ppi standardization: is this the right strategy? · 2009. 5. 12. · medassets company 2....
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CONFIDENTIAL – PROPERTY OF MEDASSETS. MedAssets® is a registered trademark of MedAssets, Inc. Copyright MedAssets, 2008. All rights reserved.
PPI Standardization: Is This the Right Strategy?Nick Sears, MD
Chief Medical Officer
MedAssets
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Introduction
• Nicholas Sears, M.D.
• Chief Medical Officer, MedAssets
• Senior Vice President, Aspen Healthcare Metrics, a MedAssets company
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Is This the Right Strategy?
• Will I be shot by my physicians?
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Agenda
• State of Healthcare
• Stakeholders
• PPI Standardization
• Alignment Methods
• Other Issues
• Questions…at any time
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State of Healthcare
• Demand
• Macroeconomics
• Political football
• Transparency
• Cost drivers
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Growing Demand on Healthcare System
6© 2009 MedAssets
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Cost of Caring for Seniors
• 24% increase above inflation since 2000
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National Health Expenditures as a Share of Gross Domestic Product
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10
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1980 1985 1990 1995 2000 2005 2010 2015
National Health Expenditures as a percentage of GDP
Actual Projected
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U.S. Healthcare Growth is nearly ¼ of U.S. GDP Growth
158B : U.S. HC
711B : U.S. GDP= 22%
$ billions
5.1%
7.1%
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State of Healthcare: Facts
• US Healthcare Expense and Projections
2006 2009 2015
$1.9 Trillion $2.9 Trillion $4 Trillion
2-3 times normal economic growth
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Hospital Industry Pressures in a $650B Market
25%
75%
% With NegativeTotal Margins
….And Weak Financial Performance
% of Community Hospitals With Negative Total Margins – 2005
Source: AHA Annual Survey
(26)(23)
(14)(6)(5)(5)
(30)
(20)
(10)
0
10
20
30
2000 2001 2002 2003 2004 200570
80
90
100
110
120
130
Source: American Hospital Association – 2007 Trendwatch Chartbook
Private InsuranceMedicaid Medicare
Government Shortfalls Subsidized by Private Payors…
Payment vs. Cost ($Bn) Payment / Cost (%)
Self-Pay Driving Higher Rates of Bad Debt & Charity Care…
% of Total Expenses
5.75.65.65.55.45.66.06.26.1 6.1 6.0 6.06.1
0.0
2.0
4.0
6.0
8.0
10.0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Health Forum, AHA Annual Survey Data
Lead To Declining Operating Margins…
% Pretax Margin
02468
101214
1Q94
4Q94
3Q95
2Q96
1Q97
4Q97
3Q98
2Q99
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
Source: Company Reports and Wall Street Research
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0
1
2
3
4
5
6
1Q01 1Q02 1Q03 1Q04 1Q05 1Q06
Rising Supply Costs & Complexity Pressuring Hospital Margins
Consistently higher growth in hospital costs versus overall inflation− Technology and innovation driving increased cost
of care
Historically profitable procedures are becoming less profitable− Aging boomers will drive additional demand for
key implant procedures
− Device costs / procurement processes
− Competition from specialized facilities
Complexities inherent in procuring the vast number and quantity of supplies− 35,000 SKUs used by a typical hospital
− MedAssets: 4MM SKU master item file with 40MM price points
Hospital Cost Trends
Source: CMS, Bloomberg
Annu
aliz
ed In
crea
se /
Dec
reas
e B
y Q
uart
er
(%)
Joint Implant Cost as % of ReimbursementMS DRG 470 Total Joint Replacement – Lower Extremities
Spend Management – Size / Challenges
Cost Pressures
Total Hospital Cost Index Core CPI
78.9% 74.3%
70.1%
50.0% 54.6% 60.1%
64.7%
45.0%
40.0
50.0
60.0
70.0
80.0
90.0
100.0
1999 2000 2001 2002 2003 2004 2005 2006
(%)
4Q06
Hospital Cost IncreaseOver Core CPI
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State of Healthcare: Policy
Obama Healthcare
Fix Coverage
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Average Annual Premiums For Employer-Sponsored Family Health Coverage
• The average annual premium for a family of 4 reached $11,500 in 2006 and is projected to increase 60% by 2012.
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$0$2,000$4,000$6,000$8,000
$10,000$12,000$14,000$16,000$18,000$20,000
2001 2003 2005 2006 2012
Annual Premium
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Healthcare Policy
• Obama healthcare– Fix coverage
• Primary Issue– Not coverage, but cost
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State of Healthcare: Transparency
• Our healthcare system is far from transparent
• Why?
