As the new millennium begins, hospital revenues for orthopaedic
operations are falling and hospital expenses for orthopaedic operations
are rising. Many health-care payers have negotiated fixed hospital
payments for orthopaedic operations, and the ability of a hospital
to break even or profit from these operations depends on its control
of expenses.
From 1991 to 1997, the rate of joint-replacement discharges at
our hospital increased 68 percent and the rate of orthopaedic operations
increased 64 percent. During this same period, we implemented several
cost-reduction programs for joint-replacement operations and we
were able to achieve substantial reductions in our average cost
of implants for hip and knee-replacement operations. However, the
erosion of hospital revenues for orthopaedic operations and increasing
hospital expenses suggested that our hospital should further reduce
our cost to deliver orthopaedic operations. The operating room was
identified as a prime candidate for cost reduction20.
The Single Price/Case Price Purchasing Program was developed
to further reduce the cost of orthopaedic implants and to reduce
the cost of orthopaedic supplies for our hospital. The program was also
developed to eliminate potential conflicts between surgeons and
hospital administrators regarding the selection and cost of implants
for joint-replacement operations. The purpose of the present study
was to evaluate the economic impact of the Single Price/Case Price
Purchasing Program at the Lahey Clinic.
In April 1997, six types of orthopaedic implants and supply items
were identified for cost reduction: total hip arthroplasty implants,
total knee arthroplasty implants, total shoulder arthroplasty implants,
arthroscopic shavers and burrs, interference screws, and bone-suture
anchors. At a meeting of the members of the Department of Orthopaedic
Surgery, surgeons with subspecialty expertise volunteered to implement
the Single Price/Case Price Purchasing Program for each item on
the basis of their subspecialty experience. All of the surgeons
who used these implants and supplies agreed to participate in the
process and to use the products that were selected. The orthopaedic
surgeons took responsibility for developing and implementing the
Single Price/Case Price Purchasing Program.
A standardized request for proposal was developed and sent to
the orthopaedic vendors who distributed the specific products. The
program included the following provisions:
1. One contract would be issued for each specific type of implant
(hip, knee, and shoulder implants) or supply item (arthroscopic
shavers and burrs, interference screws, and bone-suture anchors).
Six contracts would be issued.
2. The vendor would be asked for one single price for implants
for primary joint-replacement operations and one single price for
each specific orthopaedic supply item.
3. No price increases would be permitted during the period of
the contract.
4. The implants and supplies would be stocked at the hospital
on consignment, and inventory would have to be maintained to the
satisfaction of the Chairman of the Department of Orthopaedic Surgery.
5. The response to the request for proposal would have to include
a specific list of instruments, implants, and various sizes and
models of each item that would be stocked at the hospital.
6. No loaner fees or shipping fees would be paid by the hospital.
7. If the process resulted in the selection of a vendor for an
item other than its current vendor, the new vendor would purchase
or trade out all of the items currently owned by the hospital.
8. During the period of the contract, the vendor would upgrade
instruments, implants, and supplies at no charge if new technology
or new products were developed and introduced by the vendor.
9. High-quality local service representation would be required.
10. The hospital would require local backup of implants and willingness
on the part of the service representatives to coordinate the acquisition
of infrequently used items that must be borrowed.
11. The hospital acknowledged that it would not require service
representatives to be in the operating room for routine primary
joint-replacement operations. However, the representatives would
be expected to be available in the operating room for complex operations
or joint-replacement revisions.
12. The hospital would provide historical utilization data for
three prior years to help the vendor prepare an appropriate response
to the Single Price/Case Price request for proposal.
13. The hospital reserved the right to cancel the contract at
any time on the recommendation of the Chairman of the Department
of Orthopaedic Surgery.
The vendors submitted their Single Price/Case Price bids for
the implants and supplies to the orthopaedic surgeons at the Lahey
Clinic. The surgeons then evaluated the proposals on the basis of product
quality and price, and they selected the preferred vendor for each
item.
The Single Price/Case Price Purchasing Program was successful
in reducing the cost of joint implants and orthopaedic supplies
for operations at the Lahey Clinic (Table I). The average cost reduction at
our hospital for these joint implants and orthopaedic supplies was 32
percent.
