A detailed case report of how one Hospital successfully controlled implant costs
An Ailing Healthcare Environment®
Most healthcare professionals understand that, when a patient is sick, sometimes it is necessary for them to take a bitter-tasting pill in order to recover. But when the patient is the hospital and the bitter pill is cost reductions, that rationale can be hard to swallow.
It’s no secret that most hospitals are financially stressed and have been for a long time. However, the onset of the Patient Protection and Affordable Care Act (PPACA) has made those financial challenges and uncertainties even more acute.
Providers are now faced with changes and reductions to Medicare and Medicaid reimbursements. In addition, the Centers for Medicare and Medicaid Services (CMS) are departing from their fee-for-service payment system. They are transitioning to a reimbursement methodology that incentivizes Providers who institute value-based purchasing programs and are delivering care that is both high-quality and cost-effective. These external factors will demand that all Providers make internal changes within their organizations.
As a result, Providers across the country are preparing for a new reality by implementing strategies to cut costs, though not always in ways that are mutually beneficial to both the hospital and its physicians. In fact, these cost-cutting measures often lead to strife and animosity between the hospital administration and the physicians who practice there.
The administrators and physicians at Loma Linda University Medical Center (LLUMC) are not immune to these economic adversities. However, LLUMC leadership knew that, in order to continue providing quality care to communities within California’s Inland Empire, they would need to re-create their organizational framework to shape the perspectives and mind- sets of all stakeholders. They understood that their approach to doing business must change, as the rules of healthcare delivery have changed.
Loma Linda University Medical Center was established in 1967 as an outgrowth of a 1905
Seventh-day Adventist Sanitarium. From its inception, LLUMC dedicated resources and
expertise to providing quality medical care to patients in and around Loma Linda, CA, as well as many third world countries. To date, LLUMC is the only level one regional trauma center for Inyo, Mono, Riverside, and San Bernardino counties in California.
LLUMC’s Christian-guided mission to “make man whole” physically, intellectually, emotionally, and spiritually served as
the impetus behind their pursuit to contain costs, implement value-based purchasing initiatives and improve patient access to quality care. And since the costs for orthopedic implants are increasing at a higher rate than any other medical care1, and already account for 30-80 percent of the reimbursement received from public (Medicare/Medicaid/Medi-Cal) and private insurers2, it made sense for LLUMC to start by establishing aggressive pricing caps for all orthopedic implants and suppliers.
“There’s no question that this was a bitter pill for all of us to swallow, especially us ortho surgeons,” shares
Dr. Gary Botimer, Chairman and Associate Professor of Orthopaedic Surgery at Loma Linda University, School of Medicine (LLUSM) and Institute Director of RONI (Rehab, Orthopaedics, Neurosurgery Institute) at Loma Linda University Health. “However, and more importantly, it was the morally right thing for us to do.”
Long before PPACA and LLUMC’s capitation’s on medical devices and other service lines, Dr. Botimer had diligently attempted to reduce the costs of orthopedic implants. From his experience as a surgeon, managing partner of an Ambulatory Surgery Center, and Head of Arthroplasty Service at Loma Linda University, School of Medicine (LLUSM) and as an Orthopedic Surgery Professor at LLUSM, Dr. Botimer knew that the majority of surgeries could be performed without a sales rep in the OR. He also came to understand that, while it’s a significant cultural change, hospitals could manage their orthopedic implant services themselves, without having to consign the instruments and sales reps associated with each device.
“What many surgeons don’t realize is that more than 43 percent of the cost of their implants is due to the orthopedic company’s selling, general and administrative (SG&A) expenses. Although SG&A includes several components, the largest is payment to the sales group,” explains Dr. Botimer. “The equipment and resources that are sold as being ‘included’ with the implant, such as the instruments and the sales reps, are actually enveloped into the overall cost of the implant. So a $6,500 orthopedic implant could actually be $2,500 or even $1,500 if the sales rep was taken out of the equation. For Providers, that can be game-changing.”
