The Journal of Healthcare Contracting

Risks and Rewards
The difficulties of balancing physician preference with lowering costs.

As financial pressures continue to build for hospitals across the country, JHC readers will no doubt find their skills tested, as administrators ask them to tackle high-cost physician preference items. After all, items such as orthopedic implants – the poster children of physician preference – represent the biggest opportunities for savings. But they also represent the biggest risk, in terms of their potential to damage administration’s relationships with the clinical staff.

No one knows this better than the supply chain executives at Lee Memorial Health System in Fort Myers, Fla. They came off a two-year-long, rough-and-tumble journey which only recently concluded on a positive note.

Two-year journey
It began roughly two years ago, when Bill Tousey, vice president of Cooperative Services of Florida (the group purchasing arm of Lee Memorial and Sarasota Memorial Health System), and Gaile Anthony, chief administrative officer of Lee Memorial Hospital, met with the IDN’s board of directors, who issued a mandate that they achieve pricing for implants commensurate with Lee Memorial’s volume. And that volume is substantial. According to Tousey, the IDN has consistently ranked among the top five or 10 providers of total joint replacements in the nation.

Indeed, Lee Memorial is a well-oiled orthopedic machine. A couple of years ago, it launched its "All Star Total Joint Program" with the aid of Chicago-based Marshall Steele & Associates. Patients are educated on the causes of joint problems, and about the surgery they are about to undergo. Hours after their surgery, they are up and moving about. They exercise with other joint-replacement patients in the gym, and are discharged in an average of 2.4 days. They return to the hospital for a "reunion luncheon" a month or two after surgery.

Despite the success of the program, Lee Memorial administrators were disappointed at the responses they received to their RFP for implants. "Unfortunately, on average, vendors responded with price increases," says Tousey. "We still had not achieved pricing that was commensurate with our volume." So Tousey and Anthony engaged a consultant to help the IDN compare its costs with those of others in the country. They decided to set a cap for prices they would pay for implants. "We set a goal of what we wanted to pay, and basically, we expected everyone to come back and agree to those prices," says Tousey.

It didn’t happen. As a matter of fact, only three vendors met the IDN’s cap by the deadline, and all three (Endotec, Exatech and Hayes Medical) were minor players there. When administrators announced the results, the physicians were furious. And they were not shy about letting administration and the public know about it. In August, one week after doctors were notified of the firms that were authorized to do business in the IDN, 30 doctors signed a letter to the local newspaper – The News-Press – pledging to support the system’s cost-cutting efforts, but not at the expense of losing control over how they treated their patients.

Administration agreed to reopen negotiations with the major players, and ultimately secured agreements with nine vendors (including such companies as Biomet, Stryker, Smith & Nephew, DePuy Orthopaedics and Zimmer). The whole process might not have been pretty, but Lee Memorial did accomplish what it set out to do – cut the cost of orthopedic implants.

What went wrong?
But why was the going so rough? Judging from reports in the local paper, the surgeons and vendors felt they hadn’t been properly notified of just how the process was going to take place. And when they learned who the new suppliers were, they freaked. But Lee’s administrators and supply chain executives felt they followed a textbook approach to the whole thing.

"We spent over a month meeting one-on-one with as many physicians as we could," says Anthony. Administration reviewed with the surgeons their usage of implants, as well as how much the IDN was getting reimbursed for the procedures they performed. "We tried to be as transparent as possible," she says.

The supply chain executives met with vendors as well. "We set dates and deadlines," says Anthony. "We had some comments afterward that said, ‘I didn’t think you really meant it.’ The hospital had not taken the lead in the past, but we had the solid backing of the board, employees and some key physicians. But the vendors didn’t believe it."

In hindsight, Tousey and Anthony say that perhaps they could have communicated even more. But some degree of friction was probably unavoidable. "We had to unfreeze the status quo of decades," says Tousey. "We knew what we were getting into."

Adds Anthony, "Next time, we’re going to grab [clinicians’] hands and let them know, ‘This is real; we need your support.’ We said those things, but this community never had experienced the climate to come together and achieve a goal like we wanted to achieve. This was a very powerful vendor community."

