Medical Devices Hit The Radar Screen. The Journal Of Healthcare Contracting

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Medical Devices Hit The Radar Screen. The Journal Of Healthcare Contracting

  1. 1. Medical Devices Hit the Radar Screen If buyers and sellers don’t check the rising cost of implantable medical devices, the government just might do it for them. By Bill McIlhargey and John Murray (In the Winter issue of The Journal of Healthcare care. Drug-eluting stents would be an example. Contracting, national accounts veteran Bill McIlhargey Driven by innovation at its best, these products tend to pointed out the need for buyers and sellers to get to “yes” have short life cycles, with new technology and prod- when contracting for physician-preference items. In this ucts always one step behind. Obviously, such products article, McIlhargey and John Murray of Premier point live and die on the speed of getting to market. out the consequences of the industry’s failure to do so.) Skill-based. These products are much more evolution- When it comes to healthcare products, physician- ary and deal with incremental changes. They are more preference items capture more than their fair share of technique-oriented, like orthopaedic reconstructive attention, either because of the excitement of break- joints, and rely on one-to-one training and support, through technology or the less exciting business aspects which spawn the supplier/surgeon relations that become of buying and selling. a basis for product dependence. Implantable medical devices are a $14.6 billion In the aggregate, the products resulting from both industry, representing such products as pacemakers, technologies are highly physician preference. Because of heart valves, stents, hip and knee replacements, defibril- regulations, such products demand that suppliers bear lators (ICDs) and a host of other technical marvels. They the responsibility for costly educational support to the are projected to command an 11 percent average annual clinical community. increase in U.S. demand through 2007, according to the Freedonia Group (“Implantable Medical Devices to Why the Attention? 2007,” October 2003). Despite the hype surrounding Implantable medical devices improve the quality of life. these products, however, more and more attention is now Procedures involving vascular stents, reconstructive shifting to the business practices surrounding them, par- joints, cardio defibrillators and spinal instrumentation ticularly their contribution to the high cost of healthcare. have captured the imagination of every physician eager The Journal of Healthcare Contracting/Summer 2004 Central to the discussion is the high SKU price of to become the regional expert for their delivery. With implantable medical devices (keeping in mind that favorable reimbursement policies, hospitals, surgery medical devices cannot be benchmarked against centers and now specialty hospitals are clamoring to be traditional commodity products). To visualize the impact the facility of choice in their area. (The New York Times, of these devices, think of technology employed under the “Barred as Rivals, Doctors See Some Hospitals in Court,” following two platforms, both of which influence the April 2004). However, consistent economic pressure is business dynamics underpinning manufacturers’ go-to- catching up to these “pearls of profit.” Consider: market strategies: According to IMS data (IMS Hospital Supply Index, Plymouth Meeting, Pa.), there is a 10.7 percent com- Pure play. Products dubbed as “disruptive technology” pound annual growth rate on pricing for medical-surgi- bring a revolutionary contribution to the next level of cal products since 2001. Of these products, implantable 36
  2. 2. medical devices represents 89 percent if that person is charged with reducing of the dollar spend and 11.8 percent of overall supply costs. the average growth rate, while the However, it should be noted that remaining products show a 2.6 percent as providers continue to struggle with rate. Most notable are: grafts and fab- the economic pressures of reimburse- rics (23.8 percent), orthopedics (17.5 ment, they are recognizing that supply percent), pacemakers (12.9 percent) chain executives must bridge clinical and diagnostic and therapeutic (11.2 attitudes with economic realities. In fact, percent), although the last includes several hospitals have initiated successful dramatic price erosion of bare metal service line teams, comprised of surgeons, stents, offset by higher priced drug nurses, supply chain and hospital execu- eluting stents. tives, which focus on process and utiliza- The issue for providers is not tion of good comparative information for the increased price of Bill McIlhargey decision making. these devices, but rather, providers’ in- The dominating influence and Problematic ability to quantify resulting control resides with th e Issues their impact on the Before declaring level of care. As sys- physician, partly because it