We cannot disclose the specific prices that we agreed to pay
our vendors for joint implants and orthopaedic supplies. However,
in 1997, the average price of hip and knee implants reported in
the Orthopaedic Research Network was $2490 per joint-replacement
case33. This price decreased slightly
to $2482 in 199833. The Network
reported that the 1998 average selling price of implants per case
was $3375 for cementless total hip arthroplasty, $2163 for hybrid total
hip arthroplasty, and $2720 for modular total hip arthroplasty with
cement33. The prices that we negotiated
for joint implants with the Single Price/Case Price Purchasing Program
were less than those published average prices.
We judged the success of the Single Price/Case Price Purchasing
Program by comparing our costs for joint implants before and after
implementation and by reporting the reduction in prices in percentages.
We reduced our cost for total hip arthroplasty implants by 32 percent
per case with a change of hip-implant vendor. We also reduced our
cost for total knee arthroplasty implants by 23 percent per case
without a change of knee-implant vendor. We reduced our cost for
total shoulder arthroplasty implants by 25 percent per case with
a change of shoulder-implant vendor.
We were also successful in reducing our cost for three orthopaedic
supply items. We reduced our cost for arthroscopic shavers and burrs
by 45 percent per item without a change of vendor. All arthroscopic
shavers and burrs cost the same price regardless of size, design,
or features. We reduced our cost of interference screws by 45 percent
per screw without a change of vendor. We reduced our cost for bone-suture
anchors by 23 percent per anchor without a change of vendor.
The prevalence of hip and knee-replacement operations in the
United States increased 4.4 percent from 1996 to 199730. In 1997, 556,060 hip and knee-replacement
operations were performed in the United States. A similar trend
is noted for the number of spinal operations paid for by Medicare,
which increased 6.3 percent (from 108,841 procedures in 1997 to 115,652
in 1998)34. The amount of hand
surgery, sports medicine surgery, foot and ankle surgery, and orthopaedic
trauma surgery is also increasing. Furthermore, demand for musculoskeletal
care is projected to increase during the next decade. However, despite the
demand for orthopaedic operations and despite successful outcomes
following orthopaedic operations, a disturbing trend is developing
in the hospital economics of orthopaedic operations.
Hospital revenues for orthopaedic operations are not keeping
pace with inflation or with rising hospital expenses. The average
hospital payment for total hip arthroplasty and total knee arthroplasty from
Medicare under the DRG (Diagnosis-Related Group) 209 classification
decreased 2.8 percent (compared with the previous year) on October
1, 199731, 2.0 percent on October
1, 199832, and 2.1 percent on
October 1, 199935. Hospital payment
for bilateral knee replacement under the DRG 471 classification
decreased 4.9 percent on October 1, 1997, and 4.0 percent on October
1, 199832. Furthermore, the Balanced
Budget Act of 1997 permitted the Health Care Financing Administration
to implement a transfer rule for DRG 209 patients on October 1,
1998. This transfer rule was intended to further reduce the hospital
payment for Medicare patients who are discharged to a post-acute-care
facility following a joint-replacement operation31,35.
Hospital revenues are also being diminished by changes in the
hospital payer mix. The payer mix for orthopaedic operations has
shifted from predominantly indemnity and commercial insurers, which
generally provide higher reimbursements to hospitals, to managed-care
organizations and Medicare, which generally provide lower reimbursements.
Ironically, hospitals are having problems with reimbursement for
orthopaedic operations at a time when the demand for and prevalence
of these operations are increasing, the clinical results and outcomes
of these operations are excellent, and the cost-effectiveness of
these operations has been demonstrated by several investigators3,5,6,8,15,23-25,30,39,40.
As hospital revenues are decreasing, hospital expenses are increasing.
New knowledge and technology are leading to the development of new products,
new pharmaceuticals, and new orthopaedic services that increase
expenses for hospitals. Hospital expense budgets are dominated by salaries
and wages, and labor costs in health care are rising. In an era
when hospital reimbursement is capped by the Diagnosis-Related Group
reimbursement system, new products, new services, and rising labor
costs are squeezing already tight hospital operating budgets. In
order to continue to deliver high-quality orthopaedic operations
that make use of new technology on a profitable or break-even basis,
hospitals must reduce the expenses associated with these procedures.
Two basic strategies have been used to lower the cost of hospital
care: reduction of utilization and reduction of the unit costs of
resources.
