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Industry’s New Customer: Hospital + Surgeon

  1. This article appeared in ORTHOKNOW® July 2010. Your peers found it to be extremely valuable and educational; hence we are republishing it here in its entirety. --Editor

I started practicing orthopaedics in 1975, when joint replacement was in its infancy. There is no doubt that, along with arthroscopy, joint replacement has created phenomenal value for patients and our healthcare system. That during the past 35 years, the number of patients having joint replacements and arthroscopy has risen, surgeon reimbursement has dropped quite dramatically, hospital reimbursement has stayed flat and implant prices continued to rise. A quick look to factors from the past helps us understand what fueled this phenomenon.

1. Great technology

Device manufacturers developed implants and instruments that were easy to use and very successful, when implanted by skilled surgeons. Arthritis patients who had joint replacements did very well and became advocates for the procedure, thus fueling growth. This encouraged fierce competition in innovation, which demanded that device manufacturers differentiate themselves by providing new technology every year. Competition normally drives prices down, but normal economic forces were not in place here. 

2. Vendor/surgeon relationships

Surgeons chose an implant based on their relationship with the distributor, not necessarily because of the data. These relationships became very strong, much stronger than hospital/physician relationships. Device manufacturers didn’t have much data on how their implants performed in the hands of their surgeons. All manufacturers could show you why their products were superior. In fact, when distributors changed companies, the surgeon would remain loyal to the distributor, not to the implants they were using.

3. Surgeon power and price insensitivity

Surgeons were independent and autonomous. They ordered the products they wanted to use, but it was the hospital that paid for them. Price wasn’t important to the doctors, who saw wasteful hospital practices every day. Many surgeons did not feel that the hospital treated them as customers, so tension between administration and surgeons was often high. Woe to the hospital that tried to reduce costs by limiting the implants available to a more cost-effective selection.

Many surgeons threatened or actually left the hospital if they were not able to choose. The loyalty of the surgeons was to the distributor, who treated them like a customer, not to their hospital, that did not. At times, the distributors chose to help their surgeons battle their hospitals to keep prices up, thus escalating the tension between hospitals and surgeons.

4. Lack of transparency

In the past, hospital-reported data on clinical, operational and financial information was not shared or available, was inaccurate or was difficult to easily digest. Benchmarks were not available, either, to compare against best practices. This lack of transparency was further evidence to the surgeons that the hospital was making a fortune on them and not being honest.

In addition, to keep other hospitals from knowing pricing, vendors had hospitals sign nondisclosure agreements as to their prices. Ninety-eight percent of physicians never collected or aggregated data on patient-reported outcomes. 

Everything is about to change. Here’s why.

The Baby Boomers are becoming senior citizens, and will put enormous demands on the system

The first wave of 78 million Baby Boomers is reaching 65 next year, and this will create a huge new demand. Medicare, already cash flow negative, will be unable to meet its financial obligations, thus creating a crisis in healthcare funding. The first chapter of healthcare “payment reform” has been passed. The growth in joint surgeries will be dramatic. The way these procedures will be reimbursed will be changing.

The U.S. government and the employers of this country cannot afford the escalating cost of healthcare

The government knows, rightly I believe, that one of the keys to reducing costs and improving quality is to get physicians and hospitals to act as a team rather than as independent entities. They have demonstration projects, such as ACE (Acute Care for Elders), that pay the hospital a discounted rate for all services related to total joint replacement. The hospital and the surgeons must then work together to divide the reimbursement.

In this scenario, some device manufacturers in Texas were excluded, and those not excluded had to discount their prices. In order to get patients to choose these discounted hospitals, patients were eligible to receive reimbursement up to $1,000. The website of one of the hospitals stated, “Medicare will send the shared savings payment directly to qualified beneficiaries approximately 90 days after they are discharged from the hospital.”