Coaxing orthopedic surgeons to help minimize the skyrocketing costs of supplies has always been one of the most troublesome problems confronting hospital materials managers. But now, two apparently unrelated forces out of Washington are working in hospitals' favor.
One development came in February from HHS' inspector general's office, which in a flurry of advisories gave the green light to gain-sharing arrangements between four hospitals and the physicians in their cardiology and cardiac-surgery programs (Feb. 21, p. 6). The arrangements, which most experts believe other organizations can replicate, gave each hospital some latitude to financially reward doctors who collaborate in efforts to lower costs. Most observers also believe that orthopedics is the next logical frontier for similar efforts.
Indeed, HCA, the nation's largest for-profit hospital chain, is already implementing a gain-sharing project around hip and knee implants, says Jeff Prescott, a company spokesman. Although HHS' inspector general's office hasn't approved the project yet, HCA is confident it will and is already signing up physicians, offering them financial incentives for both saving costs and improving quality.
The second round of good news for hospitals arrived just weeks later in March when the U.S. Justice Department subpoenaed nearly all of the large orthopedic manufacturers, throwing a sweeping net for information about their relationships with orthopedic surgeons.
"I think the two (developments) are coincidental, but they could end up having an unintended dual effect. That is, both of these developments have the potential of increasing competition and lowering prices in orthopedics," says Gadi Weinreich, chairman of the national healthcare group in the Washington office of Sonnenschein Nath & Rosenthal. "They may end up working in tandem to achieve similar results."
Perhaps orthopedics, better than any other hospital service line, crystallizes the intrinsic and seemingly eternal conflicts in the love-hate triangle that exists between hospital administrators, manufacturers and physicians. From 1991 to 2004, orthopedic implant prices climbed 132% while hospital reimbursements rose only 16%, according to Aspen Healthcare Metrics, citing data from Orthopedic Network News. Aspen, a wholly owned subsidiary of group-purchasing organization MedAssets, is a clinical consulting and benchmarking data firm.
Physician preference items haunt administrators in other service lines as well, but orthopedics is especially problematic because just about every hospital in the country offers those services, says Dan Piro, Aspen's senior vice president. In addition, about two-thirds of the patients in need of knee or hip replacements are over 65 and on Medicare. In the meantime, the more profitable orthopedic procedures that are typically performed on younger patients have shifted to the outpatient setting. The only upside to this situation is that it is easier for hospitals to be tough with vendors because they don't have as much to lose, Piro says.
Orthopedic surgeons have seen their Medicare reimbursement for a total hip replacement decrease by 35% between 1991 and 2004, Aspen says. In 2004, Medicare reimbursed hospitals on average about $9,800 for total joint replacement surgery and doctors a little less than $1,500. The implants consumed 70% of the hospital's reimbursement, according to Aspen, citing Orthopedic Network News. The high proportion of Medicare patients in need of implants combined with the high cost of implant devices thus nearly erased the profitability of inpatient orthopedic services. Profit margins in orthopedics plummeted from 25% in 1997 when orthopedics was third on a list of 10 hospital service lines in terms of profitability after general and cardiac surgery to 2% in 2001 when it sunk to 10th, according to Aspen.
Eileen McGinnity, president of Aspen, puts the blame squarely on device costs, which have increased as much as 8% a year. For both total knee and hip replacements, acquisition costs have increased at twice the rate of all other costs associated with the surgery, she says. In 2004, knee implants cost roughly $4,200 -- up 42% from just under $3,000 in 2000. Hip implants in 2004 cost about $5,600 -- up 60% from about $3,500 in 2000.
Though there are some new technologies behind the devices "that would warrant a premium payment, it's not as much as (the cost increases) would suggest," she says. Meanwhile, the publicly traded device companies, such as orthopedic companies, are spending less on research and development (10% of their revenue) than on marketing and sales (33% of revenue), McGinnity says, citing a December 2003 CMS report.
"The cost is not going up in technological innovation but in marketing and the development of the physicians' alignment," she says.
Hospitals, which rely on aggregating volume to control supply costs, are often powerless as manufacturers nurture their particularly strong relationships with physicians, putting hospitals and their GPOs at a disadvantage in negotiating volume discounts with vendors.
"My take on the orthopedic implant issue is that you've got a broken economic model. You've got manufacturers building relationships with surgeons and surgeons deciding what they want to use and developing specific relationships with manufacturers for whatever reason. Then the hospital has to come along and negotiate favorable pricing, but of course their basis for negotiating is limited" because of their inability to guarantee a specified volume to vendors, says Michael Sweeney, president and chief executive officer of Surgical Implant Services, a consultancy. "Anytime you are in a situation where the person making the purchasing decision is completely divorced from the financial impact of that decision, you have created the perfect storm for costs to spiral out of control, and that's kind of where we've been for the last decade or so."
