Vendor’s Choice

Payment-cap approach to cost containment can be complex, but worthwhile.

Editor’s Note: The participation of those in the following articles on Physician Preference Items does not constitute an endorsement of the sponsor’s products or services.

For some IDNs, the going may get confusing, but if the end result works for the physicians, contracting professionals and, yes, even the vendors, then the process is worthwhile. Today, more hospital systems are departing from the traditional formulary model of cost containment – which limits physicians in the number of vendors they may work with – in favor of payment capitation (or, payment cap). In the payment cap model, the provider establishes price ceilings on item categories, regardless of the vendor. Ideally, this method forces the vendor, rather than the physician, to adjust to hospital spending restrictions. In theory, it’s a simple system. But, contracting professionals agree they must be savvy to navigate payment capitation and stay one step ahead of the vendor.

Why payment cap?
Lana Smith, director, clinical contract management/value analysis at 19-hospital Adventist Health (Bakersfield, Calif.), estimates that 35 percent of the IDN’s spending is on specialty items, such as joint replacements, cardiac devices and spinal implants. “The expense of new technology is steadily [driving] our spending,” she says.

“It’s not uncommon to see double-digit increases on physician preference items,” adds Roseanne Zagone, new product manager at Aurora Health Care (Milwaukee, Wis.), a 13-hospital IDN (about to open a 14th). Both IDNs use a payment cap approach to cost containment and both are pleased with their results, in spite of how complicated the system can be.

“The cap model removes the responsibility from the physician and places it on the vendor,” says Zagone. “We have physicians who participate in planning [price ceilings]. When they meet with vendors, they know exactly what our ceiling is and what the vendors’ options are.” Aurora Health uses the payment cap approach for orthopedics, spine and interventional radiology. “So far, our vendors have stuck to the contract,” she adds.

Adventist Health has adopted payment cap for pacemakers, ICDs and orthopedic devices, and a couple of its hospitals use it for spine procedures as well. Both Smith and Zagone agree that, whereas the payment cap approach is straightforward for such procedures as hip and knee replacements, managing a price ceiling can be tricky for spine procedures, which have a high level of variability.

Do vendors play fair?
The payment-cap model can be difficult to pull off because of the complexity of some product areas involved. Particularly with regard to spine procedures, where there are many different materials and steps involved, contracting professionals must stay on their toes to get the best prices. Price ceilings are defined by product categories, Zagone says. Whereas hip and knee procedures, which employ about four standard components, are straightforward to categorize, spine procedures involve about 44 categories. “There is a separate category for each piece of the procedure,” she says. “We must agree with the vendor that each product belongs in a certain category, depending on its utilization.” This can be challenging given that some vendors have as many as 15,000 line items on spine contracts, she adds.

“Vendors aren’t necessarily trying to outwit the [pricing] system, she continues. “But, they make the system so complicated, it becomes difficult to manage.” For one, manufacturers frequently merge their companies, creating havoc on product codes. “When companies merge, they get new product or catalog numbers,” says Zagone. “Vendors often change product descriptions, or the number on a box of products may differ from the number on the invoice or contract. And, new technology must constantly be evaluated to see where it fits in.” That said, Zagone says her vendors do their best to remain upfront and honest with her. “They’re not necessarily doing anything negative,” she points out. “It’s just a complicated system.”

Smith agrees that a complex pricing system can be mind-boggling for both the contracting professionals and the vendors. Still, she questions the approach some companies take. “Spine companies are notorious for [offering] to take 5 percent off the price, and then [raising the price] 7 percent the following year,” she says. “And, reimbursement doesn’t keep up with this rate [of price inflation].” IDNs need contracting professionals who are savvy enough to negotiate a price that will hold for three years, she adds.

Managing the system
Indeed, whether it is the nature of the beast, or if, in fact, vendors are working the system, it’s up to the IDN to stay on top of price changes, which can occur even in the smoothest-running payment-cap programs. “If a P.O. request is higher than what we should be paying, someone at the hospital must catch this,” says Smith. “When physicians sign off on implants, they likely are not aware of the [actual] cost of the product.”

Contracting professionals are doing a better job of passing along data to physicians, she continues. “This definitely helps doctors make better choices,” she says. In addition, Adventist Health has implemented a simple plan, with positive results. “We call it the Stoplight Effect,” says Smith. Supply chain management identifies the hospital’s highest-priced vendors as “red-light” vendors. Mid-priced vendors are “yellow-light” vendors, and the lowest-priced vendors have a green light. “Our physicians respond well to this,” she says. Armed with more data than ever, doctors at Adventist Health can better negotiate with their vendors. “Physicians can tell a red-light vendor, ‘If you want me to continue using your product, you need to give me a better price.’ It sends a message to the physicians that they must think real hard when they choose to work with a red-light vendor.”

Doctors want to make choices that are both clinically and financially appropriate, she adds. “Hospitals are finding that the more financial data we share with doctors, the better they can work with us.” Along these lines, after Adventist Health benchmarks the cost of its products, its contracting professionals “show our doctors what’s what,” she says. With a better understanding of the hospitals’ margins, physicians are more apt to negotiate with vendors on behalf of the facilities, she adds.

Zagone agrees that physicians today are more inclined to work with contracting professionals to contain costs. “Doctors realize that in order for hospitals to be successful and provide [the most appropriate] technology and [staff the facility] sufficiently, they must control expenses,” she says. “As we involve doctors [in the contracting process] more, they see that we value their input and knowledge, and that we’re not making decisions arbitrarily.”

Vendor – physician relationships
In spite of feelings that vendors can complicate IDNs’ efforts to contain costs, contracting professionals agree that they also bring value to the process through education and product discounts (on non-ppi items). “I think they are becoming more sensitive to [the need] to help us keep spending down,” says Smith. At the same time, she keeps her eye on vendor-physician relationships. On one hand, “we can’t be prejudiced against vendors [simply] because they have a relationship with doctors,” she says. “But, we do have to partner with the physician better than the vendor does.”

“I think we should question vendors about the benefits surgeons get for working with their company,” she says. “This disclosure would be helpful. After all, vendors should be held to the same standards as other healthcare professionals, she points out. “We all have to disclose information. Even I have to sign a conflict of interest form.”

Here to stay?
Whether the payment cap model will become the prevalent method of cost containment for IDNs remains to be seen. “It really depends on what happens with reimbursement rates,” says Zagone. She says reimbursement should reflect quality of care, especially when quality outcomes depend on more expensive technology. “We need to maintain a revenue balance by knowing what the most expensive physician-preference items will cost.”

How, then, can hospitals control the highest-cost items if reimbursement rates don’t keep pace? “For now, the payment cap model is here to stay. But, if federal and commercial payers cut reimbursement rates, how hospitals continue to pay for care will determine how [successful] this model will be.”

About the Author

Laura Thill

Laura Thill is a contributing editor for The Journal of Healthcare Contracting.