is he or that the healthcare tem insiders agree, a primary con- will she who bears the liability for th e system is moving toward a solution to cern and challenge is surgical procedures in which these the business chal- measuring the quality devices are used. lenges surrounding of care, and then bal- implantable med- ancing that against the perception of the consuming pub- ical devices, we need to have a well-grounded under- lic. This may encourage movement beyond the current standing of the underlying problems. model, which separates fiscal and clinical decision-mak- First and foremost is the issue of liability, which is ing, to one that aligns the two. Unfortunately, we fear the responsibility of the physician, and which is depend- this alignment will require a dramatic increase in finan- ent on the skill they employ during procedures. cial responsibility for the consumer. Second is the dilemma surrounding “best practice,” clouded by the very nature of physician preference as well Why Is This Difficult? as supplier marketing. Equally concerning is the lack of Why is it so difficult to obtain an economic solution for benchmarks for revolutionary vs. incrementaladvances, products that clearly contribute so much to the health- particularly in techn o l o g i e s s u c h a s biologics. care system? One reason is the traditional application of Third are the supply chain implications of The Journal of Healthcare Contracting/Summer 2004 buying and selling practices. The more widgets you buy, implantable medical devices, which are not only unrecog- the greater the buyer’s expectation for a lower price. This nized, but also undervalued by the purchasing communi- is true, of course, only if supply chain dynamics are ty. Unlike other products, suppliers have been required determined and controlled by the purchaser. to control the inventory and instrumentation used dur- But in the case of implantable medical devices, the ing delivery. Providers have grown accustomed to this dominating influence and resulting control resides with service, and in some cases have abdicated nursing support the physician, partly because it is he or she who bears for this activity. the liability for the surgical procedures in which these Fourth, the various components in the healthcare devices are used. Because of this, the purchaser plays system lack alignment in financial incentives. The pay- the role of facilitator –an uncomfortable role at best, ment process has divided the providers of care (hospi- 37
  3. 3. Medical Devices Hit the Radar Screen tals) from those who deliver care (physicians), leading to political process. a struggle for resources and paving the way for specialty Looking further, one can see that years of negoti- hospitals and ambulatory surgery centers to capture the ating with managed care companies have left more lucrative procedures. hospitals with little in the way of margins. In fact, it Fifth, economic buyers are concerned about the is our belief that threats from hospitals to walk away acquisition and consolidation of start-up medical device from the negotiating table have led insurers to grant companies, providing a never-ending supply of new products yearly cost increases to hospitals, effectively making from fewer companies, i.e. those with deep pockets and the insurers dependent on the business prowess of finely tuned distribution channels. the hospitals. This would be a major contributor to Sixth, the frustration levels of the buyer and seller the double-digit rate increases for health insurance have polarized the two. Buyers’ lack of familiarity with, experienced in the past several years by corporations and training on implantable medical devices make them and consumers. ill equipped to balance their administration’s cost con- Would it then be far fetched for this industry, given cerns with the clinical needs of the staff. At the same its regional strengths, to pursue direct supplier contract- time, supplier’s ability to align with surgeons and win ing with manufacturers of implantable medical devices? continual price concessions has shielded many of them What’s more, why wouldn’t large corporations want do from the ever-deepening financial plight of the health- the same thing? Consider the $5.1 billion cost projected care industry. Meanwhile, consumed by the demands of for this year’s healthcare claims of General Motors, their investors, sup- the largest private pliers face mounting provider of healthcare pressures to grow First and foremost is the issue of benefits in the United margins. liability, which is the responsiblity States. These issues pose For our health- formidable barriers of the physician, and which care system to between buyers and is dependent on the skill they venture down this sellers, with danger- ous implications. e mploy during procedures. path could be much more painful than the dilemma in Where Will this Lead? which we currently find ourselves. Supplier margins What will happen if buyers and sellers fail to build