Demanding Financial Value In Valve Programs

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As reimbursement for cardiac valve surgeries diminishes, so do the profit margins for hospitals that traditionally rely on such procedures to offset Medicaid and other money-losing aspects of patient care. To contain costs, hospitals are implementing financial incentives and other strategies to align physician interests with their own. In the long run, this strategy may lead hospitals to greater harmony with cardiac surgeons as well as suppliers.

A money maker, for some

Cardiac valve surgery is expensive, with a price tag of up to $172,087, according to an analysis of 37 hospitals and 1,858 patients who underwent the procedure in 2008 (Health Serv Res 2011;46:1928-1945). Payment per case averaged $62,040, while contribution margins averaged $18,308.

But not all hospitals made a profit. The profit margin ranged from a loss of $14,395 at one hospital to a gain of $47,616 at another. And reimbursement varied widely, with payments through private insurance bringing in almost $28,000 per case more than under Medicare. The chasm between contribution margins was even wider, at $47,126 for private insurance vs. $9,495 for Medicare. After adjusting for patient, hospital and market characteristics, the average contribution margin with Medicare paid $30,986 less than private insurance.

“With valve replacement, the vast majority of patients have Medicare coverage,” says study author James C. Robinson, PhD, MPH, a professor of health economics at the University of California, Berkeley. “It is a problem with the elderly.”

Under today’s prospective payment system, Medicare typically reimburses U.S. hospitals at a set rate for each admission, regardless of the actual costs to the hospital. But physicians may dictate what materials are used in procedures, such as a valve replacement, with little consideration of cost. Physician preference can be based on a variety of factors, including familiarity with a product and a relationship with a supplier that provides important educational and support services. In some cases involving high-priced items in a variety of specialties, surgeons have been influenced by financial rewards, too.

“Hospitals are really on the hook,” says Jonathan D. Ketcham, PhD, an associate professor of marketing at the W.P. Carey School of Business at Arizona State University (ASU) in Tempe, who researches physician and hospital incentives. “It comes directly from their profit margins.”

Physician-preferred items, such as cardiac valves and related items, offer hospitals an attractive target for cost containment. According to a 2011 analysis of nonprofit hospitals by Premier, the difference between Medicare reimbursement and costs for cardiac valve replacements fell short, on an average $14,547 for each of the 12,792 procedures performed in 2010 included in the analysis. The Charlotte, N.C.-based healthcare alliance is a membership-owned organization that serves about 2,500 hospitals, health systems and providers.

Costs and collaborations

“The devices are expensive and the cost is rising higher than the reimbursement that hospitals receive for a variety of procedures,” says Robinson. “It is a financial cost-supply chain challenge.”

Hospitals are not powerless, though. Eugene S. Schneller, PhD, director of the Health Sector Supply Chain Initiative and a professor in the business school at ASU, argues that hospitals have a variety of strategies they can employ to rein in costs while maintaining quality of care. But to effectively change the purchasing dynamic, hospitals need to institute programs that retain physician choice and build trust to counter the sway of suppliers that offer physician-preferred items traditionally have held.  

In a study that assessed the process of selecting, assessing and purchasing of physician preferred items and the relationships that affected those decisions, Schneller and Kathleen Montgomery, PhD, from the University of California, Riverside, discovered that many hospitals reported implementing value analysis teams (VATs) in an effort to standardize purchasing decisions (Milbank Q 2007;85[2]307-335). Although variable in their design and processes, the VATs generally used committees that combined physicians, clinical directors, nurse managers, materials managers, financial representatives and others in a disciplined process that allowed them to assess products, evaluate their value and compare that value to relative costs.

The key to success was engaging physicians in critical—and costly—areas, such as cardiology and cardiac surgery, and giving them a sense of ownership. “Hospitals figured out that they need to engage the thought leadership among the clinical staff,” Schneller says. “They have done a better job of finding the physicians who are influential.”

Of course, there are challenges to building a VAT, including:
  • Getting busy surgeons to commit the time needed to participate. Schneller says some facilities pay staff for taking on this duty.
  • Getting buy-in from physicians who feel they are being dictated to. The researchers noted that avoiding the use of a rigid “formulary” model that limited the range of products and, as a team, determining payment caps to vendors for products worked well.
  • Getting all on board. The ability to negotiate with vendors depends on physicians’ willingness to abandon a product, Schneller and Montgomery noted. But because the decision is team- and clinician-based, physicians were less likely to oppose it.
  • Retaining the value of vendors. Schneller and Ketcham emphasized that vendors can play important roles helping both clinicians and inventory managers.
  • Provide accurate and granular data for physicians with the use of EMRs and other resources.
“This also is developing a culture where evidence drives decision making,” Schneller says. “That is what physicians respect most. It is putting together data in a convincing way and demonstrating that the hospital has a commitment to not just pick supplies with the lowest price tag, but also bring value to a practice over time.”