Before he could persuade his hospital and fellow surgeons to “take back their OR,” Dr. Botimer knew that he had to first connect with manufacturers of orthopedic implants who would be willing to sell directly to the hospital without going through middle- men. He started by reaching out to the manufacturer of the implants he was using within the hospital.
“It was definitely a frustrating process. Time and again it was made clear that my values were not in line with those of the companies I was reaching out to. In fact, the only people I was really allowed to speak with were in the sales divisions of these companies. And they certainly weren’t interested in me telling them to reduce the selling price of their orthopedic implants because that meant putting them out of a job,” Dr. Botimer recalls.
Purchasing orthopedic implants directly from a manufacturer, without sales reps, is a disruptive and controversial concept for many. Over the years, medical device sales reps have become so ubiquitous within the OR that a status quo has evolved. Both hospitals and physicians abdicated responsibility for the handling of inventory, instruments and surgical guidance to sales reps and the medical device companies they represent. Orthopedic companies have also done an effective job positioning their sales reps as being indispensable to surgeons and hospitals. This co-dependent relationship has been essential to orthopedic companies’ ability to solidify and protect their business. As the number of sales reps increased, so did the prices of medical devices.
“While I didn’t make much headway in my conversations with orthopedic implant manufacturers, I did remain vocal about why the transformation from being a ‘renter’ of these devices to an ‘owner’ was vital to our ability to survive under PPACA,” shares Dr. Botimer. “And when PPACA started to look more and more like a reality, we wanted to get a head start. I felt taking back control of our orthopedic service line would be key to our long-term viability as a value-driven Provider. That’s when LLUMC sought outside assistance from a supply chain consulting group.”
Finding the Right Formula
“Sustainable, competitive advantage is correlated to how unique and cost-effective your supply chain is.” ~ Michael Porter, Bishop William Lawrence University Professor, author of On Competition, and leading authority on competitive strategy
While helpful in other areas, the supply chain consulting group did not specialize in the OR or orthopedic supply chains.
Since expenditures for medical devices, specifically physician preference items (PPIs), account for at least one-third of overall hospital supply costs (and rising)3, LLUMC knew that it was vital to carefully evaluate how they could regain control of their orthopedic implant supply chain. To help LLUMC get the best possible guidance and expertise, the supply chain consulting group that was originally brought in referred them to OrthoDirectUSA®.
“Surgeons want to purchase the products they want, for the patients they want, when they want. And, for a variety of reasons, they really aren’t all that interested in whether or not their implant choices negatively impacts the hospital’s financial health and stability,” says Dr. Botimer. “But under the reality of PPACA, they need to. If surgeons continue to insist on purchasing preference items with complete disregard to cost, then they – nor the hospital that they practice in – won’t meet CMS’ performance targets. And since Medicaid/Medi-Cal and Medicare are the two biggest payers to Providers, the leader- ship at LLUMC saw this as a real problem.”
Under CMS’ new reimbursement system, Providers who do not give adequate consideration to the cost of their orthopedic implants compromise their performance evaluation under CMS. They will not only see further reductions to their payouts, but they are likely to lose patients as well. CMS and other payers are starting to refer patients to Providers who can demonstrate that they are able to provide quality care efficiently and cost-effectively.
As a specialized Learning Development and Change Management Company for orthopedic implant services, OrthoDirectUSA® (ODUSA) teaches hospitals to manage their orthopedic supply chain process and regain control of their OR. By educating Providers on the principles of value-based purchasing and providing in-depth product and personnel training, hospitals can develop a self-sufficient, internally integrated orthopedic service.
A value-added outcome of ODUSA’s service is that they enable Providers to access a wide variety of high-quality, time-tested orthopedic implants that can be purchased directly from sources without traditional middlemen costs. ODUSA facilitates these Direct-Access™ relationships so hospitals and physicians are positioned to succeed in the new reality of Value-based Reimbursement systems.
