Issue: May 2006

May 01, 2006

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Controlling implant costs

Senior health care executives — including a chief financial officer and supply chain directors — serve up some practical approaches.

Issue: May 2006

“Controlling implant costs” is the latest in a series of “virtual” roundtable discussions convened by the not-for-profit Healthcare Financial Management Association (HFMA) to consider financial issues of pressing practical concern to health care leaders. Below, prominent industry professionals candidly share their personal views, experience and advice about how to best manage implant costs.

Orthopedic and cardiac implants are arguably among the most important medical innovations of this era. They have allowed countless patients — particularly seniors — to continue to live healthy, active lives by reducing or eliminating pain and physical deterioration.

And implant technology continues to evolve and improve. But with these improvements come greater costs: The device costs for total joints, pacemakers, and internal defibrillators represent 50% to 72% of the total cost for the corresponding diagnosis-related groups. In addition, as clinical indications for implants increase and the U.S. population ages, the demand for these implants is growing quickly. Hospitals, then, must find ways to keep the costs of high-dollar implants under control.

Presented here are the thoughts of a group of senior health care executives — one CFO, two supply chain executives and two purchasing executives — regarding the challenges of controlling implant costs and partnering effectively with physicians and vendors to do so.

Participants

	Jon Bruss Vice president of supply chain management for Advocate Health Care, an eight-hospital, 3500-bed, not-for-profit health care delivery system; Oak Brook, Ill.
	Michael Long, FHFMA, CPA, CFO Mt. Ascutney Hospital and Health Center, a 91-bed community hospital; Windsor, Vt.
	Karen Barrow Vice president for the Amerinet Clinical Advantage program; St. Louis, Mo. Amerinet Clinical Advantage is focused on reducing high-dollar implant costs.

	John Gaida Senior vice president of supply chain management, Texas Health Resources, a 13-hospital system with more than 2400 licensed beds; Dallas, Texas
	Tod Lloyd, MS, RN Value analysis manager at Dartmouth-Hitchcock Alliance, Hanover, N.H.; 2005 Association of Healthcare Value Analysis Professionals board member. DHA is an alliance of nine hospitals in New Hampshire, Vermont and western Massachusetts.

HFMA: High-dollar implants typically represent the single-largest expense for orthopedic and cardiology procedures. What are some key ways a health care organization can keep these costs in check?

Jon Bruss: To begin, you need to know what’s going on in the marketplace. What new technologies are being promoted? What technologies are being used in your organization? What suppliers are being used and how much market share does each have? What is the pricing for the different types of products and at the different sites in your network? You also need to know your organization’s reimbursement and your physicians’ reimbursements for implant procedures.

Once you have that information, you need to get physicians involved, as well as key staff — like those in the cardiac catheterization lab, surgery, or electrophysiology — to discuss strategies for controlling implant costs.

John Gaida: We publish a quarterly resource guide internally with data by payer and by vendor, which shows how our hospitals stack up and how different vendors compare. Making this information available paves the way for discussions with surgeons, because they can see how they compare with their peers based on the vendors they use. They’re not going to switch brands just because you want to save money, but no one wants to be the one with the highest costs.

Michael Long: We have purchasing contracts and participate in a group purchasing organization, so we’re able to track our contracts to make sure we’re getting best prices and that the vendors are in compliance with the contracts. A key part of that process is getting clinical input — engaging physicians early on in terms of evaluating products from a clinical perspective so they know we’re not going to ignore their point of view.

Tod Lloyd: Negotiating with vendors is important. All contracts are volume-based at some level, so if you can limit your purchases to a few vendors, you can take advantage of that. Some hospitals have gotten vendors to agree to separate pricing for the implant and for their service. Some vendors provide a lot of assistance along with their devices — they’ll have a representative in the OR to consult on procedures, they’ll manage your inventory of their implants — but you need to know how much you are paying for that.

HFMA: A common challenge in controlling supply chain costs is obtaining physician buy-in to purchasing initiatives. What sort of process should a provider have in place to address this?

Bruss: You need to convene key physicians — routine users of the devices, medical directors, respected leaders, and other physicians with a stellar reputation — and get them together to talk. Share with them what the organization’s experience is, and have the data needed to illustrate that. Show them the reimbursement and cost information, so they can see what the situation is.

Then work with them to see what their concerns are. Physicians’ concerns regarding controlling implant costs tend to revolve around two things: having to switch from products and suppliers they are comfortable using and relationships with supplier representatives with whom they are working. However, physicians will usually be willing to listen when they know that their concerns are being heard. We invited cardiologists from our hospitals to discuss cost issues associated with implantable defibrillators, and they were very open to the idea that they could help us reduce costs. But they wanted to keep the suppliers they knew, so they asked if we could negotiate ceiling prices with those suppliers — and they understood that if those suppliers refused, we might not be able to continue purchasing from them. This strategy allowed physicians to keep using products they were comfortable with and allowed us to reduce costs. We later used the same approach with orthopedic implants.

