Case Study: Physician Owned Specialty Hospital Saves $500,000 Per Month on Orthopedic Implants

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Holly Mitchell
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1 Case Study: Physician Owned Specialty Hospital Saves $500,000 Per Month on Orthopedic Implants August Wyndemere Pass, Fort Wayne, IN

2 Contents Introduction... 2 Challenges to the ability of POHs to operate profitably... 3 What initiatives are underway to reduce orthopedic implant costs in POHs?... 4 Our Solution... 5 Business Model... 5 How it Works... 6 The Case Study... 6 Call to Action... 9 Figure 1. Cost of implants compared with reimbursement and hospital profits... 4 Figure 2. OrthoDirectUSA Supply Model... 5 Figure 3. Implant cost as percentage of Medicare reimbursement... 7 Introduction This white paper will outline a solution to the problem facing Physician Owned Hospitals (POHs). The problem is how to improve profitability and maintain quality of service during the state of flux caused by the Patient Protection and Affordable Care Act (PPACA). Our solution derives from a working example: a specialty hospital that is showing significant savings on the cost of orthopedic physician preference items (PPIs). The case study findings took several years to implement. Yet, within six months of contacting OrthoDirectUSA (ODUSA), the hospital implemented an aggressive plan to address its implant costs and saved $70,000 in the first week! A key factor in the hospital s success was its CEO s vision and determination to implement a system that accurately identified, tracked and monitored implant costs. He took control of the relationship with suppliers and educated his physician colleagues to think commercially about their use of implants and other medical supplies. This is your call to action. If you re serious about lowering your implant costs, we invite you to collaborate with ODUSA and develop a plan that helps you take control. Be proactive, and we'll help you build consensus with your physicians. You do have alternative options, so why not begin the process now? You can be profitable on Medicare cases. 2

3 Challenges to the ability of POHs to operate profitably Physician owned specialty hospitals have demonstrated efficiency, excellence in patient care and cooperation between physicians and administration since their inception. Unfortunately, they have also been dogged by political uncertainty, which has threatened their existence and ability to operate. With that said, many hospitals have thrived and expanded, or planned new facilities. Now, however, the PPACA has halted development of new POHs and the ability of existing POHs to expand their capacities, recruit more physician partners or change the percentage of physician ownership from the base in place on March 23, The act is being contested with litigation that challenges the constitutionality of the law with respect to physician owned facilities. These political pressures have had an impact on the business viability of POHs. They are now limited in their ability to attract capital, which negatively affects day to day facility operations and reduces profitability. Adding to the financial pressure has been a steady increase in the price of orthopedic implants, while procedure reimbursement, reimbursement of physician fees and hospital profitability have not kept pace, or have declined sharply. (See Figure 1.) The cost of medical supplies, implants and other items are the second highest expenditure area, after salaries. The PPI component is the most sensitive and costly element within the medical supply costs 1, with orthopedic implants representing a significant proportion. Cooper and colleagues 2 have summarized a key action for hospitals that want to stay in business. If the forecast is for continued viability The hospital should identify specific, appropriate cost cutting measures that can be implemented to keep costs down and improve efficiency. 1 Don Fox and Mary Hibdon, Supply Cost Management Optimizing Participation, Minimizing Cost. PHA 9 th Annual Conference and Exhibition, New Orleans. 26 September Cooper R, Riley S, Lane M, Hagood G, Physician Owned Hospitals Continued Financial Viability. The Impact of the Patient Protection and Affordable Care Act (PPACA), PHA Summer 2010, pp

