As the industry moves toward value-based care, hospitals are under increasing pressure to confront skyrocketing supply costs, consisting heavily of physician preference items (PPI) such as hip and knee implants and cardiac stents. But hospital leaders are finding that it’s hard to manage what they can’t see.
Ortho manufacturers’ nondisclosure agreements have hidden the costs of medical devices, leaving many department heads, surgeons and patients in the dark when it comes to understanding the true cost of PPI. As a result, the same implant can be sold for a different price to another hospital. The price of a primary knee implant, for example, varies from $1,800 to more than $12,000—with very little difference in patient outcomes.
While it’s tempting to point fingers, those responsible for purchasing decisions only manage one small piece of the puzzle. Procurement and supply chain leaders negotiate with sales reps and may use formulary or payment-cap strategies to manage and standardize PPI. While they may get a five to 10 percent reduction, the gains are negligible and vendors still often have influence over physicians. Furthermore, pressuring physicians to choose less expensive options is also unlikely to work. Surgeons not only bring in considerable revenue for hospitals, but their preferences have more to do with vendor alignment and product familiarity than cost-consciousness. As NPR recently reported, fewer than 25 percent of orthopedic surgeons could correctly estimate the cost of an implant. Moreover, under the fee-for-service model, a surgeon is paid the same fee, regardless of the cost of the device used.
The forward-thinking CFO can, however, take steps to tame the PPI monster and regain control over costs by demanding price transparency. Additionally, he or she can and create economic alignment through shared savings or episodic gainsharing programs, whereby both the hospital and its surgeons are financially motivated to drive down costs.
That said, driving down supply costs is one of the most important issues facing today’s hospitals, and you don’t have to go it alone. Implant Partners can provide a road map that will help you evaluate and determine which economic model is right for your organization, establish baselines and track progress and payouts.
How could your organization benefit from preference items that are not just physician preference, but patient and hospital preference too?