No matter your position within your company, it’s imperative that you consider how your work impacts the value created by your product. I say this in general terms, because first, it’s a basic business principle that applies to all industries, yet it can be lost in the day to day. Second, it’s the reality for success in orthopaedics today.
Committees have formed at hospitals and surgery centers across the U.S. with the mission to determine whether your product creates clinical and economic value for their systems. Product adoption will take teams of teams—contract manufacturers, suppliers and service providers included—to meet today’s purchasing demands.
John Pracyk, M.D., Ph.D., Franchise Medical Director for DePuy Synthes Spine, provided the proof behind that message during his OMTEC® 2017 Keynote, describing how surgical meritocracy has evolved into medical device meritocracy.
Dr. Pracyk’s keynote was highly received due to his direct, objective and opportunistic view on complex industry shifts. He is a past ORTHOWORLD author, and I found that his writing follows the same vein. Whether you attended Dr. Pracyk’s keynote or not, I share this article from ORTHOPRENEUR® in October 2014 with the conviction that we can all get smarter about how decisions are made to purchase our products.
Surgeon Leadership Essential to Influence Implant Purchasing Committees
ORTHOPRENEUR, October 2014
By John Pracyk, M.D., Ph.D.
Changes in hospital purchasing decisions directly impact the surgeon’s ability to freely select surgical implants. Often, surgeons find they may no longer have access to the implants they have always used, because of the healthcare system’s efforts to streamline purchasing decisions. One strategy is to reduce the hospital’s absolute number of “surgeon preference items,” such as implants handled by the facility. This reduction in implant variation drives efficiencies on a variety of levels.
The Changing Landscape of Hospital Purchasing
Hospitals realize that they clearly spend too much when it comes to purchasing implants. As a result, value analysis teams (VATs) or committees (VACs) have formed to study, review and ultimately decide which implants will be allowed into the hospital, and at what specific price point.
The traditional sales model involved a close relationship between the medical device sales representative and the surgeon. That relationship no longer drives purchasing decisions, as VATs decide the selection of implants from which the surgeon may choose. This formalized process serves as a checkpoint to prevent the surgeon from simply selecting a device based on personal preference, because that decision-making usually costs the hospital in the end. The latest device often commands the highest price, as manufacturers try to increase their production numbers through price increases each and every year.
Surgeons often get a letter from the hospital informing them that the device they have used for years may no longer be available. Naturally, they’re upset and left wondering, “Why is this taking place?” Once they realize that it’s no different than the constantly-changing number of drugs available on the hospital formulary, its starts to make sense. The pharmacy & therapeutics (P&T) committee’s mission is to maintain the formulary for the hospital. By way of analogy, the VAT’s mission is to maintain a portfolio of surgical implants used at the hospital and monitor its effectiveness.
Expectations and responsibilities placed upon surgeons are now even greater. If surgeons want to trial a new product, they need to be able to cite the implant’s clinical benefits, along with the economic value that the product delivers. Is the product any different than others that are already “on contract” with the hospital? The preference product runs the risk of being commoditized—evaluated on price alone—if it lacks a unique differentiating factor.
Each implant should have a balance between clinical effectiveness, quality, durability and intrinsic value. Surgeons are being approached by sales representatives to help develop a “value proposition” for a particular device. Forward-thinking manufacturers already develop return on investment (ROI) analytics for larger capital purchases like MRI and CT scanners. These clearly illustrate how the product can either enhance hospital revenue or save the healthcare system money, while simultaneously improving clinical outcomes for the patient. These ROI analytics are becoming more commonplace for surgical device implants. Some manufacturers even provide computerized tools that allow the hospital to plug its own numbers into a spreadsheet to run various financial scenarios. Manufacturers that can undeniably substantiate their value proposition will reap the rewards of greater market share. Some hospitals go a step further to request a trial period for the device to determine if it truly performs as described, from both the clinical and financial perspective, under real-time market conditions.
Value Analysis Team
These teams usually comprise a supply chain vice president, an OR manager, many different purchasing agents and a clinician. Typically, a physician or surgeon is a permanent member to reconcile clinical utility with purchasing decisions. As the situation arises, other specialists are temporarily invited to serve as subject matter experts for a particular purchasing decision that directly impacts their medical or surgical specialty. For example, it is not advisable for the cardiologist to decide orthopaedic implants, nor for the neurosurgeon to determine which cardiac stent is best. The surgeon mindset usually gravitates to these positions, so as VATs are established, surgeons are often at the front of the line to secure a seat.
