Performance for price: The other P4P

Price is important. Performance even more so. When it comes to implants, the two aren’t always connected

Payers are leaning toward pay-for-performance methodologies, that is, reimbursing providers on outcomes rather than on the amount of procedures performed, in an effort to save money and improve patient care. At the same time, providers are looking to dissociate marketing from clinical facts, and reward vendors accordingly. Progress is being made, but much work remains.

The Journal of Healthcare Contracting recently asked Fred Keller, vice president, and Doug Jones, assistant vice president, HealthTrust, for their perspectives on negotiating contracts for physician preference items, especially implantables.


The Journal of Healthcare Contracting: Some believe the influence of physicians over so-called physician preference items, such as pacemakers, is diminishing. They cite not only the ubiquity of product standardization and technology assessment committees, but publicity about the disparity of hospital charges, and the growing trend that finds hospitals and IDNs acquiring physician practices. How does HealthTrust perceive this?

Fred Keller and Doug Jones: There is a growing need within the United States for implant products’ value to be rooted in performance. This varies…across cardiac, spine, orthopedics and other implant procedures. But in general, there is a huge wave of consumer influence, reform pressure, cost pressure and a push for improved quality/outcomes driving [providers] to disassociate products from how they are “marketed,” and instead associate products with how they actually perform.

Other factors may be more specific to a segment of the device industry, such as physician ownership, which has riddled the spine implants and biologics market, causing many in the healthcare system – from patients to hospitals and payers – to scrutinize more of the physician decision-making. Other areas, such as cardiac service lines (including rhythm management and interventional cardiology) are further ahead of the product-to-performance association, as they tend to be rooted in a more substantive clinical outcomes mindset. The value of the products is supported by clinical information.

As the pressures on healthcare systems continue to grow, there is more engagement with physicians in selecting physician preference items. Over the past few years, certain physician specialties have been directly employed by the healthcare systems, causing marketing challenges…for suppliers to get higher prices or use premium products. Some specialties, like orthopedics, are not as clinically mature as cardiovascular products.


JHC:: The pharmaceutical market is characterized – some would say driven – by patent expirations and generics. To what extent are medical PPI companies affected by the so-called “patent cliff?”

Keller and Jones: PPI companies are not affected nearly as much, primarily because the science behind an implant cannot necessarily be duplicated because the product is on or off patent. The traditional patent cliff in pharma is easier to manage when there is a transition to generics, as there is more science (or data) and literature associated with the drugs. In the pharmaceutical world, much of the decision is driven by the ability or inability of a company to chemically duplicate or clone a drug.

In the PPI space, there is less objective data to demonstrate equivalency between devices. Most of the manufacturers won’t dispute that many devices are the same, so they try to differentiate themselves in other ways – sales rep service, for example. Within other areas of physician preference items, this is not the case at all. Products have very little clinical evidence to support their claims. Even if there is a patent protecting it, the product is marketed more than sold. And, because many of these products go through a much simpler FDA approval process compared to drugs, there is less information to fully understand how the design works, if it works and what effects it has on the intended use. The vast majority of approval claims are [based on a finding] that a new product is simply no worse than a previous version of a like product.


JHC:: In September 2013, AdvaMed (a trade association for medical manufacturers) issued a report saying that hospitals in 2011 paid 34 percent less per device for drug-eluting stents than they paid in 2007. AdvaMed also reported substantial price cuts for six other categories, including bare metal stents, pacemakers, cardioverter defibrillators, artificial hips and knees. Are you finding this to be true in your contract negotiations? If so, can you explain why this trend is occurring?

Keller and Jones: Generally, we have found similar trends. First, consider the starting point, which shows how many of these devices were and are overpriced, as well as the product margin. Many of the declines have followed the trend of physician ownership. The trend is occurring because for years, hospitals have taken increases on many product lines, and new product lines have been introduced that consume most, if not all, of the profitability from other service lines.

For instance, in the past 15 years, orthopedic prices for a product produced in 1999 have increased more than 138 percent. No other industry works in such a way. You can buy a flat-screen TV today that is 10 times better than one produced in 1999, yet costing 30 percent less than what you paid 15 years ago. This trend is changing considerably in healthcare, as service line performance is dismal at best for the vast majority of providers in the United States. And as a result, healthcare facilities are getting smarter, more in touch with their operations, better at managing their physician relationships, negotiating payer contracts and understanding the economics that impact their facilities. Price was the first low-hanging fruit that needed to be right-sized, and that is what you have seen across the physician-preference and clinically sensitive implant areas.


JHC:: The 2013 AdvaMed report offers this disclaimer: The study does not account for average prices of any specific device, but instead, looks only at average hospital costs for different categories. That suggests that falling costs may be partly attributable to changes in product mix over time, such as hospitals opting to buy cheaper or pricier versions of different implants. Can you comment on this?

Keller and Jones: The fundamentals behind the AdvaMed report may not include all the cost drivers that need to be understood to completely verify if average hospital costs have fallen. Additionally, there is no rationale to the price points in the market, and the AdvaMed disclaimer that doesn’t follow or account for normal market forces.

The fact is, high-volume implants often do not have the best pricing. This is why the manufacturers require “gag clauses” in their agreements with physicians. In the area of kyphoplasty, the cost of the implants has dramatically dropped over the past two years. The main reason is that two years prior, there was only one supplier in the market. Now there are four.

The costs of the implants alone are not the only thing at play. Over time, many of these procedures have moved from an inpatient to an outpatient setting, with very different reimbursement schedules. The fact that the costs have decreased cannot be looked at without understanding that procedures have moved to a very different payment schedule. In other areas of device implants, both product mix as well as acuity can play heavily into the cost within any stat – patient day, adjusted patient day, admission, adjusted admission.

Hospitals are not necessarily chasing just the price of the implant; they are also looking for ways to make the entire equation a more successful outcome for patients, physicians and financially. Clinical performance is moving more toward making decisions on what to use. This same phenomenon is also driving the true value of the products used. If a historically high-priced implant is showing inferior performance, it will get pushed down the value chain and be worth less if anyone wants to buy it.


JHC:: Has HealthTrust’s role in negotiating contracts with so-called physician-preference vendors changed over the past five years? If so, how? What do you foresee in the next five years?

Keller and Jones: Yes, our role in negotiating contracts with physician preference vendors has and will continue to change as payments shift to an outcome-based system. In addition, HealthTrust anticipates that the market will become more transparent and shed light on any clinical differences between devices. There is a confluence of clinical and cost data that will change the conversation on how product selection will occur.

Our clients, their hospitals and facilities currently provide over 15 percent of the care in the United States. Our role has changed, as increasingly, we find clients paying more careful attention to how they run their service lines that utilize PPI and other medical device implant products. As a result of their due diligence, they are seeking more guidance, expertise and assistance in tackling all aspects of these service lines – from price to implant cost and the total of cost management opportunities. This represents a tremendous opportunity for SourceTrust to engage those types of organizations for both consulting and PPI analytics.

While the next five years aren’t terribly easy to predict in terms of specifics, one thing is certain: More informed providers are certain to be better equipped to navigate physician preference areas.