While hospital systems’ responses to the intensified healthcare environment will continue to evolve in the form of new strategies, one thing is clear: cost and quality will filter all decisions. This was the critical message from the OMTEC® 2018 opening Keynote Panel of hospital decision makers and industry advisors.
Our panel consisted of:
Gloria Graham, DNP
The panel addressed myriad topics that you may expect, including pressure from public and private payors, bundled payments, value analysis committees and outpatient surgeries. Through the hour-long discussion, three takeaways continued to surface:
- Hospital systems are increasingly more sophisticated from operational and supplier standpoints.
- Hospital purchasing priorities are highly focused on value—quality.
- Hospital purchasing decisions are complicated.
No matter your titles and responsibilities, as a professional within the orthopaedic industry, we believe that these takeaways offer you important reminders of hospital actions and priorities.
Takeaway #1: Hospital systems are becoming more sophisticated from operational and supplier standpoints.
The panel discussion opened with Mr. Rajpal of L.E.K. stating that the firm continues to see a maturation of business discipline from hospitals, particularly those that he calls progressives—large hospital systems and academic medical centers. This is important, because progressives represent 46% of hospitals and 70% of U.S. hospital spending. Mr. Rajpal’s comments and these numbers come from L.E.K.’s 2016 Strategic Hospital Priorities Study, which was based on interviews with nearly 200 hospital executives and which was detailed in the March 2017 issue of ORTHOKNOW.
We provide this context for two reasons. First, it’s a good reminder for you to consider: who are your customers, or your customers’ customers? How fast can you expect your hospital customers to respond to the evolution of value-based healthcare? How much purchasing power do they have? And what does that mean for your business? Second, Mr. Rajpal’s fellow panelists—all from progressive systems—echoed his comments through their examples and stories.
These hospitals are focused on standardization of processes and vendors, utilization of data and analytics, consolidation and integration of alternative sites of care and finally, greater adoption of value-based purchasing and alternative purchasing models.
When asked by Dr. Pracyk who is positioned to win in today’s world of value analysis, Mr. Rajpal responded, “We are seeing a change in behavior, but the pace of change is different across systems. Progressives are changing their behavior more rapidly; they’re recognizing that accountability is critical and actually beneficial.”
Mr. Rajpal mentioned that the shift to value and accountability is now being done voluntarily by various health systems, as they are seeing the true values (no pun intended) and benefits from monitoring cost and quality. Take Mr. Slunecka’s Avera Health, for example: a $2 billion Integrated Delivery Network (IDN) that operates over 300 sites of service. “When we bundled orthopaedics, one of our community hospitals made $1 million on the bundle. We’re all in on bundles, especially in orthopaedics. We’re finding that cost savings isn’t in devices; it’s in managing how much physical therapy a patient needs, or how many days they spend in skilled nursing or rehab facilities following surgery. If a device costs an extra $100 but saves a day in the hospital, or it saves a week of physical therapy, I’m more than happy to pay that extra cost. But it has to be outcome-based. You have to show me.”
This brings us to Takeaway #2: Hospital purchasing priorities are highly focused on value—quality.
Hospitals and surgeons believe that reduction in variation and the addition of standardization will correlate to an increase in quality. This heightened focus, which includes utilizing data and consolidating vendors, is imperative for orthopaedic manufacturers to remember because it will drive decisions like purchasing implants with the best patient outcomes and determining whether surgeries will be performed in a hospital or surgery center.
And while hospitals want you to come armed with data on your device, they’re collecting their own.
One of the ways that surgeons and practices reduce variation is through use of data. “Electronic medical records give us data we’ve never had before,” Mr. Slunecka said. “In the past, all of the information on how a doctor performed surgery was buried in a paper record on a shelf in some dusty storage room. It was hard to evaluate how well a doctor performed surgery with one device compared to another. Now that data is showing how much variation in practice exists; it opens up whole new opportunity for reducing costs. After we’ve done everything else to reduce costs, we’ve concluded there is only one other way to do it and that is to reduce variation in care.”
Ways that Avera Health, Slunecka’s IDN, plans to accomplish that is by changing the way it incentivizes its specialists incorporated in Accountable Care Organizations (ACOs) and by boosting its number of care coordinators and case managers to aggressively manage patients post-operation. Avera is building a $140 million orthopaedic hospital that is strategically positioned near hotels in order to discharge patients in a timely manner, while keeping them in close proximity to hospital staff.
Value-based purchasing, alternative payment models and ACOs are of the highest priority for many hospitals. “This is what’s driving us,” Slunecka said. “We are completely organized around these. All of my orthopaedic robots are sitting off to the side; we’ll deal with them later. Right now I’m focused on getting ACOs functioning and my EMR paid for.”
