Fixing the Orthopedic Supply Chain

May 21, 2015  |  Posted in: Articles
Fixing the Orthopedic Supply Chain

Dave Distel, Vice President, Business Development

– Demand for primary and revision arthroplasty is expected to double in 10 years and by 2016, 1,896 arthroplasty surgeons will retire, estimating a procedural shortfall of 69.4% (assuming a retirement age of 65). This sobering fact, coupled with declining profits and changing payment models, is forcing many healthcare executives to ask: how can greater efficiencies and value be realized in a service line so dependent on outside vendors and premium priced products?

Increasing Pricing Transparency
In a recent study published in Health Affairs, it was reported that orthopedic surgeons possess a minimal understanding of the true cost of devices they implant. In the premium-priced implant segment (>$5,000), surgeons drastically underestimate the cost of the orthopedic device:

chart_dave blog

 

One of the fundamental issues with healthcare, and specifically with hospital supply chain, is the lack of accurate, relevant, and timely information. This lack of pricing clarity is exacerbated by the time it reaches the true “buyer” of orthopedic devices (the surgeon).

Roughly $40 out of every $100 is attributed to the selling and servicing of the surgeon; a cost that the average implant buyer is uninformed of. Buyers of orthopedic devices must begin to understand the “must-be” as well as the “should-be” price of such devices in order to start the process of driving out unnecessary costs. To do this, they will need to unbundle the payment that is made to the supplier, which is inclusive of inventory management, service, education, sales and administrative costs.

Hospitals and surgeons must also work collaboratively to promote and develop pricing transparency, seeking the full cost calculations (pre-and-post procedure), as compared to reimbursement. Once a clear understanding of cost is achieved, hospitals can engage surgeons in activity-based costing to make product decisions that are backed by empirical data.

Questioning the Value of Premium Priced Implants
While there are many companies making implants, most are producing similarly designed products with what appears to be small enhancements as opposed to significant innovation. The similarity is evidenced because most receive FDA approval from the predicate 510K process. This means that a company bringing the device to market is claiming it to be safe and effective because it is substantially equivalent to a device already on the market and legally cleared. This includes many implants marked as premium with the manufacturer seeking significantly higher prices than the earlier generation product.

However, in the past 10 years, clinical results of premium priced implants have failed to show increased clinical benefit compared to more standard devices. And despite the industry’s trend toward commoditized products and a drastic increase in TJA procedure volumes, prices are 60% higher today than they were in 2000.

As a result of plateauing orthopedic innovation, and with roughly 75% of the US orthopedic implant patents expiring in the upcoming years, hospitals are well-positioned to leverage these time-tested, stable technologies coming to market. FDA approved and used effectively for years with the same outcomes, such “stable” technologies are available at 50%+ less cost. Greater demand for such devices will force the much needed price-leveling and foster greater innovation, while offering hospitals a low-cost alternative to the premium priced offering.

Taking Back Control
While the state of the orthopedic market is the result of a multitude of stakeholder decisions, hospitals must ultimately own responsibility by taking back control of the clinical and financial decisions of the orthopedic service line. This will be achieved largely by reducing the hospital’s reliance on the sales rep and embracing value-based devices. Increasing transparency regarding the true cost of implants and supplies is the first critical step. In the words of management expert Peter Drucker, “If you can’t measure it, you can’t improve it”.

Hospitals must also start by thoughtfully identifying the key areas of their service line that have the greatest rep dependence and focus on rebuilding their in-house capabilities. Merely removing the sales rep without giving careful consideration to sustaining the long-term health of the service line is a recipe for disaster. This would be similar to a “get thin quick” scheme; it may work for the short-term, but in the long-term you’re back to where you started (or worse). It is important to identify a strong service line partner that is brand-agnostic and has the hospital’s best interests at heart. What is a complicated process, can be streamlined and facilitated with the help of this partner, resulting in a high-performing, low-cost service line unencumbered by vendor influence.

 

Lars-Thording

Dave Distel
Vice President, Business Development

Dave has over 20 years of experience in healthcare on both the provider and supplier side. Starting his career as an RN then becoming a CRNA he practiced anesthesia for 7 years before transitioning to the business side of healthcare. There, he led the contracting teams as Director of Supply Chain Management for the Mayo Clinic. Under his leadership, the team saved millions in orthopedic and cardiac rhythm spent annually. Most recently Dave was the Senior Director of Pricing Strategy and Contract Management for Stryker. Dave earned a BSN from Duquesne University, MSN from the University of Pittsburgh and an MBA from Cleveland State University. Additionally he is a Fellow within the American College of Healthcare Executives.