Karen Barrow: You must build support and physician relations through collaboration on this type of project. Start by defining a manageable project scope: Set a clear time table and target measurable results so everyone understands the project goals, and be sure to gain the commitment of senior leadership. It can also be valuable to find an implant surgeon who can be influential with his or her peers and work to gain that individual’s buy-in. Then build a representative project team that includes physicians, so that physician needs, such as brand preferences, are addressed during the process. Ensure that the team has comprehensive data, including procedures by physician, supplier, and the facility — if you are a network. You will also want dollar and procedure volume for each supplier per case and hospital, cost variation between facilities and physicians, and reimbursement by payer and procedure. When you have that information, the team can begin to evaluate and select cost-reduction options, and determine how much your organization can afford to pay for different devices.

Lloyd: The first thing you have to do is communicate with your surgeons to find common ground. Some organizations have pursued gainsharing agreements with the OIG, but that’s very time-consuming — it may take up to 18 months to get requests approved. Another option is to make an agreement with physicians that you will pass on some of the savings on implant purchases by getting something for the organization, like a certain piece of surgical equipment that they want.

HFMA: How can financial managers build a quality case — as well as a business case — for implant cost control?

Gaida: It all goes back to tracking and sharing the data. Look at your outcomes and see how they are affected by different brands and types of implants. If your data show that physicians can get the same or better quality of care with less-expensive implants, you need to show that to them — physicians will respond to data.

Long: If we can get that outcomes data, it’s easy to make the case that higher cost isn’t necessarily related to higher quality — the problem is it can be hard to get that outcomes data. In a smaller organization, we can track those patients, but it’s a relatively small population.

“Right now, we’re finding that physicians are more interested in efficiencies than the cash return on gainsharing.”
— Karen Barrow

Bruss: You can build a quality case by creating a situation where price is similar among vendors: If pricing no longer determines why we use one vendor over another, then vendors have to compete on quality.

HFMA: What are some of the greatest challenges to successful supply chain communications between financial staff and physicians?

Barrow: In their daily activities, physicians and financial staff speak different languages. Unfortunately, many physicians perceive financial administrators as being concerned only with cost and not patients’ welfare, so establishing a common ground is the first step to building trust and collaboration. You can accomplish this by utilizing a third party to analyze your facility’s cost and outcomes data and benchmark these data against national and regional data. By always including outcomes, you ensure that patient care is always a part of the equation, and you show physicians that their input really matters — it truly has to matter. We cannot come in with our guns blazing, thinking we can just tell the MDs what they are going to do.

Bruss: Finance people may feel that physicians don’t care about costs and are being financially advantaged by using certain suppliers, while physicians may believe that finance executives don’t care about quality of patient care. The reality is that both groups care about both issues.

Gaida: The biggest challenge is to find time on the physicians’ schedule to even talk about this. They are too busy. The best chance we have had to talk about this issue is in their monthly meetings, where we can talk to leadership. Sometimes we are able to catch them at their office. Either way, you don’t have a lot of opportunities to sit down with physicians, so when you do, you had better be ready with all of the information you need to make your case.

Lloyd: Gathering valuable quality information for these talks is a challenge. In a modern OR software system, it’s comparatively easy to gain basic data, but to make some further differentiations takes a certain amount of work. You have to delve into patient records and conduct chart reviews — you can’t just punch in a query.

HFMA: What solutions work well in improving these communications between finance and clinical leadership? Any advice to others looking to bridge the gap between these two areas?

Barrow: If you want physicians to come to the table on reducing implant costs, you have to be willing to give something back. We have found that greater efficiencies, such as improved turnover times in the OR, are very desirable to physicians, because they always need more time. This may mean investing some of the cost savings in capital equipment such as power equipment to prevent delays, personnel training, or dedicated personnel to prevent surgery delays.

Some health care providers are opting to pursue true gainsharing programs, but these require a lot more work than improving efficiencies. Each program requires legal approval, must meet strict guidelines, and requires a full year of monitoring patient mix, outcomes, and contract compliance. Right now, we’re finding that physicians are more interested in efficiencies than the cash return on gainsharing.

“If you want physicians to come to the table on reducing implant costs … give something back. … Greater efficiencies, such as improved turnover times in the OR, are very desirable.”
— Karen Barrow

HFMA: Another key cost-cutting strategy for implants and other high-cost clinical supplies is improved contract management. How important is physician involvement in this process?

Bruss: Physician involvement is crucial because they talk to suppliers more than contract management staff do. If a physician makes a commitment to the supplier representative about use of a device without input from the organization, then the organization’s leverage is weakened. But when physicians tell suppliers that they need to work with the organization on costs, then the suppliers have to play ball. Alignment of physicians with the organization is very important.