The fundamental objective is to drive quality by reducing variation. This is a manufacturing definition of quality, now being applied to healthcare. It’s typically accomplished through two methods:
Develop a capitated price structure to determine what the hospital will pay for each implant.
Then, if needed, reduce the number of products available through manufacturer “consolidation.”
It’s not all one-sided, as manufacturers can benefit substantially from this situation. If they can deliver exceptional patient outcomes and service at a competitive price, they will capture the lion’s share of business. Some manufacturers may opt out altogether if they are not guaranteed a certain percentage beforehand. Others are more open-minded and will voluntarily participate, in hopes the hospital will use their product preferentially. Large, aggregated manufacturers may offer global packages across various platforms, including cardiovascular, general surgery, orthopaedics, neurosurgery, pain management and even hospital equipment, such as hospital beds and furniture. The economies of scale of such offerings are certainly compelling, and may place smaller manufacturers at a competitive disadvantage. One small spine implant manufacturer has begun to offer warranties with its products in order to compete.
If the savings are not realized, then the offering can be narrowed down to two or three manufacturers through consolidation. However, there is a delicate balance to achieve. Curbing competition too much can have an upward pressure on prices, as an unintended consequence of only a few limited manufacturers.
Integrated Delivery Networks
Larger healthcare systems or integrated delivery networks (IDNs) are also changing the dynamics of purchasing behavior. Manufacturers may no longer sell to the surgeon or the hospital, but the whole network system. This is no different than the “enterprise selling” that characterized corporate sales, such as IBM and Xerox. The pharmaceutical industry has restructured its sales force from the “detail” representative that called upon individual physician practices, into “key account” representatives that work with the pharmacy and therapeutics committees in hopes of getting their drug onto the hospital formulary. In some ways, both the medical device industry and pharmaceutical industry are now operating in parallel universes.
This begs the questions: Who is the customer? Is it the healthcare network? Is it the hospital? Is it the surgeon? Shouldn’t it be the patient? The answer is collectively yes to all of the above. If the hospital is functioning more or less independently and not part of an IDN yet, then the traditional sales model focusing on the relationship between vendor and surgeon may still apply. Alternatively, with larger economies of scale, an IDN seeks uniform pricing across all hospitals. The local sales representative is no longer in control of that, and the medical device manufacturer must develop the “key accounts” enterprise approach in order to sell to the entire enterprise.
To achieve the overall goal of successfully responding to these purchasing changes, surgeons need to be included in the process and likewise think carefully about what they’re doing for the hospital. Surgeons rarely know their “contribution margin” or how much profit they produce for the hospital on a per-case basis. On the other hand, the hospital knows precisely how much surgeons make for them, but are hesitant to share that information for fear that it can empower the surgeon and afford him a decided advantage in negotiations.
However, if the hospital is losing money, the surgeon needs to know the contribution margin per case to work with the hospital, correct the situation and hopefully ensure financial viability for the organization. The low contribution margin may be due to a poorly-negotiated contract with the insurer. That is not the vendor’s fault, but many hospitals try to balance their budgets on the backs of the manufacturers, which is clearly inappropriate. Today, hospitals are becoming more transparent about sharing financials with the surgeons, as they are realizing the need to work closely with each other to meet economic challenges of declining reimbursements.
With an influx of uninsured and underinsured patients that reimburse at a lower rate, more economical implants that still meet the standard of care for quality and durability are in higher demand. The challenge is for device manufacturers to develop a range of products. This is illustrated perfectly when a 65-year-old weekend warrior who needs a hip replacement is contrasted to the 80-year-old grandmother who is less mobile and active. Obviously, you’re looking at two different hip implants. One may be a high demand, more durable product that will need to last for decades, whereas, the other will have lower demand and durability requirements. Naturally, these should be at very different price points.
The changes in hospital purchasing methods now reflect a multitude of stakeholders who must learn to work together to truly create value for the system, by realistically assessing needs, features, volume and durability when making purchasing decisions. It simply cannot stand on price alone. Like anything else, if surgeons want a voice in the process, they need to step up and become involved in these new processes and committees to ensure that their patients' best interests are represented equitably.
Through flexibility, collaboration and transparency, surgeons can work with their hospitals and manufacturers to successfully respond to these changes in purchasing and procurement.
John Pracyk, M.D., Ph.D. is currently Franchise Medical Director for DePuy Synthes Spine. At the time of publication, Dr. Pracyk's titles included neurological surgeon, strategic healthcare consultant and neuroscience program architect.