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Healthcare Cost Drivers
• Medical Malpractice
• Labor
• Uninsured/Indigent Care
• Supplies and Pharmaceuticals– Branded pharmaceuticals and utilization
– New technology
– Physician preference items
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Stakeholders
• Physicians
• Administrators
• Vendors
• Patients
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Medical Staff Functions: Traditional
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Medical Staff Functions: Deterioration
• Factors Causing Medical Staff Fragility– Political issues
– Understaffing with collaborative leaders
– Financial pressures• Disparate payments for physicians and hospitals
• Shrinking pie
– Health services market demands• Increased efficiency and effectiveness
• Increased responsiveness
• Increased transparency
• Increased accountability
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Medical Staff Functions: Deterioration (cont’d)
• Factors– Changes in workforce demographics
• Work/life balance
• Decreased job satisfaction
• Decreased reimbursement
• Increased pressure on performance (scrutiny)
• Decreasing specialists, “turf wars”, competition
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Medical Staff Functions: Paradigm Shift
• CEO can’t depend on medical staff– Alternative ways to fill in the traditional roles
• Clinical excellence
• Safety
• Organic growth of service lines
• Cost management
• CEO work-arounds– Joint ventures
– Special contracts
– Co-management agreements
– Physician employment
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Stakeholders
Vendors
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Stakeholders: Vendors
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New York Times
“In the last two years, Medicare payments to hospitals for implant surgery have risen about 40 percent, from $10 billion to $14 billion...”
“... in the last two years alone, spending on implant surgeries by Medicare...increased twice as fast as the program’s spending over all...”
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Medical Supply Industry: Spending Dominated by Device Market
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Medical Supply Industry Factoids:Supplies vs. Devices
• $85,000,000,000 industry
• Distribution: 55% vs. 35%
• Growth: 7% vs. 23% per year
• Ave SG&A: 18% vs. 34% of revenue
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Medical Supply Industry Factoids:Supplies vs. Devices (cont’d)
Therefore…
• Medical Device industry 16% higher
• 16% of $85,000,000,000 = >$13,600,000,000
• Sales commissions, executive salaries,
administration and options
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What does that REALLY mean?
$13,600,000,000 would double the net income of all non-
profit community hospitals in the country!
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Trends in Orthopedic Implant Price, Physician and Hospital Medicare Payment
$4,209
$6,898$7,512
$1,583 $1,631 $1,655 $1,600 $1,427 $1,455 $1,486 $1,336
$9,360 $9,150 $9,223 $9,057$9,681 $9,835 $10,110
$7,985
$6,268$5,440
$4,575 $5,037
$10,120
$1K
$3K
$5K
$7K
$9K
$11K
1999 2000 2001 2002 2003 2004 2005 2006
Implant Cost Surgeon Reimb. Hospital Reimb.
The implant consumes 80% of the hospital’s reimbursement
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The Picture for Orthopedic Implant Vendors
28%
7%
40%
9%17%
0%
20%
40%
60%
80%
100%
Orthopedic Implant Companies
Perc
ent o
f Tot
al R
even
ues
Net Income Margin
Taxes, Net InterestExpense and OtherSales, Marketing, General& AdministrationResearch &DevelopmentCost of Goods Sold$7,640 Versys Hip $1,300 Profit
$3,056 Sales/Marketing
$534 R&D
$2,138 COGS
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Implant Sales Commission Versus Surgeon Medicare ReimbursementCPT# 27447 - TOTAL KNEE ARTHROPLASTY
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1993 1995 1997 1999 2001 2003 2004 2005 2006SALES COMMISSION RBRVS PAYMENT
$700 $800$900
$1,000$1,400
6.3% Price Increase in 2006
$1,600
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Stakeholders
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Stakeholders
Patients
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Stakeholders: Patients
• Internet
• Direct to consumer marketing
• Word-of-mouth
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Example
“Jack Nicklaus Tees Up Hip Replacement Awareness”
Jack Nicklaus, shown with his grandson, got a new hip in 1999.
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Stakeholders
Alignment
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Stakeholders
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Align!!!
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Procurement Professionals
The View from Materials Management
Physicians Executive Team
Alignment: Key To Success
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Device Manufacturers
Hospital X
Whoever has two against one usually wins!
Physicians
Alignment: Key To Success
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Alignment: Physician
What is the favorite wine
of your doctor?
What’s in it for me?
