Strategic Purchasing of Medical Devices James C. Robinson Leonard D. Schaeffer Professor of Health Economics Director, Berkeley Center for Health Technology University of California, Berkeley
Overview Hospitals in the fat years Hospitals in the lean years Technology strategy Physician alignment Technology assessment Procurement and purchasing Service line strategy
Goals of Strategic Purchasing Supply chain management and purchasing support institutional goals and strategy Cost moderation and predictability Patient volumes, revenues, and margins Physician alignment Vision: Center of Excellence
HOSPITALS DURING THE FAT YEARS Hospitals reimbursed based on volume (per case, per diem, charges) by health insurers Consolidation creates strong bargaining leverage Medicare DRG rates are acceptable, if not generous Device intensive specialties (orthopedics, interventional cardiology) are attractive Rising volumes due to demographics, new technology Margins high for major acute procedures Prestige attaches to technology 4
PHYSICIANS DURING THE FAT YEARS Physician autonomy is core value Independent practices, splitting admissions across hospitals No emphasis on cooperation across medical staff Lack of interest in hospital finances Widespread consulting relations with device vendors The medical arms race Hospitals compete for patients by competing for doctors New equipment, facilities No interference with physician device preferences (PPI) 5
DEVICE PURCHASING DURING THE FAT YEARS Hospitals accommodate physician preferences Contract with all or most device vendors No rigorous assessment of device performance No formal committee structure for technology assessment No pushback on conflicts of interest No mandated disclosure or limits on payments Weak device purchasing leverage: high prices Prices passed on to private insurers through device carve-outs and supplemental FFS charges Some hospitals use devices for additional mark-ups Medicare DRG is the only form of payment bundling 6
HOSPITALS IN THE LEAN YEARS Insurers shift (back) towards prospective payment Experiments with episode payment Capitation and shared savings (ACO) Increases in consumer cost sharing High deductible health plans From copayments to coinsurance Reference pricing Affordable Care Act Newly insured patients are in low-paying plans Medicaid managed care Bronze and silver plans within insurance exchanges 7
INSURER EMPHASIS ON ACUTE PROCEDURES Concern for high and variable pricing Bundled payment in orthopedics, cardiology: Medicare ACE IHA: Blue Shield, Aetna New contracting and benefit designs COE strategy: Lowes, Boeing, Walmart Reference pricing strategy: Safeway, PERS 8
Reference Pricing in California Sponsor (employer, insurer) establishes a maximum contribution (reference price) it will make towards paying for a particular service/product This RP limit is set at minimum or median of the prices charged by comparable providers Patient must pay full difference between the RP limit and the actual price charged by the provider Patient payment is not limited by OOP max Patient has good coverage for low priced options but full responsibility for choice Targets services with high variation in price but only low variation in quality
Basis for Reference Pricing at Safeway Colonoscopy Cost Per Procedure Greater SF Bay Area MSA 1 10 16 22 31 34 38 41 Diagnostic Colonoscopy Providers Representative sample: 8 out of 41 facilities 10
Basis for Reference Pricing at PERS 11
70% 65% Percentage of Surgery Patients Choosing Low-Priced (VBPD) and High-Priced Hospitals before and after the Implementation of Reference Pricing CalPERS VBPD 60% 55% Anthem VBPD 50% 45% Anthem Non-VBPD 40% 35% 30% Reference Price Implementation CalPERS Non-VBPD 2008 2009 2010 2011 2012*
Thousands $45 $40 Prices for Knee and Hip Replacement Surgery in California Hospitals after the Implementation of Reference Pricing CalPERS Non- VBPD $35 $30 Anthem Non-VBPD $25 CalPERS VBPD $20 $15 Anthem VBPD Reference Price Implementation 2008 2009 2010 2011 2012* Source: California Public Employees Retirement System (CalPERS) and Anthem Blue Cross. All prices in 2011 dollars. VBPD : Value Based Purchasing Design. *Through September of 2012 13
EMPHASIS ON PHYSICIAN ALIGNMENT Misalignment between hospitals and physicians is no longer sustainable Physician practices under financial stress Hospitals must control supply chain, LOS, reduce complications and readmissions Strategies for alignment Employment of physicians, partnership with medical groups Joint ventures, co-management for cath labs, specialty hospitals, ambulatory surgery centers Encourage physician leadership at all levels Mandates for disclosure of conflicts of interest 14
TECHNOLOGY STRATEGY IN THE LEAN YEARS 1. Technology assessment 2. Procurement and purchasing 3. Service line efficiency 4. Centers of Excellence 15
Technology Assessment Formal committee structures Leading hospitals include practicing physicians and surgeons on committees in addition to management All new devices must be reviewed and approved before being reimbursed by hospital Formal presentations by physician champions, not by device representatives Subcommittees for complex new technologies All available evidence is gathered (FDA label, registries, etc.) Consider price as well as clinical performance Committee also serves cultural function Encourage identification, adoption of best practices Encourage physician interest in costs as well as quality 16
Technology Procurement: contracting Assess price variation across vendors, facilities Assess market shares of each vendor Physician views on quality and pipeline Physician financial relationships Limit number of contracts for each clinical domain Some hospitals use formal RFP strategy Some create price targets with intention of dropping vendors Have mechanism for exceptions for special innovations Dual, not single source contracting Enforce contracts No reimbursement outside of contract Limit new technology exceptions 17
Technology Procurement: price negotiations Obtain pricing benchmarks ECRI, MedAssets etc., across vendors and facilities No single best pricing structure Matrix pricing % of list pricing across entire product line Device price as % of Medicare DRG payment Physician adherence is key to pricing Formal or informal gain-sharing Cultural alignment is more effective than financial Hospital must be willing to lose non-cooperative physicians 18
Service Line Efficiency Hospitals pursue efficiency improvements beyond the device price Increase OR turnaround Focus on complications and readmissions Focus on discharge planning and LOS Principles of lean management The total joint dance Appropriateness of surgery: disease management? 19
Centers of Excellence Hospitals identify service lines for growth Structures: heart hospital, ortho hospital, spine institute, cancer center, cardiac valves Contract with national insurers and self-insured employers Travel medicine: domestic and foreign Bundled payment Quality reporting and improvement Commitment to appropriate care Not every hospital should offer every service 20
Conclusion From the fat years to the lean Technology strategy in the lean years Assessment Procurement, purchasing, pricing Service line efficiency Centers of Excellence Physician alignment is key to every strategy 21
The Berkeley Center for Health Technology (BCHT) promotes the efficiency and effectiveness of health care through research and education on the development, insurance coverage, payment, and appropriate use of medical technologies. BCHT.Berkeley.Edu 22