CASE STUDY: One hospital’s quest to drive down the pricing of total joints

When HonorHealth leaders were looking for ways last year to decrease spending, the joint-replacement service line stuck out as a big opportunity.

The procedures are one of the Scotts-dale, Ariz.-based system’s most popular—and lucrative—service lines and make up a significant percentage of supply chain costs, which account for nearly 40% of its $1.7 billion in revenue, according to 2016 financial data from Ernst & Young. But HonorHealth was paying more for parts than its competitors.

“If you haven’t been focused on the cost of your implants and the cost of your supplies, you get a natural creep up—we were simply paying too much. The prices we were paying exceeded what we believe is the market price,” said Alice Pope, chief financial officer at HonorHealth, which operates five hospitals in Phoenix and Scottsdale.

The system worked with Premier, the large group purchasing organization and consultancy, to figure out how its approximately 15 implant vendors compared to each other in costs. They found a lot of variability.

Costs were “anywhere from 10% to 20% higher than we should’ve been at price point,” said Timothy Miller, vice president of procurement and supply chain at HonorHealth. He added that eight of the vendors accounted for 80% of total implant costs, which are about $20 million.

Over several months, HonorHealth leaders worked with surgeons and vendors to negotiate better prices on implants. That effort was successful, to the tune of $1.5 million in annual savings.

HonorHealth is typical of providers nationwide that see joint-replacement surgery—usually a secure money-making machine for hospitals—as a prime opportunity to generate savings, especially as they face shrinking margins with declining reimbursement and patient volumes.

Tackling the wide variability in costs for joint-replacement surgery is a way to get ahead financially.

More than 1 million joint replacements are performed every year in the U.S., and by 2030 that number is expected to increase to more than 4 million as the number of senior citizens grows.

“Hospitals are looking for where they can trim. Supply costs are the largest costs, except labor, for a health system. People would much rather cut supply than cut someone’s job, period,” said Rob Austin, a director at Navigant.

And the largest portion of costs for joint-replacement procedures are supplies, specifically implants, according to a recent analysis from Premier. There is also significant variation in the cost of those expensive implants.

Premier found that among 350 hospitals, the average cost of primary knee implants was $4,464. Yet 50% of the hospitals paid between $4,066 and $5,609 on the devices.

The same group of hospitals paid an average of $5,252 for primary hip implants, with 50% paying between $4,759 and $6,463.

According to Premier, the 350 hospitals could save $23.7 million on knee implants and $19.1 million on hip implants if they paid the same amount as the top 25th percentile of hospitals. The cost data came from Premier’s database of 1,100 hospitals.

But convincing surgeons to switch the vendors and devices they are used to isn’t always an easy sell.

HonorHealth’s surgeons were initially skeptical of the data that showed their implant costs were more expensive than others in the market. The surgeons have close relationships with their vendors, and it was hard to come to terms with the fact that they could be getting a bad deal.

“Even if the data shows there is significant variation, they still like the supplier and the representative, so they come up with reasons to explain the (cost) differences. We had to work through that,” Miller said.

HonorHealth leaders spent a lot of time with the surgeons answering all the questions they had about the data until they trusted it.

“As long as your data is good, they come around, and they will understand,” Pope said.

Then, HonorHealth approached the vendors with the data so they could negotiate down prices. All of the suppliers eventually agreed to new contracts with more competitive prices, Miller said.

The easy accessibility of robust data means hospitals can have in-depth cost conversations with their physicians, said Todd Nelson, director of partnership relationships at the Healthcare Financial Management Association.

But the conversations can be broader than just the implants themselves. Premier found wide variation in total costs for the procedure, ranging from $5,000 on the low end to a high of $30,000. Anesthesia administration, operating room staffing and bone cement use also factored greatly into the wide swing in prices.

Premier found that even though local anesthesia is less expensive and has a lower risk of infection for patients compared to general anesthesia, it was only used for 22% of total joint patients. More than half—52%—received general anesthesia; for the remaining 26%, the type of anesthesia was unspecified.

Hospitals also struggle to have lean staffing in the operating room. According to Premier, the highest-performing hospitals—those in the 25th percentile—spent about $2,000 on labor in the OR per procedure compared with the lower-performing hospitals—those in the 75th percentile—that spent more than $4,600 on operating room staff.

Hospitals could also save money on bone cement, which is used to hold the implant against the bone, as well. Research showed that bone cement infused with antibiotics doesn’t improve patient outcomes, and it costs 120% more per patient compared to bone cement without antibiotics.

Here, too, it all comes back to presenting doctors with reliable data.

“It’s a hard sell for physicians in some cases. They are taking every possible precaution to prevent infections,” said Robin Czajka, service line vice president of cost management at Premier. “However, if you look at the data, it doesn’t support better outcomes, so when we are in there and speaking to physicians about increasing their use of non-impregnated bone cement, you have to bring in the outcomes data.”

As hospitals get better at collecting and analyzing data and, importantly, ensuring that financial executives and doctors are talking the same language, the easier these conversations become, Nelson said.

Still, the conversations are not widespread and tend to happen at hospitals that are strapped financially, in competitive markets or have a healthy penetration of value-based contracts.

“As long as its fee-for-service for a knee surgery, the hospital is going to be more focused on the revenue they get,” Austin said. “Even though it’s an expensive service line, it’s generally a profitable service line—usually the most profitable service line” for a hospital.

On a positive note, the Premier analysis found that median length of stay for joint replacements has fallen, during a five-year period, among 279 facilities from 3.2 days to 2.3 days.

“That is a direct result of the Affordable Care Act and the requirement to publicly report data and holding back payment where you don’t meet certain quality objectives,” Czajka said.