Dr. Yates mentioned that cost is still driving the conversation, because quality remains hard to measure. However, that will change. UPMC has invested more than $100 million in deep data and informatics. Dr. Yates’ take-home message for the audience was that he expects that systems will soon use big data, health system-specific registries and patient-reported outcomes data to make decisions. “As we get into nine to 12 months results of patient-reported outcomes, we may see a delineation of quality from one prosthesis to another that we’ve never been able to measure before. As that becomes more robust, you’re now competing at that quality level where you’ve never competed before.”
Dr. Graham summed it up in simple terms: when variation is reduced in devices and in practices, you also reduce variation in outcomes. “This is exactly what every hospital and facility is driving toward, improving outcomes. This is key work going on in facilities across the country today.”
Takeaway #3: Hospital purchasing is complicated.
While the decisions of VACs are a yes or no answer, their judgments of your product often aren’t as black or white. Dr. Graham, who serves as a Clinical Value Analyst within the division of Contracts & Value Analysis for Supply Chain Management at Cincinnati Children’s Hospital Medical Center, shed light on the process and encouraged manufacturers to connect with individuals within the hospital who have positions like hers.
In terms of VACs, Dr. Graham explained that hospitals’ purchasing contracts are set up based upon different portfolios and different service lines within their organizations. While many purchases are negotiated by Group Purchasing Organizations (GPOs), VACs will occasionally enter into “local negotiation” with a manufacturer or vendor, especially if the facility has unique needs—like in pediatrics, for example, when a manufacturer or hospital supplier cannot address all that is needed. Most of the time, contracts are signed through GPOs as single-source awards (one manufacturer awarded a contract) or even dual- or multi-source awards (two or more manufacturers awarded a contract). If a bundle is instituted (for example, products for orthopaedics, neurosurgery and cardiology), purchasing needs to perform a cost benefit analysis of breaking the agreement.
“We do have some room to play, as every GPO is different,” she commented. “There is a certain percentage you want to maintain buying through the contract.” The more that hospitals buy through contracts and GPOs, the better the reward systems, pricing and opportunities will be.
Dr. Graham described the purchasing matrix as a “shell game,” meaning that VACs must take into account the impact of one device change. “If I move this shell, what happens to the other shells and how does that work? Obviously, our goal is to provide what we need for the patient, but we have to take into consideration all of those different perspectives when we’re making those decisions for the organization. It is not simple at all.”
Conclusion: Predictions and Future Forecasts
The OMTEC panelists were asked to provide a takeaway to the audience of OEMs and suppliers. Their responses were diverse.
Dr. Graham pointed to the changing relationships between hospitals and OEM sales reps. She described how these relationships have evolved, for the better, over the last decade. The past was the “trunk stock” days, in which an OEM sales rep would get products out of the trunk of his car, go through the hospital’s back door and straight to a particular surgeon. While this method worked for some time, it also led to issues in quality and patient safety. “Leave it in the trunk,” Dr. Graham said, when describing what these relationships should look like going forward. “Come through the front door; seek out the VACs and individuals who are working with the supply chain and with clinicians.”
Mr. Slunecka envisions a future where GPOs become obsolete. “As health care systems become $20 or $30 billion entities, they are in a much better position to negotiate their own prices than to work through traditional GPOs. That middle group goes out. I think the distributors are going to get whacked. We are going to go straight to Johnson & Johnson and Zimmer Biomet to buy direct.” He also said that hospitals and health systems may look into doing their own manufacturing.
In addition to the integration of big data, Dr. Yates says the use of biologics is the next paradigm jump. Part of that is cartilage restoration; part of it is biological (e.g. nonmetal) implants. In addressing whether the manufacturing supply chain may be altered in the future, Dr. Yates said that biologics is an area where he could see hospitals rolling up startups and bringing manufacturing inhouse.
Mr. Rajpal sees a greater opportunity for suppliers. Year-over-year increase of price pressure will accelerate for companies, according to Mr. Rajpal. He described a scenario in which OEMs are forced/pressured/asked to shift further downstream to assist hospitals. As those core competencies shift, there are more opportunities for suppliers to examine the way they cater to their customers. “That is becoming a bigger and bigger differentiator as we move forward. … Strategic scale is what matters. Understand what drives that strategic scale for OEMs. That may mean that you no longer say you’re a one-stop-shop and you really become a one-stop-shop in a specific product platform or service line. That is an example of strategic scale.” Mr. Rajpal also advised that OEMs seek insights from their suppliers in the forms of partnerships, from the device design phase to the end. “OEMs are positioning themselves differently; they are not all the same,” he said. “The way that suppliers engage with them has to be thoughtfully segmented. You can’t have a one-size-fits-all approach to your customers.”