Taking back the OR is a daunting concept for hospitals and physicians. While most Providers agree that cost reductions must be made, the idea of accomplishing that by removing the sales rep from the picture is usually not even conceived of as an option. In addition, some medical device cost-containment consultants have a financial interest in the medical device manufacturers that they recommend to the Provider.
“At our very first meeting, the first thing ODUSA did was make it clear who they are and who they are not,” recalls Dr. Botimer. “Tommy Mitchell, ODUSA’s Founder and CEO, told us, ‘We’re not a manufacturer, we’re not a distributor, we’re not a GPO. We don’t sell products and we’re not paid any money from any technologies whatsoever. We focus on treating the cause, not the symptom.’ In other words, they didn’t have their hand in the cookie jar. It was apparent from day one that their goal is to ensure that our values and their values line up.”
ODUSA is impartial and technology-neutral when it comes to which medical device manufacturer they recommend to the Providers. Their focus is on process change, not product change. They help Providers grasp that the single most strategic decision they can make is to reduce their implant spend by taking back control of the OR. Ultimately this decision gives Providers more choice and more control so that they can deliver more value to the patients in their community and improve their financial self- sufficiency.
In addition to connecting Providers to multiple technology sources that can be purchased at wholesale prices, ODUSA’s unique Operating Room Device Technician (ORDT™) training and certification program provides long-term on-site Mentors to support surgeons in the OR. Through the ORDT program, carefully selected (by the healthcare provider) hospital personnel are extensively trained to become an on-site orthopedic specialist. They receive in-depth education and coaching by ODUSA’s experienced team of Mentors. These industry veterans have extensive OR experience and are experts in lean implant management and Direct-Access™ purchasing.
For most Providers, there’s often a distressing concern that purchasing cost-effective products that don’t require a sales rep will equate to lower quality care. The reality is that this couldn’t be further from the truth.
For example, a recent study evaluating registry survival of higher-cost “premium” knee and hip components compared to lower- priced standard components concluded that there was no difference in the cumulative revision rate at 7–8 years between premium and standard TKAs or THAs4. While the cost of the premium implants was approximately $1000 higher than the standard implants, premium implants did not demonstrate better survival than standard implants. Revision indications for TKA also did not differ (see Figure 1).
“There’s no question that some new devices demonstrate major technological innovation and have significant clinical evidence to support that. However, most, especially for orthopedic and spine surgery, are just incremental modifications of existing products. What’s more is that they don’t have the performance studies to validate that they are better or justify their high cost,” Dr. Botimer argues.
Respecting that Providers tend to not be aware of, or sufficiently educated on, functionally equivalent orthopedic implants (and have major misgivings about using alternative products), ODUSA knew that they needed to begin the dialogue by introducing the concept of Stable-Technology™ implants.
By definition, Stable-Technology™ products are FDA-cleared device designs that have been used effectively for years with positive clinical outcomes. What makes them unique and affordable is because their intellectual property protections have lapsed. Typically, these functionally-equivalent implants are sold at approximately 50-60 percent of the cost of brand name devices6. These matured technologies comprise at least 75 percent of the implant market and are available at wholesale pricing when purchased directly from manufacturers.
Taking advantage of Stable-Technology™ orthopedic implants is fundamental to a Provider’s ability to effectively control their orthopedic supply chain, improve access of care and maintain (if not improve) the quality of care they provide to patients. And since seeing is often believing, ODUSA brought in a variety of alternative implants for the LLUMC team to see and handle. These technologies were notably similar to brand-name products that they had been using. The main difference was that the manufacturers that made these Stable-Technology™ orthopedic implants were willing to sell them to LLUMC directly, without going through middlemen.