As of press time, peace had returned to Lee Memorial’s campuses. On Sept. 14, the local newspaper, which had followed the story for months, ran an update with this headline: "Lee Memorial Health System heals from implant fight."

Price caps on trial
No doubt Lee Memorial’s administrators, surgeons and vendors all felt on the spot throughout the process. But what really was on trial might very well have been the IDN’s "price cap" approach to contracting for physician preference items. Rather than try to convince surgeons to use products from one or two approved vendors, the IDN elected to keep the field open to more players, so long as they agreed to meet its price cap. It’s an approach more IDNs are taking.

And that’s with good reason, says Sg2 Vice President Steve Miff, Ph.D., who heads up the Skokie, Ill.-based company’s orthopedic, spine and rehabilitation intelligence. "Standardization gives the [provider] more buying power and leverage by reducing the number of vendors, enabling them to also manage variation in product and utilization," he says. "But physicians are very resistant to this approach. They’re thinking, ‘I need to switch vendors. I have this relationship with this vendor. There’ll be new training I need to go through.’"

Contracting executives have tried other approaches, each with an upside and downside, points out Miff. Some examples:

Discount off list. One problem with this approach is that list prices have climbed substantially every year for a wide variety of products, says Miff.
Volume milestones to trigger discounts. Problem: They can encourage greater utilization, thus driving up total costs.
Risk-sharing. Tying implant prices to a fixed percentage of reimbursement is an approach still in its exploratory stages, and vendors’ enthusiasm is guarded.
Demand matching. Downside: This approach can get pretty complicated.

"What you’re left with as probably the best strategy is capitated pricing," says Miff. But the IDN must approach it with care. "First, you have to gather and analyze your data," he says. That means collecting invoices, finding out which surgeon is using which products. In other words, administrators and contracting executives must fully understand costs and utilization.

Second, administration must present the data to the surgeons. "Educate them on, ‘Here’s what we’re spending,’" says Miff. "And be as transparent as possible."

Next, work on gaining physician support. "You can’t do anything without it," says Miff. Usually, most physicians understand that implant costs are rising, he says. "You should be upfront with what you’re willing to pay, so physicians can see it’s not unreasonable. Ideally, identify a physician champion you can work with."

Then find a way to reward physicians for switching vendors, if that becomes necessary. "You can more easily take a percentage of the savings, put it in a separate fund, and allow the physicians to decide how the money will be spent on the orthopedic program," says Miff.

After administration and clinicians have come to some agreement, they should approach the vendors, says Miff. "You need to give them a hard deadline; otherwise, no one will make a decision."

One risk associated with the price cap strategy is exactly the one that Lee Memorial encountered. "The challenge is, if the only ones who agree [to the cap] are the small players," says Miff. "The goal is to get at least one of the big players to participate."

Adversarial relationship unavoidable?
Communication with the surgeons may be essential, but some believe that all the communication in the world can’t soften the price cap approach. "For the hospital, I can see its benefits," says Doug Jones, president, DTJ Consulting LLC, Ligonier, Pa., a consultant to providers and suppliers, primarily in the area of physician-preference items. "It’s a good way for the provider to manage its implant costs. But the unhealthy thing about it is, it creates an adversarial relationship with the vendor." Jones was a 20-year veteran of DePuy prior to forming his own company earlier this year.

"I don’t have an issue with price caps per se," he says. "The issue is more the mandated ‘take it or leave it,’ ‘no communication or discussion’ approach. In those cases, there is no involvement of the physician or consideration for his or her clinical input, and that creates problems. No one likes to be dictated to. This approach inherently leads to a more adversarial approach with suppliers, which can then bleed into the [IDN’s] relationship with surgeons. Sometimes it can lead to doctors feeling that they’re caught in the middle, and that’s not a position a doctor appreciates."

Yes, hospitals are frustrated by the consistent rise in implant costs over the years, and price caps may be the fastest way to try to gain control of prices, says Jones. "But I associate physician-preference products with long-term relationships and a fairly sophisticated sales process on the part of the buyer and the seller." Price caps don’t lend themselves to that, he says.