Reduction of utilization of resources has been successful in
decreasing the hospital cost of orthopaedic operations. Physician
education and surgeon awareness have been identified as key factors
for reducing the cost of these operations11,22,28,29.
Clinical pathways have been successful in reducing utilization of
hospital resources and, specifically, in reducing the duration of
hospital stays after orthopaedic operations1,12,13,18,41.
Specific hospital resources that have been reduced or eliminated
for joint-replacement operations include radiology10,26,37,41, pathology7,27,38, and blood bank.
Reduction of the unit costs of services and supplies also has
been successful in decreasing the hospital cost of orthopaedic operations.
Hip and knee implants are the largest single supply expense per case
for orthopaedic operations2,9,14,36.
Other, less expensive operating-room supplies, such as arthroscopic
shavers and burrs, interference screws, and bone-suture anchors,
contribute substantially to the hospital cost for orthopaedic operations
because of the volume of utilization of these supplies. When the
cost of implants and orthopaedic supplies increases, hospitals generally do
not receive greater reimbursement for services, and the hospital's
margin of profit decreases. Several strategies have been used to
control the cost of hip and knee implants43;
these include discounts from vendors, price capping, implant matching
(implant standardization), and competitive bid purchasing.
Vendor discounting is a simple cost-reduction method in which
hospitals and surgeons negotiate with vendors for discounts on implants
and supplies. Hospitals do not have much leverage with this strategy
if the surgeons insist on using a specific company's products. Our
hospital realized a 4 percent decrease in the cost of hip and knee
implants with vendor discounting without changing our implant vendor.
Price capping is also a simple cost-reduction method. Hospitals
and surgeons set a price that they will pay for orthopaedic implants
and supplies. Vendors choose to accept or reject the capped price.
This cost-reduction method can be successful if surgeons and hospital
administrators agree on competitive prices. However, surgeons must
be willing to switch the types of implants and orthopaedic supplies
that they use if a particular vendor chooses not to accept the capped
price. We have not used this method at our hospital.
Implant matching (implant standardization) is a more complicated
and controversial method of reducing the cost of implants. The goal
of implant matching is to reduce the hospital cost for joint implants
by reducing variation in implant selection. Hip and knee implants
vary in design, materials, fixation, and cost. In general, cementless
implants that are capable of biological ingrowth are more expensive
than cemented implants. However, clinical results and outcome studies
have not documented that more expensive implants are more predictably
successful with regard to pain relief, improved function, and durability.
Implant-matching programs can reduce the hospital cost of joint implants
by recommending expensive cementless implants only for high-demand
patients who may benefit from the increased expense and by recommending
less expensive, cemented implants for the majority of patients.
Our hospital realized a 5 percent decrease in the cost of hip and
knee implants with the implementation of an implant-matching program16,21.
During the 1990s, as the cost of implants became a major issue
for hospitals delivering joint-replacement operations, implant-selection
and implant-matching programs created conflict between surgeons
who wished to use the implant that they believed was best for their
patients and hospital administrators who wished to control the cost
of hip and knee implants. Opponents of implant matching said that
these programs reduced a surgeon's opportunity to choose specific
implants for specific patients. They also suggested that implant-matching
programs may encourage surgeons to perform total joint arthroplasty
operations with use of techniques with which they are less familiar and
less expert4,17. We implemented
an implant-matching program that used objective patient criteria
for the selection of implants, and we used only high-quality implants
that were familiar to our surgeons. We measured the impact of clinical
pathways and implant standardization on the short-term outcome of
the hip replacement in our patients. These cost-reduction methods
did not affect patient outcome in the short term19.
Competitive bid purchasing of hip and knee implants is the most
time-consuming, complex, and successful method of reducing the hospital
cost of orthopaedic implants and supplies. With this cost-reduction
strategy, surgeons evaluate implant systems and decide which manufacturers'
products are acceptable for their patients. It is important to note
that the first evaluation of the product is the surgeons' assessment
of its quality. The vendors with acceptable implant systems submit
bids, and the hospital administrators and the surgeons select one
vendor on the basis of cost. The surgeons reserve the right to select
the implants that will best serve their patients. This cost-control
strategy may require surgeons to switch implants and vendors on
the basis of price. The surgeons at our clinic determined that several
implant systems could be used to care for our patients. The hospital
realized a 35 percent decrease in the cost of hip and knee implants
after the initial competitive-bid purchasing process was completed
in 1995.