4 Figure 1. Cost of implants compared with reimbursement and hospital profits What initiatives are underway to reduce orthopedic implant costs in POHs? Two ongoing strategies being employed by POHs are the utilization of Group Purchasing Organizations (GPOs) and local negotiation of pricing with vendors of orthopedic implants. The former can realize savings on the order of 10 to 15% 1. That s because a GPO covers a broad range of medical supplies, inclusive of implant products and, by buying nationally, it can leverage price reductions over a wide range of items. The GPO also provides a consulting service to deal with vendors, contract negotiations and pricing, thus enabling hospital staff to focus on other duties. A GPO isn t always the answer, though. Sometimes, hospitals can be more successful engaging in direct, local negotiation of pricing with vendors. This may be particularly true for a hospital with a larger number of surgeons and annual procedure volumes. Consolidation of demand and rationalization of PPI utilized, however, can be a challenge, especially in view of some surgeons traditional affinity for specific implants. 1 Russell Hall, Group Purchasing Organizations Will Help Your Bottom Line. PHA Summer 2010, pp

On the supply side, a number of new manufacturers have formed in the last two years to bring less expensive implants and products to the POH market 2.

5 On the supply side, a number of new manufacturers have formed in the last two years to bring less expensive implants and products to the POH market 2. These strategies address the problem in part, but they do not yield the 50% 70% savings possible through the utilization of ODUSA services and your determination to change the way you do business. Our Solution Business Model In 2009, we introduced a new and innovative approach to the supply chain of orthopedic implants and equipment to hospitals and surgery centers in the United States. Our business model is simple and straightforward; it brings the hospital or ASC directly to the manufacturer of the product. Simply put, we eliminate the need for middlemen. Our focus is "stable technology implants, which make it extremely hard to distinguish between the various manufacturers. This point is outlined in Figure 2, which compares our model with the traditional supply chain. Figure 2. OrthoDirectUSA Supply Model 2 Such as: Covenant Orthopaedic Solutions (TN), and Phygen (CA). 5

6 How it works ODUSA establishes strategic alliance relationships with manufacturers of stable technology products. We also qualify their commitment to lean manufacturing concepts and their interest in establishing a direct to hospital sales relationship. Stable technologies are devices and equipment that can be described as generic, and their substitution poses no risks for successful surgery and efficient utilization within the hospital. We have successfully matched hospitals to these suppliers. Through this process, implant purchase prices are reduced 60 70% from their current level. We introduce POHs to an alternative process. We show them how to take back the responsibility for purchasing their implants, instrumentation and equipment. Our approach does not depend on sales representatives in the operating room, or consigned instrumentation and implants. Instead, the hospital takes complete ownership of purchasing, as hospitals do in every other country. We assist the POH in appointing or recruiting a staff member who will manage the implant inventory, instruments and equipment. We then appoint local facilitators who train and coach these in house implant technicians, providing ongoing mentoring and oversight. We are always watching your back by proactively looking for lower cost alternatives options that will increase your profitability while you stay focused on day to day operational demands. We are paid a base fee, and an agreed percentage of the savings. This performance percentage is paid only if implant costs are reduced. ODUSA is your catalyst for ongoing price reductions from existing and/or new suppliers who seek to increase their sales volumes. The Case Study A specialty hospital with 11 ORs and 38 beds began to collaborate with us in February 2010 to save money on implant costs. This commercial, for profit institution is a highly efficient center of surgical excellence with a 5 star rating for patient satisfaction. Since its inception, the hospital has been very aware of implant pricing and its impact on profitability. To be profitable on Medicare reimbursement, the hospital knew implant costs could not exceed 33% of the DRG. When the hospital began operating in 2002, implants were already exceeding this target. The hospital leadership assessed the situation and developed a system to accurately define and monitor costs. A software program was developed that clearly defined how much each surgery cost and whether it was profitable. The hospital's goal was overall profitability but they were willing to lose money if a surgeon thought a particular procedure and its implant costs were in a patient s best interest. Implant costs kept increasing; by 2008 they reached a peak of 65% of the reimbursement. (See Figure 3.) 6

The CEO used the data to begin to educate the hospital s 12 surgeons on the profit and loss implications of various implants used in their 20 cases per week.