Communication still best
Even though tackling physician-preference items is almost always bound to be sensitive, today might be the best time to do it, says Jones.

"In the past year, I have noticed a significant increase in surgeons’ interest in how much implants cost and how [the surgeons’] decisions affect hospital economics," he says. Doctors understand that new technology is being introduced every day. "They’re hearing this on a consistent basis, and they’re saying, ‘Help me understand this.’ And there’s a younger group of surgeons who are probably more aware of general business practices."

Together, hospital administrators and physicians can engage vendors in productive discussions, says Jones. "If you can establish that three-way discussion, you end up creating a better relationship and driving better solutions. We’re talking about a long-term relationship with creative solutions – not one-time hardball price negotiations."

Sidebar:
‘Do I really want to tackle this?’

Steve Schrot is director of materials management at Port Huron Hospital in Port Huron, Mich., who decided to tackle orthopedic implant prices at his hospital. "It was a question of, ‘How do we start? Where do I begin?’" he says. He started by educating himself on the world of orthopedic implants. He looked at videos, read the literature, spoke with his surgeons and vendors, and tried to familiarize himself with the nomenclature.

The technology behind orthopedic implants is a moving target, says Schrot. "It keeps us all off balance." But without at least trying to understand it, the contracting executive doesn’t stand a chance to compare products, evaluate their usefulness to the surgeons, and attack pricing. "It’s not as simple as getting a bid on a commodity product."

"As a materials manager, you’re going to have to decide, ‘Do you really want to tackle this?’" he says. The answer probably is "Yes … but not alone." Indeed, Schrot says that working closely with the chief financial officer and the vice president of medical affairs is a critical starting point. " Just as critical is the need to communicate with and engage the physicians," he says. "Whereas some friction may be inevitable, by involving the physicians in the process from the beginning, a great deal of friction can be avoided."

And the effort is well worth it. "Certainly with the Baby Boomers, orthopedics will continue growing and growing," says Schrot. Living in Michigan, it’s not surprising that he draws upon an auto-industry analogy. "Ford says they’re losing $2 billion a month. Obviously, they can’t continue to do that. They have a compelling reason to make changes. And hospitals are the same way. But it comes down to doing it the right way."

Sidebar 2:
Elephant in the room

When it comes time to discuss contracting for physician-preference items with your clinical staff, pay attention to the elephant in the room – the financial tie that may exist between surgeons and medical device companies. The newspapers are all over it. "Hip deals put money in pocket," chimed one headline in the October 26 edition of the Chicago Tribune.

Indeed, the suspicion of money flowing between surgeons and device companies clouded discussions about orthopedic implants between administrators at Lee Memorial Health System and its orthopedic surgeons. (See related story.) According to reports in the local newspaper, The News-Press, hospital officials publicly suggested that Lee Memorial’s orthopods had encouraged vendors to hold out for higher prices when the IDN tried to enforce a price cap for implants. The doctors denied this. What’s more, the newspaper reported that seven of Lee’s doctors had collected some sort of payment from device-makers, ranging from $161 for meals to $25,000 for unspecified reasons.

A cloud of suspicion
Indeed, hospital administrators and contracting executives may not know whether a doctor is receiving remuneration from current or potential vendors. Even if a vendor’s Web site contains information about payments to clinicians, contracting executives are still faced with some unenviable decisions. If they choose to confront the clinician, they still must make a judgment call: To what extent has that remuneration affected the clinician’s judgment about a particular product being considered for contract?

"A doctor going out to dinner [with a vendor] may be relatively routine," says Steve Schrot, director of materials management, Port Huron Hospital, Port Huron, Mich. "But in the last year, physicians have been named who have gotten remuneration from [device-makers]. Their names are out there. The bright side is, it has put a lot of people on alert that they should be cautious in their interaction with vendors."

"The government is getting tougher on relationships," says Steve Miff, Ph.D., vice president of Sg2, a healthcare intelligence firm in Skokie, Ill. "Any time money is exchanging hands, whether between physicians and hospital, or physicians and vendors, the government is taking a critical look. Vendors, for example, are required to post on their Web sites how much they pay physicians. This has provided a lot more transparency."