Barrow: Physician involvement is critical to the entire contracting process, especially when it comes to choosing acceptable suppliers to work with. Physicians are willing to comply with contract terms when they understand why the hospital needs contracts in the first place and then have a hand in setting them. Really, that’s the whole point of establishing a collaborative process for cost containment.

Lloyd: It’s important to involve physicians in the process, but if they don’t show up, you need to find out why — find out what they have an interest in. Then you have to keep coming back and building on information until you’re able to build a relationship with the physicians.

HFMA: How can hospitals best engage physicians in purchasing discussions pertaining to the evolution of new technologies?

Long: One approach is to get some time on the medical staff meeting agendas to talk about new technologies before making decisions to buy or not to buy. Get speakers who can talk about evolving technologies and how they affect outcomes. In that kind of forum, the context is educational and informative before you start getting into cost control issues. When physicians do want to make the change to a new technology, the key is to engage and inform them on what the hospital can afford to do.

Gaida: Have the surgeons ask vendors directly — what’s new about this? What does it do that the old one can’t? How can I get a price deal on this one, too? Physicians are often competitive and analytical, so they can be really good negotiators if you give them that opportunity.

Barrow: Establish product evaluation committees to address new technology. These committees should be staffed by physicians and clinician peers to determine what products are revolutionary with evidence-based research and which ones are simply retooled designs with a premium price attached. Then include information about this committee and its processes in your vendors’ contracts: Define what “new technology” means to your organization, and clearly state the consequences for bringing in new items that have not received prior approval from the committee.

Bruss: The best thing that can happen is for physicians to meet periodically to discuss new technologies and decide which ones are worth pursuing. They can also help create guidelines for introducing and accepting new technologies. Then finance staff can talk to suppliers in advance and decide prices before bringing new technologies into the organization.

Lloyd: Sometimes, I think it’s the other way around — how can we get physicians to involve us in their evaluation of new technologies? They are interested in new technologies in their field, and they talk to their suppliers and each other about them. To make sure physicians and suppliers involve the finance staff, you need to include language about new technologies in the supplier contracts. We included language in our contracts saying that to be considered new, a device must have a new 510(K) — an approval from the FDA indicating that it is a distinct clinical item — and it must have received prior review by a certain group within our organization. Without prior review, you cannot bring any new product into our institution, and if you don’t go through that process, we reserve the right not to pay you. But you also need to be careful about being overly tough — vendors are our partners.

HFMA: How can facilities sustain and monitor implant savings over time?

Lloyd: You need to monitor cost by case, by surgeon, by patient age, and any other relevant criteria. It depends on how much time you have, because you need to look at the same criteria over a period of time and that can be hard to do. It’s a long-term commitment.

Gaida: Keep that data in front of physicians on a regular basis. Once vendors know that your physicians are well informed and are concerned about price, things happen.

“Some organizations have pursued gainsharing agreements with the OIG, but that’s very time-consuming — it may take up to 18 months to get requests approved.”
— Tod Lloyd, MS, RN

Long: We track our costs and expenditures under the contracts, and we include an analysis of costs according to the contracts vs. what we would have paid outside. Also, we need to give feedback to physicians when they have agreed to a change in order to reinforce the decision as it relates to the quality and savings we have gained.

Bruss: It’s very important to run reports that show what products have been utilized and what products are under contract, so we can see if there are any additional products we should contract for. Also, we need to make sure we are purchasing products at the prices we agreed to, and that the products are being purchased at the same price by all sites.

Barrow: After implant contracts are in place, someone on the project team must be made responsible for monitoring compliance on both the physician and supplier sides. Then a senior executive at the facility, such as the CFO or CEO, must be willing to address all noncompliance issues. Someone from the team must also be responsible for tracking savings to ensure that the promise of cost containment is fulfilled. Often the third party that compiled the implant data at the beginning of the process can also do this.

Quarterly or at least biannual reviews of costs and reimbursements will need to be routine. This process will ensure that supplier contracts are intact and competitive, and that payments from commercial payers are appropriate for the cost of care.

The most important thing is that communication on this issue be ongoing — new cost-savings ideas will come out of every meeting. Finally, always thank physicians and others for their efforts and show them the savings that they have helped to achieve.

Reprinted, by permission, from Healthcare Financial Management, May 2006.

For More Information:
HFMA is the nation’s leading membership organization (and is not-for-profit) for more than 34,000 health care financial management professionals employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and long-term care facilities, physician practices, accounting and consulting firms, and insurance companies, hmfa.org. This round table was sponsored for HFMA by Amerinet, a health care group purchasing organization servicing some 1900 hospitals and 33,000 non-acute care facilities.