In a changing healthcare economy, commercial payers have to re-evaluate how they do business with hospitals in order to contain costs while also meeting the demands of their members, many of whom are seeking expensive surgeries such as knee and hip replacements.
The U.S. market for implantable medical devices tops $43 billion a year and is expected to climb eight percent a year for the foreseeable future. Medicare alone spends about $20 billion a year on implanted devices. While all segments are expected to grow due to the prevalence of chronic disease and an aging population, joint replacement for hips and knees are some of the highest volume--and most expensive--procedures for payers. Despite the fact that these are relatively standardized surgeries, costs are high and can vary from hospital to hospital by as much as a factor of 10 [PDF], according to noted Princeton political economist Uwe Reinhardt.
Payers--including Medicare, Medicaid and commercial payers that have initiated various value-based payment programs--continue to be challenged by an industry-wide lack of transparency that includes lack of published manufacturer list prices, hospital mark-ups, physician preference items (PPIs), and an inefficient audit and recovery process. For payers to remain financially viable in the new healthcare environment, however, cost efficiency is essential. One opportunity payers have for cutting costs is partnering with hospitals that purchase implantable devices directly from manufacturers.
Price transparency lowers costs
Currently, physicians tend to select medical devices and equipment for their patients based on their familiarity with and loyalty to certain products. Physician preference items can account for more than half of total supply expenditures. These devices often have costs such as sales rep fees and labor costs packaged into the price of the implant.
In fact, the largest cost of most implants is not research and development or manufacturing but SG&A: selling, general, and administrative expenses. Although this category contains elements such as royalty payments, insurance and general administration, the largest single expense is the commission payment to sales reps.
That may be part of the reason why device manufacturers frequently enforce price-confidentiality clauses in contracts with hospitals for purchases of PPI. These non-disclosure agreements prevent hospitals from revealing prices to third parties that help them negotiate contracts, as well as to surgeons who specify which device brands and models hospitals purchase.
With direct purchase, on the other hand, comes the opportunity for payers to gain data and insight into the cost and quality of implants. By replacing the sales rep "middleman," direct purchase can help control payers' and providers' costs by eliminating device markups that typically run as high as 40 percent.
This kind of transparency not only helps payers and hospitals better understand the connection between the cost and effectiveness of devices, but also empowers patients to make more informed treatment decisions. In light of recent changes from CMS--including new surgical quality measures comparing hospital and surgeon performance as well as the release of comparative pricing data that reveal how much hospitals charge for common procedures--the information yielded from transparency can give both parties a market advantage.
Aligning incentives drives change
Along with transparency, the direct purchase of medical devices enables all stakeholders to work collaboratively for clinical and financial alignment. For instance, it empowers providers to identify the best treatments from evidence-based medicine and determine appropriate care without the influence of a manufacturer's sales representative. It also allows all parties to agree on costs in advance--in detail and with full disclosure. Shared savings models such as co-management, bundled payments, shared contracting and gainsharing can ensure surgeons, hospitals and payers all work toward the same quality and cost goals.
Healthcare reform promises to help payers and providers find common ground. Partnering with hospitals that buy medical implants directly from manufacturers can help lead the way to data-driven solutions that decrease costs and enhance transparency around implant use and surgical treatment decisions. A collaborative and comprehensive approach to implant purchases can bring about the clinical and financial alignment needed to motivate all players in the medical value chain.
Steve Lamb is Lead Partner of Implant Partners, a leading provider of orthopedic implants and services.