Seeing Device Costs Clearly

Research by Bob Kehoe

ABOUT THIS SERIES

H&HN has created this exclusive yearlong series called Fiscal Fitness with the support of the VHA. Finding ways to rein in expenses without sacrificing quality and safety is imperative for hospitals as they struggle to maintain financial viability in a shifting payment system even as their operational costs continue to climb. Over the next several months, we'll look at everything from the supply chain to pharmacy, IT and more. Follow the Fiscal Fitness series in our magazine and in our e-newletter H&HN Daily.

It's tough to hit a target you can't see. And to a large extent, that's what hospitals and health systems face in trying to manage implantable medical device costs, a leading supply expense category.

A longstanding inability to obtain comparable pricing information on IMDs has hampered providers' negotiating power with manufacturers, adding untold costs to care. Significant costs are incurred in the manual, and often inaccurate, capture of IMD data during surgical procedures, which causes higher downstream costs in billing, accounts payable and other areas. Hospitals have done a better job of engaging physicians in value analysis, product standardization and other efforts to reduce IMD-related expenses, yet significant savings opportunities remain.

To address these sometimes daunting challenges, hospitals need a clear strategic vision supported by senior leadership.

"Hospital executives must play a strategic role in getting the best competitive price for products used," says Jake Groenewold, senior vice president of supply chain for University HealthSystem Consortium, Chicago. "More important and tied to that is how we manage clinical care to give us the best clinical and financial outcomes."

The U.S. Government Accountability Office in January issued a 31-page report detailing the substantial variation in what hospitals paid for selected IMDs between 2004 and 2009. The study found variation in prices for identical cardiac devices across three product categories — from $500 to more than $6,000 per device — confirming what many in health care long have known. Providers have limited bargaining power on IMD prices because they often can't access comparative data.

Lani Berman, vice president of performance services with Irving, Texas-based VHA, notes that group purchasing organizations have taken aggressive steps over the last several years to bring hospitals more powerful comparative pricing data, including refusing to sign gag clauses in vendor contracts prohibiting them from sharing pricing information. It's essential, she says, that hospitals leverage as much data as possible to educate and build strong partnerships with their physicians to better manage IMD-related costs.

Value analysis teams comprising physicians, nurses and materials management directors must be provided with this data along with senior leadership support to effect change and target effective strategies for sustained IMD-related cost savings.

"Value analysis teams need to target key line items that create the largest variances and demand better pricing. They can look at capping pricing by component, category and procedure. They can look at capping pricing in tiers for premium technology," Groenewold says.

McLeod Health, a five-hospital independent delivery network in Florence, S.C., has been leveraging data to strengthen its value analysis teams. It's also focusing on reducing upselling by vendor sales reps and automating burdensome tasks such as manual data entry in the operating room. The efforts have led to steady progress and savings.

"We've had value analysis teams in place for some time now, but they only have become functionally strong over the past year and a half. We've invested more time and confidence in those teams to enable them to help us do our jobs in managing supply costs," says Dale Locklair, McLeod Health's vice president of procurement and construction.

The organization also has instituted a process in which all IMDs must be preapproved by the value analysis team before the products can be used. Locklair says this step prevents upselling by sales reps before devices ever hit the operating table. The program is not 100 percent successful, but tremendous strides have been made, he notes.

Jamie Kowalski, a Milwaukee-based supply chain management consultant, underscores the importance of this issue to the bottom line. Overall, total supply chain-related costs consume about 50 percent of hospital operating budgets, he says. In Senate testimony in 2007 on lack of price transparency with IMDs, some hospitals reported IMDs accounted for 40 percent or more of their medical supply expenses.

Case study

Virginia Commonwealth University Health System
Richmond, Va.

Tim Wildt, director of materials management at VCU Health System, didn't hesitate when his GPO asked him to participate in a blind data analysis that would show where his hospital stood in the marketplace on prices paid for cardiac rhythm management supplies and total spend. "So many times we go down this road not knowing what the competitive marketplace is outside our facility, so this was an opportunity to gauge what was going on in the marketplace," Wildt says. The CRM program that began with five GPO members now has more than 40 organizations participating and has generated valuable data. One key finding: No statistically significant correlation was found between market share or total spend and line item price. Wildt learned that his institution didn't have better pricing than many of its peers. Still, the data helped the system implement a capitation strategy with its three CRM vendors. "It's been fantastically successful," Wildt says, adding that VCU Health System expects to save $800,000 yearly by using the CRM data to negotiate more effectively for these products.

Case study

St. Luke's Medical Center
Boise, Idaho

As part of a five-year gainsharing program for cardiology, cardiac surgery and vascular surgery, St. Luke's Medical Center installed analytics software in its cath lab and cardiac operating rooms in 2007. The system tracks costs, utilization, quality and productivity. The goal was to determine appropriate cost savings while maintaining the highest-quality supplies and providing a strategy for short- and long-term business objectives. Once the goals were met, cost-saving opportunities were shared with key stakeholders. St. Luke's then established baseline practice patterns for cost, clinical and quality indicators. An internal heart request-for-proposal committee also was established, comprising physicians, hospital executives and supply chain leaders with oversight from the consulting arm of its group purchasing organization. Savings from the RFP began accruing in 2009, yielding more than $3.6 million since then. "We had aggressive negotiations across all service lines and full committee involvement from department leaders, materials management and medical staff," says Tonja S. LaDue, divisional director of St. Luke's Health System heart and vascular services. "Cardiologists and surgeons were very engaged and continued to accrue a high percentage of targeted savings year after year."

Driving out manual processes and cost

Capturing data on implantable medical devices used in surgery remains largely a manual task fraught with inefficiency and high costs. This can introduce errors that can bring lost revenue opportunities, excessive inventory and labor costs, and downstream problems in billing and other areas for hospitals and vendors.

"The health care market is losing more than $5 billion every year due to the inadequacy of current solutions in the implantable device supply chain," says Bruce Johnson, CEO and president of Global Healthcare Exchange, Louisville, Colo.

McLeod Health, Florence, S.C., knows the drawbacks to manually managing IMD data in the OR. And it's a progressive health system when it comes to IT, winning the 2010 American Hospital Association and McKesson Quest for Quality award. Dale Locklair, vice president of procurement and construction at McLeod Health, notes that in a single total knee replacement case seven different product bar codes could be keyed into a computer — a billing process that takes about 20 minutes.

"Typical error rates for manual data entry, studies show, are one error in every 300 keystrokes or 3,300 errors for every million keystrokes. The error rate for bar-code scanning is greatly reduced to one error in 15,000 or one error in 36 trillion keystrokes," Locklair says, adding that a portal has since been developed through which IMD sales reps can now enter information directly into McLeod Health's requisition system, sharply reducing data entry time in the OR.

Locklair is working with GHX as a beta site to implement a system that will automate repetitive manual data entry tasks.

Content by Health Forum, Sponsored by: VHA.