Step 1 is to define the problem:
1. We all know that implants cost too much. They consume as much as 50 percent of the DRG for a total knee replacement. We know that most of this technology is expired IP and deserves to be a value based, generic offering. The hospital desires to purchase stable technology at a wholesale price. To achieve this, the whole process of implants in orthopedic cases has to change. Fundamentally, the hospital has to take ownership of the entire process such that they can make value based implant choices with extraneous costs removed.
2. In order for the hospital to consider this approach, they begin by analyzing their current costs and consumption. By the time the bureaucracy gets this completed, they often forgot what the question was.
3. The help in the OR is poor (This is the systemic problem in the OR). Even if the product is free, the help needs to be upgraded.
4. This is a management problem, not a personnel issue.
5. Ultimately, this is a hospital. They should make sure the right people are in the room. Programs like OrthoDirectUSA’s Operating Room Device Technician (ORDT) certification to address these issues.
Step 2 is to accurately frame the problem:
1. Quantify what the consigned rep, implants and instruments are actually costing the hospital. Understand the real costs of depending on the large implant companies and not taking advantage of purchasing direct (at wholesale).
2. Mr. Mitchell feels it is difficult for providers do this themselves. “The daily tyranny of the urgent prevents this from happening in a timely manner.” By outsourcing this consulting to a group like OrthoDirectUSA, bias is removed and a sense of urgency established, which is vital in managing change. “Our experience has shown us… most providers really don’t understand their true costs… because they really don’t understand the devices.”
Step 3 is to implement:
1. Develop a plan (process) to change the internal behaviors to address the problem. This is accomplished with outside direction.
Today the average selling price of a total knee is approximately $6,500 to $5,000. Pricing pressure (capitation) will drive this down to $3,500. The big implant companies will fight this tooth and nail, but reluctantly, meet it. They will initially reduce their selling expense by 10 percent by taking the distributor out. This will reduce their SG&A expenses to 30 percent, allowing them to stay close to their existing operating profit. They will keep a tech or service rep for implementation (this of course still costs them something). However, generic pricing will eventually get the knee price down to $1,500 or less. No rep will come with this price.
The bottom line is that the hospital or surgery center will need to take back ownership. This means that they need to take back the responsibility for the process and own the implants and instruments. The way it works now is that the hospital has given this responsibility to the orthopedic company and sales rep. Currently, the instruments and implants are consigned to the hospital with an able bodied sales rep to walk the unprepared operating room technician through the case. There is a 70 to 80 percent mark-up for this service.
The hospital needs to be an owner again. That means someone needs to have the responsibility of controlling the inventory of implants and knowing how to manage the instruments. Not many centers have wanted this responsibility and gladly gave it to the orthopedic companies. Ownership also means owning the implants and instruments. This is simple for a sports medicine offering with six instruments and three types of anchors. To manage a total knee line, a hospital would generally need an inventory of three lots of each knee size from size two to size five.
Even at the bargain basement price of $1,000 per knee, the inventory will set a center back $120,000 plus another $40,000 for two sets of instruments. Then someone at the center needs to understand and take the responsibility of inventory management. Remember, you don’t get a generic knee for $1,000 and get a sales rep to come to the case carrying the instruments and implants in tow. This is about process, not just procurement.
For the hospital that learns to execute, the net savings will accrue quickly. The basic tenant is to buy wholesale implants. The trick is to manage the change associated with ownership. “If the hospital would only do two cases per day and save $2,000 per implant (this is very, very easy to do when you can purchase wholesale), this would result in $4,000 per day times 20 days or $80,000. It is not too difficult to save $1,000,000,” says Mr. Mitchell
The big idea is the single greatest cost is the sales rep in the operating room. If a hospital is serious about lowering costs, they need to take back control of the operating room. The bottom line is that the generic push simply has not started yet. People do not change (or buy) until the personal pain of change is less than the pain of staying the same. In this arena, payor reform will be the key. Someday, someone will be rewarded to reduce costs. When this happens, the players late to the game will be looking for jobs.
Blair Rhode is a sports medicine orthopedic surgeon that founded RoG Sports Medicine (www.buyrog.com), a generic maker of sports medicine shoulder anchors. Tommy Mitchell is the CEO of OrthodirectUSA (www.orthodirectusa.com). OrthoDirect consults with providers that are interested in change management and the implementation of wholesale orthopedic products. Tommy can be reached at tmitchell@orthodirectusa.