After signing a Non-Disclosure Agreement with ODUSA, LLUMC provided ODUSA with pertinent pricing information on the knees, hips, spine and trauma implants that they had purchased in the past year. This information allowed ODUSA to conduct an audit and compare Stable-Technology™ orthopedic products side-by-side with the orthopedic products that LLUMC had been using. What’s more is that, after the audit, ODUSA was able to show LLUMC how they could reduce their orthopedic implant spend by 50-75 percent.
“Not only was ODUSA able to answer all our questions about alternative products – the who, what, where, when and how – they also made the process transparent,” shares Dr. Botimer. “For the first time, everyone was on the same page about the cost of these implants and able to see that there was a better way to acquire them—a way that was in the best interest of the patient, the physician and the hospital.”
One of the most important factors in transforming LLUMC’s orthopedic implant supply chain was the enlistment of key doctors and stakeholders into the strategy. Making a compelling business case for purchasing Stable-Technology™ products directly from the manufacturer at wholesale pricing is one thing. Effectively implementing the process change is another. It requires hospitals and their physicians to work together. Without their collaboration, cultural change is ineffective. This is because, as Peter Drucker astutely noted: “Culture eats strategy for breakfast.”
Transitioning from Subjective to Objective Value Analysis
Once the LLUMC leadership team (which included hospital administrators and physicians), embraced that they would be able to save millions of dollars and still be able to choose from a large variety of high-quality, Stable-Technology™ implants, ODUSA was given the approval to proceed with implementing their ORDT™ process.
A key step in the ORDT™ process required LLUMC’s leadership to appoint an “Implementation Team.” This guiding coalition is made up of carefully chosen change-agents (including physician surgeons) who represent multiple departments and are 100 percent committed to influencing cultural change. To keep the ORDT™ process simple and manageable, ODUSA guided the Implementation Team in developing a plan that had a high-probability of early success.
“After careful consideration, we decided that it was best to start the process with RECON (hips and knees) products. ODUSA helped us to identify several hip and knee vendors who could offer LLUMC functionally equivalent Stable-Technology™ THA and TKA products and would sell them to us directly,” shares Dr. Botimer.
Once the initial Stable-Technology™ category and appropriate vendors had been selected, surgeons were recruited to be part of the Value Analysis Trial (VAT) team to conduct detailed evaluations of the chosen implants. The objective was to compare the Stable-Technology™ devices that LLUMC was currently purchasing with similar, functionally equivalent implants that could be purchased directly at wholesale price points. From there, the VAT surgeons documented their clinical experience and were educated on the economic differences between all the implant options.
After extensive VATs (a total of 61 cases) were performed and evidence-based scientific data was gathered to substantiate the efficacy of each Stable-Technology™, the VAT surgeons made their recommendation to the Implementation Team based on their design and performance preference. From there, ODUSA assisted the Implementation Team to objectively analyze the total cost and total return-on-investment implications to LLUMC for every Stable-Technology™ evaluated.
During the VAT period, the Stable-Technology™ implants used in the trials were purchased directly from three TKA companies and two THA companies. Even though the associated products and instruments were consigned, ODUSA was still able to help LLUMC reduce their implant spend by 39 percent (for each implant) from capped pricing.
Once LLUMC made the decision to purchase the implants and the instruments directly from the manufacturer, the implant price dropped to 59 percent below capped pricing levels (See Figure 2). Forecasted over a 12-month period, LLUMC is on track to reduce their RECON spend by more than $1.2 million dollars.*
“As impressive as the savings are that we’ve experienced, they pale in comparison to the early culture change we are beginning to see unfold. As surgeons and hospital personnel at all levels become more empowered to maintain quality and eliminate waste from the delivery of patient care, a newfound sense of teamwork and work satisfaction has developed. Instead of feeling like victims of change, we see ourselves as initiators of change. Being part of the solution—not part of the problem— feels really good to all involved,” expresses Dr. Botimer.
The Road to Recovery
By learning how to remove the emotion from the implant decision-making and purchasing process and becoming more in- formed of alternative Direct-Access™ sources, LLUMC has begun the transformation from being a subjective buyer to a knowledgeable, objective buyer.
