Shrink Hip and Knee Replacement Costs

Over the past two years, IU Health has slashed the cost of hip and knee replacement implants by fostering competition among nearly a dozen vendors.

This article first appeared in the March/April 2018 issue of HealthLeaders magazine.

Through a market-based approach that promotes price transparency and competition, Indianapolis-based IU Health, an organization that includes hospitals, physicians, and allied services, has cut the cost of hip and knee implants by 25% in the past two years. 

The following tactics are how IU Health achieved these results.

"We have an open market that encourages competition between vendors," says Anthony Sorkin, MD, medical director of the statewide orthopedic strategic service line.

IU Health's Orthopedic-implant Procurement Enhancement (OPEN) program takes an unconventional approach to lowering implant costs, by declining to select only one or two winning bidders.

"The role the hospitals have played in the past is that they have received proposals or contracts from the vendors, then they have kept them silent and confidential, and a very small group at the health system decides who the winners and losers are going to be," Sorkin says.

"The current mantra across the country has been to isolate down to one or two vendors, and they sign a three-year deal. Then some surgeons are happy and other surgeons are unhappy," he says.

However, cutting three-year deals is often financially disadvantageous, he says. "In a three-year deal, like with any other commodity, the value of that commodity can and will decrease, while the health system is held to the contracted price."

IU Health features 15 acute-care hospitals, and orthopedic surgeons at nine of the facilities have been participating in the OPEN program. For the fiscal year that ended December 2016, the health system posted an operating revenue of $6.2 billion.

Use color-coded transparency

The primary ingredient of the OPEN program is a red-yellow-green implant pricing board that is posted in orthopedic units at each hospital, with red representing the most expensive implants and green representing the least expensive implants.

"You create transparency for both the surgeons and the vendors, then you allow the vendors to do their job, which is to promote sales in a constructive environment. For a standard procedure, whether it is a hip or a knee, about 80% of the costs are in the operating room," Sorkin says. "A significant part of that 80% cost in the operating room is the implants." 

As the country's Medicare-eligible population mushrooms, hip and knee replacement procedures are growing steadily, which is generating a growth opportunity at hospitals and health systems nationwide, he says. "If you can create an environment where you can decrease the cost of the implants, then you can improve the financial position in what is a dramatically growing market."

Engage stakeholders

There were two key steps to launching the OPEN program in 2016: physician engagement and vendor engagement.

For more than a year after OPEN's launch, one-on-one meetings were held with surgeons about their performance metrics, surgical supplies, and implants, says Megan Brown, an analyst in the IU Health clinical value analytics group.

"We provided specific metrics to physicians based on their surgeries and their patients, which focused on overall cost, length of stay, and other metrics for quality and performance improvement. In addition to that, we would provide the surgeons with their implants from the surgical logs as well as all of the items that were used in the surgical procedure," she says. 

"They were very surprised by the cost of a lot of the items they were using," Brown says.

Quarterly meetings were also held with each surgeon and key members of the surgeon's operating room team to discuss product utilization and cost, she says.

Boost incentives

Sorkin says surgeons were given a financial incentive to embrace the OPEN program's drive for cost efficiency. 

"IU Health decided to allow gain-sharing with the surgeons. It's not much money, but it created a general attitude among the staff that they are involved in the process of value-based care, and that helped pull everybody along," he says.

Gain-sharing is based on costs from admission to discharge, with an average cost figure established for IU Health's nine participating hospitals. Surgeons ranking in the top quartile for low cost receive a 20% gain-sharing payment of the savings their procedures achieved.

Sorkin says IU Health's approach to vendor engagement is consciously capitalistic. "What we wanted to do was to open the market to all vendors, then let them freely compete."

IU Health's vendor-engagement strategy for hip and knee implants has been nationwide, and vendors can re-bid at six-month intervals. 

"We had all of the vendors come together, and we talked with them all at the same time in a large room," Sorkin says. 

"We had 11 vendors in the room from across the country. If we had picked a winner, we would have had one happy company and 10 very unhappy companies. This way, all of the vendors were engaged," he says.

The OPEN program has improved surgeon engagement, helped the health system meet its metrics, and kept vendors happy with opportunities to sell their products, Sorkin says.

"We took a situation where all three parties were in some way disappointed; and now that we are more than a year into our program, all three appear to be doing well," he says.

Give physicians options

Having multiple vendors and implants available to surgeons gives physicians flexibility to pick the best implants for individual patients, Sorkin says.

"This allows our physicians to not be forced to either use a product from a company they are not familiar with or to limit the products that are available to them based on patient needs. A hip replacement in a very active 55-year-old is very different from a hip replacement in a very inactive 75-year-old. All patients are different, so it seemed to make sense to us at IU Health that we should create and foster an environment where the surgeons can do what they are trained to do, which is demand-match products and technology to the various patients."

Having price transparency has led to cost-cutting among vendors and surgeons alike. "No vendor wants to be red. … No surgeon wants to be known as the high-cost provider," he says.

The free-market approach has been a crucial element of the OPEN program's vendor strategy, Sorkin says.

"We told all of the vendors that we wanted all of them to participate, that this was not about winning or losing, and that we were not setting a price. We did not tell them that they had to hit a price in order to participate. We just asked for their best price, and we showed them how the red-yellow-green [pricing system] would look," he says.

"Everybody else wants to pick a winner—that is the take-home message. Whenever you pick one or two winners, you are going to create ill will no matter how you do that," Sorkin says.