In 1997, we developed the Single Price/Case Price Purchasing
Program in response to disturbing trends in hospital economics.
In order to understand the development of the Single Price/Case Price
Purchasing Program, it is important to understand the organization
in which it was developed. The Lahey Clinic is a physician-led,
nonprofit, vertically integrated health-care system. The Clinic
has a medical staff of 500 physicians and surgeons, 4400 other employees,
a 272-bed hospital, several satellite clinics, and a home health-services
company. The Lahey Clinic network is located primarily in eastern
Massachusetts, which is a very competitive health-care market with
a high proportion of managed care. The organizational structure
of the Lahey Clinic aligns physicians and hospital administrators
to work together to achieve economic prosperity. The physicians and
the administrators are partners, and all components of the organization
share one bottom line. Therefore, the orthopaedic surgeons have
an incentive to work in the best interest of the hospital. The Single
Price/Case Price Purchasing program succeeded at the Lahey Clinic
because it was designed, implemented, and controlled by orthopaedic
surgeons serving as advocates for their patients, their hospital,
and themselves.
The major beneficiary of the Single Price/Case Price Purchasing
Program is the hospital. This program effectively reduced the cost
of joint implants and orthopaedic supplies at the Lahey Clinic.
Although the major advantage of the program is the reduction in
the cost of implants and supplies, the hospital also benefits from
reduced operating-room inventory and a more simple accounting process
for the implants and supplies.
The Single Price/Case Price Purchasing Program also has advantages
for patients, surgeons, and orthopaedic manufacturers and vendors.
The program is advantageous for patients because high-quality implants
and supplies are selected by their surgeons, who become experts
with one system of implants or brand of supplies. The surgeons realize benefits
from this program because they have access to all of the implants
and supplies distributed by the manufacturer or vendor for each
operation. For example, cementless and cemented joint implants are
included in the Single Price/Case Price Program. Conflicts between
the surgeons and the hospital administrators regarding the cost
and selection of implants are eliminated, and surgeons are not forced
to choose between high and low-priced implants for their patients.
Furthermore, the program allows the surgeons to use competitors' products
sporadically for special purposes, so they are never limited in
what products they can offer to their patients. Orthopaedic vendors
may find this program beneficial if the volume of implants and supplies
sold is increased and if their market share is increased or preserved.
In our hospital, we guarantee surgeon compliance with items in the
contract. The surgeons, the hospital, and the vendor are partners
in this program.
There are several barriers to the universal implementation of
the Single Price/Case Price Purchasing Program at all hospitals
and in all health-care systems. In general, hospitals and physicians
receive compensation for services from different revenue streams.
They do not share their professional and technical revenues for
orthopaedic operations. At the Lahey Clinic, physician (professional)
and hospital (technical) revenues accrue to one bottom line for
the organization. In less integrated organizations, hospitals would need
to create incentives for physicians to want to implement this program.
Surgeons frequently have strong preferences for orthopaedic implants and
supplies, and product and vendor loyalty is a strong characteristic
of the market for orthopaedic implants and supplies. Several so-called
gain-sharing programs have been developed by hospitals and physicians
to create alignment on hospital economic issues, but these proposed
programs have not been approved by the Office of the Inspector General.
The Single Price/Case Price Purchasing Program in orthopaedic
surgery reduced the unit cost of joint implants and orthopaedic
supplies at our hospital. This program can be expanded and applied to
other medical and surgical subspecialties. Furthermore, the economic
benefits of the program could be increased if several hospitals
combined their volume and market share to negotiate further reduction
in prices for orthopaedic implants and supplies.
As hospital revenues diminish and fixed payment systems for hospital
services evolve, hospitals must control expenses to prosper and
survive. The Single Price/Case Price Purchasing Program developed
at the Lahey Clinic can reduce the cost of orthopaedic implants
and supplies. This program can also reduce potential conflicts between
orthopaedic surgeons and hospital administrators regarding the selection
and cost of implants for joint-replacement operations. However,
in order for the program to succeed, hospitals must enlist surgeons as
partners and create a structure for the program to be implemented
and controlled by orthopaedic surgeons serving as advocates for
their patients, their hospitals, and themselves.