7 The CEO used the data to begin to educate the hospital s 12 surgeons on the profit and loss implications of various implants used in their 20 cases per week. He introduced the policy of having the surgeons sign the invoices for the implants used in each case. The company representative then had to check each invoice against its negotiated price. This process alone saved $60,000 in billing errors made by the manufacturers. Education was the key issue here, with the CEO encouraging the hospital s surgeons to think like businesspeople. Previously, the physicians had been unaware of the real implant costs and believed all the systems cost approximately the same. Armed with their new information, however, the surgeons became more aware of the implants in terms of what each patient truly needed. As a result, they began making decisions they had not made before. The CEO motivated the physicians to move away from their higher priced implants in favor of lower priced ones by explaining to them that saving $4 million dollars in implant costs would be the equivalent of generating $40 million in additional revenue for the hospital. Figure 3. Implant cost as percentage of Medicare reimbursement As mentioned previously, in 2008 the CEO began to share with the physicians what the implants cost, versus what was received from payers, and some progress was made in reducing costs. In 2009, it became clear that reimbursement would only get lower in the future. Analysis also revealed poor purchasing efficiencies, such as 22 suppliers for $2.0 million of bone / tissue substitutes and 15 suppliers for spine products. 7

8 In September 2009, at the 9 th Annual Physician Hospitals of America meeting, the CEO repeatedly visited the OrthoDirectUSA booth. As we reviewed the OrthoDirectUSA business model with him, we made an immediate connection. Our values were aligned: Stable technology implants are all the same these are implants that have become commodities but still command a premium price. Sales representatives and distributors add considerable cost to implants. Their service has never been free. It s paid for in the implant price. Hospitals must commit to taking back responsibility for managing their orthopedic service store. They should no longer continue to abdicate this responsibility to the orthopedic companies. Hospitals must be willing to become owners. This means starting to think and act like buyers, and purchase implants and instruments. Our first step was to initiate a Net Acquisition Savings (NAS) of the current implant suppliers. Besides quantifying the potential savings that could be realized by purchasing products directly from manufacturers, this audit process set the stage for moving physicians away from their firsttier suppliers. By February 2010, the hospital had identified its implant technician team and began to introduce its surgeons to alternative technologies. It was referred to as company store inventory. The surgeons were encouraged to give company store options a trial. OrthoDirectUSA, the catalyst, introduced the lowest priced implant. In the first week, the hospital saved $70,000 and in the month of June 2010 saved over $500,000. Further savings are anticipated as surgeons become more comfortable with the program and other implants are included. The original goal of being able to make a profit on Medicare has been achieved for the first time in the hospital s history. The number of sales representatives visiting the hospital has dropped from over 20 a day to two per week. There has been no deterioration of service to the surgeon, and the right implants have been in every case with the right instruments. The most important point is that money has not gone from supplier X to supplier Y. Instead, the hospital is saving $500,000 a month and is keeping those savings. 8

9 Call to Action OrthoDirectUSA is exhibiting at the 10 th Physician Hospital of America Annual Meeting and Exhibition in San Francisco in September. We want to show you our business model and explain how it can be implemented. We urge you to be proactive in planning for the inevitable. Reimbursement will continue to decline, while demand increases. We can work with hospital leadership to help them manage this change profitably. Please call us at or visit We will be pleased to schedule a date and time to talk with you. About OrthoDirectUSA. We identify suppliers of stable technology orthopedic implants and equipment for the purpose of aligning those suppliers to hospitals and surgery centers to create a new supply chain generating savings of 50% to 70%. To facilitate the Hospitals execution of this new supply chain, ODUSA teaches, trains and coaches employees inside the hospitals and surgery centers to manage and implement the purchase of the devices or equipment that until now was handled by the large orthopedic or equipment companies and/or their distributors. Our market is referred to as Providers (i.e. hospitals and surgery centers provide services to patients and receive reimbursements from federal or state government programs or third party payers, e.g. insurance carriers). ODUSA receives two sources of revenue from the Providers: (1) Fixed Base Fees: for initial consulting, program setup and to teach, train and coach Provider employees and (2) Incentive Fee: ODUSA anticipates it will receive a percentage of the savings each Provider gains each year of the contract period by implementing the ODUSA disruptive supply chain model. 9

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