Hospitals and Health Networks January 2007 Clinical Management: Working together to rebuild orthopedics a joint effort By Jan Greene For decades, hospitals and orthopedic surgeons maintained a mutually beneficial relationship that produced ample profits from inpatient procedures such as hip and knee replacements. But in recent years those profits have shriveled as Medicare tightened the belt on big-ticket surgical procedures. Net margin from orthopedics fell from 25 percent of patient revenues in 1997 to just 2 percent in 2001, Medicare numbers show. A 2004 consultant's survey found that just 47 percent of hospitals had profitable joint-replacement programs. The reversal of fortune has opened serious fissures in hospital-physician relations as each side scrambles to keep as big a piece of the pie as possible. It has even led to head-to-head competition in many areas where orthopedists operate their own ambulatory service centers. Nevertheless, experts stress that hospitals and orthopedists benefit most when they work together and that takes compromise: Hospitals need to better understand their doctors' needs; surgeons need to realize they can only get the high-quality operating room staff and efficiency they desire if their acute care hospital remains financially viable. "If we can help these surgeons with some of their issues, we absolutely need their help in terms of the cost of total joints and spine," says Matt Fulton, senior vice president for business development at Centura Health in Englewood, Colo. "It's a matter of partnership-it's a much more efficient way of advancing your business and taking care of your patients." Even if its profitability has suffered, joint replacement remains a vital service line that will grow as the population ages and as a more athletic lifestyle leads people to require implants at a younger age. The target population is expected to grow 37 percent in the next 10 years. Device divides One big concern for hospitals is the high cost of implant devices, which most often comes out of the diagnosis-related group payment. In some cases, the cost of the device now represents as much as 60 percent to 80 percent of the total reimbursement, which leaves less for overhead and OR staffing-and much less to offset losses from the many unprofitable service lines that full-service hospitals are expected to offer. But hospitals are hard-pressed to negotiate better deals with device manufacturers. The manufacturers create tight ties with physicians by having sales reps contact them frequently about new devices and even by sending reps into the operating suite with a new product. Sometimes a surgeon uses the device on the spot without going through the usual hospital appraisal and approval process. Moreover, some top surgeons get big consulting fees from manufacturers, although federal officials last summer issued a series of subpoenas to orthopedic device makers to gather information on their financial relationships with doctors. Hospitals also are in a weak position in negotiating what they pay for devices because vendors adamantly refuse to reveal the prices they charge each client. Guidant Corp., Indianapolis, won a lawsuit against a consulting firm that revealed some of its hospital-negotiated prices. Even the Advisory Board Company is being careful about the pricing information it shares in its reports, says Kyle Rose, a practice manager there. Without that transparency, it's hard for hospitals to know where they stand in negotiations. "Everyone's trying to get their hands on the data; they all want to know what a good price is," says Scott Crandall, director of orthopedic contract management for Novation, a group purchasing company. Novation has done about 400 assessments of hospital orthopedics programs during the past couple of years and finds little consistency-some small community hospitals are actually getting better prices than larger urban institutions that buy more volume. In the last few years, some hospitals have been able to talk manufacturers down on the prices, bringing the usual 20 percent to 30 percent discount down to a 40 percent to 50 percent discount. "They've beaten up on suppliers and asked for better prices and gotten it," Crandall says. "But now suppliers aren't giving in on price anymore." What's a hospital to do? There are two choices for hospitals at this juncture: work with surgeons to find ways to reduce device costs or carry out process improvement in both contracting and the OR. Crandall estimates only 10 percent of hospitals have a good handle on their purchasing processes. "There's an incredible amount of savings if you improve your processes. Smart facilities know what their purchase process is, how supplies arrive, how they pay the purchase order." With implants, hospitals can negotiate capitation agreements that cover an array of supplies. But that can easily be circumvented by a sales rep who works directly with a surgeon and sells him or her a device that's not covered by the capitation agreement. "We see 50 to 60 percent invoiced at the capitation rate and the rest at list price because the capitation was poorly written," Crandall says. "This gets back to the whole management of the process flow. Capitation works if you have somebody on both the front end and the back end of the procedure." Hospitals need to have a new-technology review committee and chief of orthopedics who will ensure that surgeons stick with the process. Materials managers are sometimes ill-equipped to go toe to toe with a top orthopedic surgeon who is being asked to give up a manufacturer's product he prefers and stick with the more limited device formulary. "Surgeons are very scientific" and have a lot of data at their disposal, Crandall says. Materials managers need to have data on the relative cost and quality of various devices in hand before they walk into those meetings. Share financial information, savings Hospital leaders shouldn't be afraid to share financials with surgeons. "Surgeons sometimes have the impression that the hospital makes a lot of money on procedures when they don't," notes Terry Cain, R.N., a senior clinical consultant with Premier. "They should present the surgeon with actual cost data and show where the margin should be. Generally when surgeons have the information in front of them, they are much more willing to look at an alternative." Hospitals also could get more leverage with physicians if they could offer surgeons a share in the savings when supply costs are lowered with the doctors' help, a practice known as gainsharing. Hospitals were uncertain of the practice's legality until recent opinions issued by the Department of Health & Human Services Office of Inspector General approved eight such agreements covering cardiac supplies. Joane Goodroe, a consultant who helped design the model that won OIG approval, believes it can be used for other service lines such as orthopedics, though hospitals should get their own legal opinion on that. The most important part of the gainsharing model is that it emphasizes quality outcomes rather than financial incentives. "You have to have a detailed ability to look at quality, cost and utilization," says Goodroe, president of Goodroe Healthcare Solutions in Atlanta. "We have a methodology to ensure that care is appropriate, nothing is going on that is not in the best interest of the patient and the financial side can be measured in a very accurate way." That is in line with what doctors really want, say consultants, which is a high-quality and efficient place to care for their patients. While surgeons are concerned about their finances, they are more motivated by the knowledge that their patients will get good care. Peggy Naas, M.D., is an orthopedic surgeon who recently joined VHA's new physician preference program after helping Allina Health System in Minneapolis improve efficiency in orthopedics. At Allina, Naas explains, surgeons were invited to help the system get better leverage in its contracting with implant makers and plow the savings into better patient care. They participated in national quality improvement efforts for surgery, such as Medicare's surgical infection reduction program and a safe-site surgery effort sponsored by AAOS. To draw physicians in, hospitals should offer an efficient operating room, good patient satisfaction, electronic medical records that are easy-to-use and help with marketing physicians' procedures, Naas says. "Hospitals can leverage these things to create a collaborative relationship and satisfy surgeons," she says. "There are shared values among the surgeon, the patient and hospital. If we can create an efficient, high-quality and safe environment for procedures, that benefits everybody."-