Hospitals have long been trying to develop creative ways to navigate the storm. Short of gain-sharing, Surgical Implant Services, founded in October 2003, offers to come in and organize physician groups into a GPO-like company, sharing the profits with doctors, Sweeney says. The doctors agree as a group to limit their selection of products, decide which supplies best fit their needs clinically and then strike agreements with vendors that take advantage of the promised volume. Surgical Implants is working with hospitals and physicians in spine and cardiac surgery, cardiology and orthopedics.
Sweeney says the business model differs from gain-sharing in that this model is "more physician-driven." Physicians are asked to make a personal investment in the company and also are obligated to monitor their clinical outcomes. Hospitals run less financial risk than they do in gain-sharing programs as they are not required to make any kind of capital investment in software or change their operating procedures, he says.
"Our philosophy is simple and market-based," Sweeney says. "If you consolidate from a large number of suppliers of similar products to a small number, it will result in the ability to negotiate a lower price." Sweeney says numerous healthcare law firms have scrutinized the business model and assured him that it does not appear to trigger any antikickback statutes. However, Surgical Implant has not sought an opinion from the inspector general. "When one enters into that process, it takes flexibility away from the business model," Sweeney says. The company owns about a dozen GPO-like entities with physicians, primarily in the South, and has on average reduced supply cost for hospitals by as much as 25%, according to Sweeney.
Gain-sharing, which has had its ups and downs over the past decade because of the fear of invoking antikickback laws, is experiencing a revival in large part because of Joane Goodroe, president and CEO of consultancy Goodroe Healthcare Solutions. Goodroe sought and got the inspector general's legal analyses that set the cardiology gain-sharing programs in motion, although Goodroe says she prefers to call it "economic alignment" rather than gain-sharing because it more aptly describes the process.
Goodroe says her firm is "definitely" moving into orthopedics now although she couldn't predict when her company might get a ruling in its favor.
Hospitals pay the bill
Orthopedics is problematic for hospitals because the "orthopedic vendors have done a fabulous job of servicing the physicians," she says. Beyond providing good products, orthopedic implant companies offer a lot of personalized technical services to surgeons, which fosters loyalty. As a result, doctors prefer to purchase products from the companies they are comfortable with based on what works well for them, Goodroe says.
"Certainly there is no room for the hospitals (to negotiate) on price," Goodroe says. "When you look at the vendor market, they are providing a tremendous service to physicians yet, the hospital is paying the bill."
A survey of upper Midwest members by the VHA hospital alliance seems to show how costly a vendor relationship can be for hospitals. The vendor's physical presence in the operating room lifted the average cost of a knee implant by more than $500 to $3,991 and the average cost of a hip implant by nearly $800 to $5,738, according to the survey. Vendor representatives were in the operating room 61% of the time for knee replacements and 81% of the time for hip replacements, according to the same survey.
Yet surgeons find a lot of value in these relationships. Rick Bassett, director of the joint replacement center at Valley Baptist Medical Center in Harlingen, Texas, says good sales representatives are available days, nights and on holidays though they are not always needed. Last year, Valley Baptist was one of the five busiest orthopedic hospitals in Texas with more than 1,000 joint replacements performed.
"These guys get out of bed and make sure you have all the things you might need," Bassett says, noting that he uses 8,000 different combinations of sizes just for hip replacements alone.
These strong doctor-vendor relationships are the context for the federal investigation of orthopedic implant manufacturers. Federal prosecutors as a matter of policy never comment on ongoing investigations, but Weinreich of Sonnenschein says the far-reaching nature of the subpoenas indicates that prosecutors are exploring the various kinds of agreements vendors have with orthopedic surgeons.
Many orthopedic surgeons are legitimately paid at fair market value for services they provide vendors, such as research or testing, but there apparently is some suspicion that kickbacks may be part of some of these relationships and agreements. Justice Department officials have warned for several years that medical device manufacturers will next go under the microscope as pharmaceutical companies have, Weinreich says.
"Many skeptics say this is the beginning of the war and (prosecutors) are going to find a lot of inappropriate arrangements," Weinreich says. "I don't have an opinion on that, but I do know that the subpoenas are extremely sweeping and when you ask for that many agreements, you tend to find things."
Though the inspector general's advisory opinions on gain-sharing have sparked a national debate, a real fix probably won't be achieved without a "congressional solution," similar to the proposal put forward in a bill introduced in May, Weinreich says. The bipartisan legislation sponsored by Sens. Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.) primarily addressed a permanent ban on specialty hospitals, but it also OKs "coordinated-care incentive arrangements" between hospitals and doctors (May 16, p. 8).