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Redesign sessions to improve service linesMeetings with all stake-holders to improve clinical and financial parameters
InterviewsIndividual and group interviews with medical staff members
Medical Management SurveyDetailed questionnaire about knowledge, attitudes and behaviors regarding medical management and resource utilization
Focus GroupsStructured focus groups of homogeneous clinical specialties designed to gain a deep understanding of physicians’ attitudes, beliefs and behaviors about clinical systems and computerized physician order entry and begin to educate physicians about what is possible
Hospital/Medical Staff Relationship ScorecardSummary assessment grid evaluating overall state of relationships between medical staff and hospital or system and its leadership
Clinical Systems Survey Paper or web-based detailed questionnaire on attitudes, beliefs and behaviors about computerized physician order entry
Readiness for Change Assessment Tool Abbreviated tool to assess physician’s readiness for engaging in computerized order entry
Alignment: Physician Driven Design -Assessment
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Standardize
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PPI Supplies –Difficult for Hospitals to Win
• Consolidation of PPI Companies
• Utilization of high-tech devices eroding margins– Physician desire for multiple vendors (Standardization difficult)
• Non-clinical issues may drive selection– Design relationships with physicians common
– Direct to Consumer marketing, similar to Rx now becoming common in the medical device arena
– Vendor/physician relationship
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Cardiac
General Surgery
Orthopedics
Neuro/Spine
Once the “Cash Cow” of hospitals, profitability declining due to technology costs outpacing reimbursement. CABG still profitable but declining volumes.
Profitability
Most cases continue to be profitable.
High % Medicare and high cost of implantables. OP procedures profitable but being skimmed-off
Positive margins highly dependant on payor-mix and ability to “carve out” spinal implants.
Changing Profitability of Clinical Service Lines
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What These Clinical Service Lines Have in Common…
• High percentage Medicare (fixed reimbursement)
• High surgical/procedural volume
• High supply costs
• Managed by a relatively small number of specialty physicians
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What These Clinical Service Lines Have in Common: Physicians
• Physician Attributes– Ego– Technical capabilities– Knowledge base
• Physician Stimuli– Cutting edge technologies– Differentiator in the community– Income enhancement
• Declining procedural reimbursement
• Bigger patient load
• Ancillary income
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Key Approaches to Engaging Physicians in Clinical Resource Utilization Initiatives
• Position physician champions to lead clinical initiatives by:
– Clinical leadership and accountability
– Oversight and initiative direction
– Allowing for interpretation of quality and cost per case data
– Determining key areas of focus for appropriate clinical resource utilization
– Enhancing physician knowledge and skills
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Key Approaches to Engaging Physicians in Clinical Resource Utilization Initiatives
• Engage physicians early in the process– Identify high cost/high volume supplies
– Identify high volume users
– Profile physician utilization by vendor/product
– Determine best case scenario for cost savings
– Determine physician willingness for change to new vendor
– Hold one on one meetings to discuss results and options for change
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Key Approaches to Engaging Physicians in Clinical Resource Utilization Initiatives
• Focus on quality issues
• Highlight successes– Communicate quality and financial improvements to medical
staff and hospital/system community– Recognize physician contributions and accomplishments
• Personally
• Publicly
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Standardization
• Multiple Sources
• Dual Sourcing
• Single Sourcing
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• Pro– Preserves physician choice– Protects against recalls– Allows flexibility of supply
chain– Preserves communication to
many vendors• Easier introduction of new
products• Allows for ongoing
competition
– Allows medical staff access to clinical trials
• Cons– Contracting difficulty– Storage Issues– Staff Unfamiliarity
• Decreased OR efficiency
– Multiple Reps roaming the halls
Standardization: Multi-Source
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Standardization: Dual Source
• Pro– Preserves some physician
choice– Protects against recalls– Allows some flexibility of
supply chain– Allows for better pricing
concessions– Preserves communication to
many vendors• Easier introduction of new
products• Allows for ongoing
competition
• Cons– Storage Issues– Staff Unfamiliarity
• Decreased OR efficiency
– Multiple Reps roaming the hall
– Limits clinical trials to some extent
– Potential legal issue due to product limitation (hospital practicing medicine)
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Standardization: Sole Source
• Pro– Allows best pricing deal
– Eases inventory management
– Staff become experts
• Cons– No physician choice
– Recall risk• Could shut down a service
line
– Vendor complacency
– Physician recruitment difficulties
– Limitation of clinical trials
– Potential legal issue due to product limitation (hospital practicing medicine)
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Compare and Contrast Through Detailed Analysis
Vendor Medtronic Guidant St. Jude Other TotalUtilization 326 70 56 27 479Sourcing % 68% 15% 12% 6%Cost/Unit $6,531 $6,068 $6,389 $6,474Spend $2,130,153 $420,150 $355,461 $176,556 $3,082,320
Vendor Medtronic Guidant TotalUtilization 394 85 479Sourcing % 82% 18%Cost/Unit $5,000 $4,900Spend $1,972,367 $413,735 $2,386,102
Vendor Medtronic Guidant TotalUtilization 96 383 479Sourcing % 20% 80%Cost/Unit $5,200 $4,700Spend $498,065 $1,800,698 $2,298,763
A savings opportunity can be derived by consolidating the number of pacemaker vendors.
Savings = $696,218 Savings = $783,557
Significant savings can be found in narrowing selections
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Other issues
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Other Issues
• Gainsharing
• Conflict of Interests
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Questions
Nick Sears, MDChief Medical OfficerMedAssets(303) [email protected]
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