Partnering with ODUSA has enabled LLUMC to re-structure their orthopedic purchasing arrangements so that it’s most advantageous and beneficial to them (the buyer) and their patients, as opposed to favoring the orthopedic companies (the seller).
“The value-analysis process that ODUSA guided us through has given us more control over what orthopedic implants we purchase, from whom we purchase them, and how we purchase them,” shares Dr. Botimer. “It also opened our eyes to the fact that, going forward, we can objectively assess each and every product we purchase to ensure the best cost and quality for our patients.”
While significant reductions to their RECON spend has been very encouraging to LLUMC, they also realize that successfully taking back the OR requires that all surgical disciplines fully embrace a Direct-Access™ purchasing process. And this type of cultural change will take time.
The Implementation Team at LLUMC will continue to work with ODUSA’s on-site mentors to seek out and prioritize other opportunities where they can successfully achieve short-term, value-based purchasing victories. This will also help LLUMC build momentum and establish further credibility so that ODUSA’s process will continue well into the future.
ODUSA is currently working with LLUMC to complete Suture Anchor trials, which is expecting to demonstrate at least an 80 percent reduction once the implants and instruments are purchased directly from the manufacturer. In addition the Implementation Team is beginning the analysis of purchasing other items, like instruments, accessories and disposables on a Direct-Access™ basis.
“Saving money on surgical instruments does not get the attention that implants get,” explains Dr. Botimer. “But since our mission is to improve efficiency in every possible way, we are looking at everything. And the more knowledgeable and in- formed we become, the more opportunity we’ll have to purchase effective, high-quality products at wholesale pricing.”
By strategically bringing change-agents together around the same table, OrthoDirectUSA® is helping LLUMC increase their efficiency; become accountable for the quality and cost of their healthcare services; and regain control over improving healthcare access to their communities.
Thomas (Tommy) Mitchell founded OrthoDirectUSA® in 2008 in response to the growing economic pressures facing the health- care industry. Tommy is a 30 year veteran of the orthopedic industry with hands-on experience in a variety of disciplines. He began his career as an orthopedic sale reps and later established his own highly successful orthopedic device distributorship, which he owned and operated for 17 years. During that time, he represented various technologies in the Sports Medicine, Total Joint, Orthobiologics and Spine markets. Tommy also served in executive management positions for three multi-national corporations as: Director of European Sales for Smith & Nephew Endoscopy, Brussels; President and CEO of US Operations for Atrax Medical Group, a Bermuda-based wound care start-up; and President and CEO of United Orthopedic Corporation USA. In addition, Tommy founded a business development consulting practice, RTW International, Inc., which specialized in emerging medical device companies.
* All cases will be followed and scored according to the AAOS knee society standards.
1 United States Government Accountability Office. Lack of Price Transparency May Hamper Hospitals’ Ability to Be Prudent Purchasers of Implantable Medical Devices. Report to the Chairman, Committee on Finance, U.S. Senate. January 2012. http://www.gao.gov/assets/590/587688.pdf.
2 “Medical Device Intensive DRGs. Orthopedic Network News 17, no. 3 (2006): 2
3 Financial Leadership Council, Enfranchising Physicians in Supply Reform: Best Practices to Achieve Procedural Cost Reduction (Washington: Advisory Board Company, June 2006).
4 Gioe, Terence J., MD, Sharma, Amit, MD, Tatman, Penny, MPH, Mehle, Susan, BS. Do “Premium” Joint Implants Add Value?: Analysis f High Cost Joint Implants in a Community Registry.
5 Clin Orthop Relat Res. 2011 January; 469(1): 48–54. Published online 2010 June 22. doi: 10.1007/s11999-010-1436-z http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3008865.
6 Ford, Ashley. What to watch for in orthopedics in 2013. The Advisory Board Company. The Pipeline: Technology Insights. January 25, 2013.