The device industry not surprisingly emphasizes the importance of the relationships between vendors and surgeons. Unlike pharmaceuticals, devices frequently involve complex technologies that require hands-on experience, says Mark Brager, a spokesman for AdvaMed, a trade association for medical device manufacturers. The average life cycle of a medical device is 18 months, and with technologies always changing, surgeons frequently require updates on training, he says.
The trade group also is "very concerned" with the proposals to legalize gain-sharing, says David Nexon, AdvaMed's senior executive vice president. "It's not a physician's role to save a hospital money," Nexon says. "It's the physician's role to provide the best possible care for the patient."
Apart from physicians making purchasing decisions that contribute to increased costs, hospitals are unwittingly increasing their supply costs for orthopedic implants by stocking the devices on consignment, says David Ricker, chief operating officer of GPO Broadlane. Hospitals mistakenly believe that since an expensive implant sits on a hospital shelf on consignment, it's free, but the vendors build in the cost of consignment into the cost of their products, he says.
"If you have $1 million worth of product sitting idle in a hospital operating room and over a year the hospital ends up using $200,000 of that inventory, imagine how much it costs the vendor. It's extremely expensive," Ricker says. "Consignment at the end of the day is just a delayed payment method."
The habit is mostly hospital-driven but vendors don't mind having their products on the hospital shelves. "It makes it easier to sell," Ricker says. "It's just a vicious circle that ultimately results in hospitals paying much more expensive prices."
Orthopedic implant suppliers also provide a lot of extra services that are getting built into the cost of the implants, Ricker says. For example, hospitals may pay "a couple hundred bucks to have a salesman stand in the operating room and answer questions. Last year that sales rep may have been selling copiers for Xerox," he says. The salesman wants to be there to have more face time with the doctors. Along the same lines, hospitals pay extra to have the salesman deliver instruments, for which they pay a rental fee. Broadlane dissected all the added costs of these services several years ago and found that the costs can add up to a third to the total cost of the joint, Ricker says. Ricker blames the hospitals, not the vendors, for allowing such practices to proliferate. "I think mostly it's the hospital, because they try to appease the doctor," he says.
James Van Drasek, system director of materials management for three-hospital HealthEast Care System in St. Paul, Minn., says orthopedics is one of the last few remaining physician preference items because of the strong relationship between vendors and physicians. Once doctors become comfortable with a product, they are less likely to change, and unlike in cardiology, the long-term success of an orthopedic technology may not be known for up to 10 years, he says. Standardization of orthopedic products used by hospitals, which would promote more volume and better prices, also is more difficult than in service lines like cardiology because there are more orthopedic implant vendors, Van Drasek notes.
HealthEast projects that in the year ending Aug. 31, its surgeons will have performed 1,800 hip and knee procedures. The hospitals will collectively spend more than $5 million for implants. But the system has successfully controlled the rising costs by collaborating with surgeons to standardize 85% of the implants to two vendors, Van Drasek says. From 1993 to 2004, HealthEast saved $30 million through the effort. As scientists, physicians respond well to data and are willing to work with the hospital if the data offer a compelling rationale for doing so, he says.
"We have a saying: If you can't measure it, you can't manage it," Van Drasek says. "A lot of organizations don't know their implant cost per case. You have to develop systems to get at that to ensure you are paying the right price."
At HCA, rising costs and also the opportunity to institute some quality measures provided the impetus for the gain-sharing initiative, Prescott says. Costs of orthopedic devices "have been ramping up dramatically," so the company is spending more than $200 million on devices alone with costs rising in line with the entire hospital industry, he says.
"There is just no way for a hospital to control that. The physicians make the decisions on what implants they use," Prescott says.
Most GPOs say they're exploring gain-sharing as a way of aligning physicians' interests with the hospitals, but Piro of Aspen says the tactic may not be the panacea that's being touted. Regardless, it will take time -- and hospitals need relief now, he says.
"People are looking at gain-sharing as some kind of life preserver for physicians to help them. Physicians are saying, `What's in it for me?' " Piro says. "If you look at the reimbursement for physicians, they've been hammered more than the hospitals."
Unlike other GPOs, MedAssets doesn't negotiate national contracts with orthopedic vendors to rein in costs as the "discounts are token and it creates in some cases a conflict of interest between the GPO and manufacturer," Piro says. Instead, through Aspen, physicians are brought on board with the hospitals' interests simply by sharing the relevant data with them, similar to what Van Drasek promotes at HealthEast.
"The physicians don't even know they are losing money," Piro says. "They are smart guys. If you show them where the money is going -- how much of it is in the implant -- you'll get their attention . . . It changes the dynamics of the triangle of physician, hospital and vendor."
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