a would probably be the early victim, although it is con- business model for implantable medical devices, which ceivable that suppliers could gain early efficiencies by allows both of them to meet their objectives? At some partnering more closely with consumers. However, in point, an outside influence with a financial interest will the long run, we believe the market would eventually step in. revert to an all-play, all-vendor situation, which The Journal of Healthcare Contracting/Summer 2004 The government would seem to be the likely can- would then demand higher SG&A expenditures from didate, considering that it contributes more than 50 the suppliers. Mean while, buyers will have abdicated cents of every dollar spent on healthcare. Given the profitable margins on lucrative procedures, while precariousness of the Medicare Trust Fund, it is clear further distancing themselves from their physician that CMS – the agency that administers Medicare – staffs. has the ability and the motivation to “reset” the The final stage of this economic cascade could come process, perhaps interjecting a bureaucratic method- in the form of “passed down co-payments” to the con- ology that could seriously jeopardize the productivity sumer – you and me. And does this not eventually lead to needed in a competitive system. Dramatic costs tiered care, which is delivered based on the individual’s increases during the past couple of years have made ability to pay? healthcare costs a prime target in the 2004/2005 Continued on Page 40 ➬ 38
  4. 4. Medical Devices Hit the Radar Screen ➬ Continued from Page 38 Solutions We believe that solutions do exist that salvage existing parameters, and that a buyer/ seller model can be created to embrace the multiple influences that one finds with implantable medical devices. The first is the development of benchmarks. Evaluating the cost of quality has been a moving target that avoids our best efforts. Yet devising measurable quality standards is doable – not across medical conditions, but rather by specific clinical treatments. For example, costs and good physician relations. the Hospital Quality Incentive Demonstration Project Finally, all employers should “set the stage” for launched by CMS and Premier has identified five responsible decision making by their health consuming conditions, four of which involve implantable medical workers. Amending the Internal Revenue Code devices. This effort rates hospitals by individual (Medicare Prescription Drug and Modernization Act – performance and then financially motivates them December 2003) provides consumer tax advantages to to a higher performance. This is a positive step save for individual care needs. The creation of Health toward aligning incentives, albeit between only two Savings Accounts (HSAs) is a direction toward consumer components. financial responsibility. For effective implementation, it The second solution is subsidizing medical mal- is imperative for employers to not just communicate practice insurance. Physicians continue to be finan- available options, but also educate consumers on the cially challenged by ever increasing premiums, and impact of their decisions. are looking for relief. This is a clear opportunity for Readers are free to agree or disagree with our partnering. Provider organizations such as HCA, observations. However, realizing that we must along with individual facilities like Grand View sustain the enormous contributions that implantable Hospital in Sellersville, Pa., and Akron General in medical devices have made to improved health, let Akron, Ohio, are developing and/or offering liability us at least agree that our healthcare system coverage through risk retention groups and captive- requires more attention and involvement from all insurance companies. Such an approach can help its constituents. motivate physicians to participate in comprehensive The Journal of Healthcare Contracting/Summer 2004 risk-management and quality improvement pro- Bill McIlhargey is currently consulting suppliers grams. Furthermore, make no mistake about it: This and buyers in the area of physician-preference has the far reaching potential of rebuilding surgeon contracting. He spent the last 12 years developing relations, long at issue in building collaboration with strategies and teams for national accounts with DePuy administration. and Smith & Nephew. He can be reached at A third solution involves intensifying collabora- 978/500-9666 or dodmcilhargey@comcast.net. tion between the hospital and its physicians. Of ben- efit to the physician is better patient outcomes/satis- John Murray negotiates contracts for faction, more efficiency for his or her practice and, of cardiovascular and surgical supplies as vice president course, greater income. Benefits to the hospital for Premier. He has spent over 20 years in the industry include increased market share, reduced procedure from both the provider and GPO perspectives. 40

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