitals are coordinating their programs in an effort to reduce implant costs, especially those related to orthopedic surgeries.
A group of Northeast Ohio health systems formed a purchasing collaborative in 2011, Community Health Collaborative, to improve efficiency and effectiveness of care. In 2013, the health systems joined with University Hospitals and Premier, a large performance improvement alliance of more than 2,800 hospitals and 93,000 other healthcare sites, to form POWR, the Purchasing Organization of the Western Reserve. It focuses on managing costs of medical devices, and within a year University Hospitals saved nearly $1 million in spine implant and other medical device costs, says Wilde, the system services vice-president at University Hospitals. The reduced costs included $250,000 on physician preference items.
The larger collaborative enabled the smaller hospitals to obtain better prices on items because of the ability of the larger organization to expand its volume. "We didn't see a downside at all," says Wilde.
"University Hospitals benefits as well since aggregation often leads to better pricing for all because the additional volume drives better price points," Wilde says. "Cooperating in purchasing also can lead to our hospitals working together more closely in the clinical areas."
Further south, in Missouri, Mercy health system's for-profit supply chain management company, ROi, is run as a separate unit from Mercy and handles supply chain management for the system's acute care hospitals. ROi not only negotiates pricing directly with manufacturers but also purchases and distributes supplies from its own 100,000-square-foot consolidated service center in Springfield. Through its total joint program, ROi reported that it generated cost savings of 10% for Mercy.
ROi services include group contracting, clinical and operational consulting, pharmaceutical repacking, custom procedures and tray manufacturing, print operations, purchasing, and master item file management. The supply chain team, founded by Mercy, includes physicians and clinical researchers.
ROi enables providers to run an "integrated system" to control pricing through negotiations with commercial distributors, manufacturers, and consultants, says McQueary, the Mercy Clinic North Central Communities president. "Our philosophy is still to maintain a lot of choices [for implants], although some systems have taken the approach of limiting choices," he says. "We're not going down that road, but it remains a possibility."
ROi's CEO, Kirtser, says that he is hopeful that the emergence of accountable care organizations can help providers gain better control over purchasing of implant devices, in evaluation and quality. Too often, providers now face device costs that represent nearly 50% for sales and general administration, while only a small percentage, about 6%, accounts for research and development designed to improve devices, he says. "I think over time change will come and there will be comparative effectiveness in the near future," he says, to improve alignment of physicians to evaluate payment models.
In 2010, ROi/Mercy joined Geisinger (Danville, Pa.), Intermountain Healthcare (Salt Lake City), Kaiser Permanente (Oakland, Calif), and Mayo Clinic (Rochester, Minn.) to form the Healthcare Transformation Group; the members share best practices and collaborate on supply chain improvements, including strategies to reduce medical device costs.
Success key No. 3: Capping prices
Loma Linda University Medical Center is one of the hospitals capping prices in negotiations with vendors, a "hard-fought" move, says Botimer, the orthopedics department chair.
The hospital took that approach because it found that vendors would mark up prices on devices, such as prostheses, that would end up costing $1,000–$2,000 more than the hospital was willing to pay.
In one instance, a company charged the hospital $16,000 for a prosthesis that would usually cost $4,000, says Botimer. The company in question had paid royalties to an "outside surgeon" who had demanded the hospital use the vendor, he recalls. In another instance, the medical center purchased small pins at $400 each that were supposed to be reusable, and "suddenly became disposable." The hospital "caught the practice" and immediately halted it.
"We have discovered many techniques that some company representatives use to increase their charges to the hospital to get around the agreed-upon prices," Botimer says. "By taking back control of the process, we eliminate a lot of the gaming of the system that has been going on. We must all strive to be transparent."
Because the cost for orthopedic implants is increasing at a rate higher than other medical devices, it made sense to cap the prices, Botimer says. Hospital officials focus on the process, not the specific product.
"We just want to cut the waste out of the system," he says. By evaluating the devices and not strictly relying on vendor recommendations, the hospital finds it can "reduce the cost for the same product 50% to 60%," he says. The surgeons are then considering various devices instead of those recommended by vendors. The process "has helped the medical team become informed buyers," Botimer says.
Unlike some other health systems, Loma Linda physicians receive no financial incentives to be involved in controlling costs, Botimer says. "The reward comes in maintaining our commitment to patients to provide the highest-quality care with better accessibility," he says.
Beaumont also sets price caps and imposes rules on what devices it will purchase, often setting the stage for intense discussions with vendors.
"We're the No. 2 hospital in the United States for joint replacement volume, and I leverage that position," says Martin, the head of the health system's value-purchasing program. If vendors object, he says the message is clear: "If you want to play in this sandbox, this is what we're willing to pay for a knee joint. If you don't want to play, you are out."
At one point, Beaumont purchased spinal implants from 33 different vendors, and fewer than half—13—agreed to supply Beaumont under new price guidelines. Its value analysis teams reduced the vendor lists after requesting competitive bids.
The hospital excludes certain vendors who are not aligned with the program for as many as 90 days, which frustrates them and delivers incentives for them to become involved in the hospital pricing. "When you can't come back for a full quarter, that's very impactful" to vendors, Martin says.
While organizations such as Beaumont and Loma Linda are making inroads in cost reductions for purchases, health officials elsewhere are making a concerted effort to study why costs for implants and medical devices are so varied.
Success key No. 4: A cost-reduction journey
The 333-staffed-bed Jefferson Regional Medical Center often relied on its orthopedic surgeons to offer advice on what devices to use for total joint replacements or similar procedures. But the expenses mounted, so in 2010, the hospital decided to change its implant purchasing policies, says Larry Kennedy, CMRP, director of materials management.
The change was worth it, Kennedy says: The hospital saved more than $1.3 million in implant costs over a two-year period from 2010 to 2012 and saved $1.9 million from 2010 to 2013.
One of the first things that the hospital did was reduce the number of vendors with which it would negotiate and from which it would purchase items. Eventually, the hospital moved to single-source purchasing after the vendor agreed on a discount. Savings were seen quickly, particularly with total joints and orthopedic trauma devices, Kennedy says. Within the first year of the program, the hospital saved $661,000 for total joints.
Jefferson Regional Medical Center was able to negotiate the savings through a joint task force, particularly with involvement of its orthopedic surgeons, he says. At the outset, surgeons told hospital officials they focused on certain vendors.
"The physicians tell us point-blank: It's got to do with representation and relationships," Kennedy recalls. Hospital officials had a differing view: "A total knee is a total knee, a total hip is a total hip," he says, noting that the product and the quality are important, not the vendors specifically. "We tried the best approach to maximize contract savings."
Meeting with physicians, Kennedy and other hospital leaders involved in device purchasing outlined potential costs, savings, and quality outcomes. "We broke down each price component of the device for each physician; how many cases each physician did each year, who did the most knees, who did the most hips, the total cost per case. The physicians looked at the DRGs, the actual payouts over the past several years, and the margins."
Physicians appreciated what hospital leaders had recommended for the sole sourcing, Kennedy says. "The 100% sole sourcing offered the best amount of savings."
In the end, "it took some persuading. The [physicians] didn't want to do it; they didn't want to change," says Kennedy. "But they saw the value for the community and the hospital, and how much money it would mean for the hospital. We can't stress enough the need for partnership with the physicians. Overall, it's a tough journey, but we showed it can be done."
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This article appears in the October issue of HealthLeaders magazine.
Joe Cantlupe is a senior editor with HealthLeaders Media Online.