Cost Characteristics of 37 Hospitals Providing Cardiac Valve Replacement (Surgery in 2008)
Variables Mean Minimum Maximum
Cost per case (all patients) $43,733
$21,027 $95,480
Medicare patients
$45,608 $21,947 $95,480
Private insurance patients $35,840 $19,263 $52,658
Payment per case (all patients)
$62,040 $33,281 $112,816
Medicare patients $55,102
$28,632 $112,816
Private insurance patients $82,966 $27,052 $172,087
Contribution margin (all patients)
$18,308 -$14,395 $47,616
Medicare patients $9,495 -$20,010 $47,103
Private insurance patients $47,126 -$1,754 $132,480
Source: Health Serv Res 2011;46:1928-1945)

Sharing the benefits

In February 2005, the U.S. Department of Health and Human Services’ (HHS) Office of the Inspector General (OIG) issued an advisory opinion that added heart valves to categories of materials for evaluation in gainsharing programs that reward cardiac surgeons for reducing supply costs. Under gainsharing, the hospital gives back a percentage of the savings it accrues when surgeons implement cost-cutting measures in surgical procedures. To receive that incentive pay, the surgical group must “work in conjunction with the hospital to evaluate and clinically review vendors and products,” the opinion stated. “The surgical group will agree to use the selected products where medically appropriate.”

Like VATs, gainsharing potentially shifts the allegiance of physicians away from vendors and toward hospitals, to a degree. But with gainsharing, cardiac surgeons and hospitals each have a financial stake in lowering costs. As the OIG detailed in its opinion, such arrangements potentially can influence physicians in ways that harm patient care, including cherry picking only healthy patients or scrimping on care.

In a study on gainsharing in cardiology, Ketcham and Michael F. Furukawa, PhD, acting director of economic analysis, evaluation and modeling at the HHS’ Office of National Coordinator for Heath IT, found that gainsharing lowered costs without compromising care in an analysis of 13 gainsharing programs (Health Affairs 2008;3:803-812). Their findings, which focused on interventional cardiology and not cardiac surgery, showed a 7.4 percent reduction in costs per patient, with most savings coming from lower prices. They reported no signs of cherry picking, changes in referral patterns or physician caseloads.

They suggested that gainsharing may improve patient care because it fosters more dialogue among cardiologists. “Gainsharing makes physicians talk to each other, think about which devices they are using, why they prefer one over an alternative and when it is acceptable to substitute an alternative,” Ketcham says. “That can alter the bargaining dynamic between the hospital and the suppliers.”

During negotiations with vendors, cardiac surgeons and hospital staff sit on the same side of the bargaining table, a visible sign that they are aligned. “The hospital can credibly claim its physicians are willing and able to switch to alternatives if the suppliers are not able to bring prices down,” Ketcham says.

The payors’ role

The use of VATs and gainsharing is not widespread, Ketcham and Schneller say, but the practices may become more common as more physicians abandon private practices for hospital employment and as Medicare reimbursement shifts toward bundled payments and accountable care organizations (ACOs). And for cardiac valve procedures, that day may be approaching soon. The Centers for Medicare & Medicaid Services (CMS) launched a three-year demonstration to test the use of a global payment for an episode of care for select cardiovascular procedures, including cardiac valve replacements, at five facilities that were selected between 2009 and 2010.

Payment will cover all Part A and Part B services, including physician services, and the facilities will have the option of rewarding surgeons or teams of surgeons who meet measures for clinical quality and efficiency. The results likely will pique the interest of not just policy-makers, but private insurers as well.

“As Medicare and even private insurers shift to paying a single bundled payment, how will they split up those dollars among all the different providers operating within that system?” Ketcham says. “Gainsharing can be one part of the way of dividing those dollars.”

Hospitals charge private insurers higher prices and make significantly higher contribution margins on cardiac valve replacement payments from private insurance, according to Robinson’s analysis. Unlike Medicare, private insurers can negotiate charges with each hospital or chain and pay per diem. Hospitals that are seen as vital in the insurer’s network also can negotiate higher reimbursement rates for cardiac valve procedures. Typically, insurers have not been involved in other aspects of pricing.

“To this point, you’ve seen payors stay out of this discussion,” Schneller says. But like hospitals, private payors are beginning to look at the relative quality and costs of materials, too. Armed with data from registry studies, results from head-to-head comparative research and other data sources, he predicts they actively will look for proven equivalency or superiority in physician-preferred items. “The payors increasingly will be concerned that they are getting value for their money. “

New direction for vendors

Suppliers also are adjusting as purchasing procedures for physician-preferred items increasingly are viewed under a microscope, Schneller says. This may be partially driven by bundling, where hospital and physician payment is rolled into one, giving both parties an incentive to keep costs down. The capability to extract evidence on outcomes using EMRs also may fuel this trend, particularly if supply chain data are linked to clinical data.

Consequently, the model of vendors and hospitals as antagonists, with each vying for the allegiance of physicians in the middle, is evolving into one of co-existence. Some vendors, instead, are broadening their networks by building relationships across the healthcare spectrum, Schneller says.

“When you look at the major suppliers, they are now understanding that a strong working relationship with the economic buyer—the hospital and insurance company—is important,” Schneller says. “In an environment with decreasing reimbursement, they understand they need to work together to improve processes, not just to improve the product, but to ensure you have high quality outcomes.”

Medicare may have the most to gain from cost-containment collaborations. The American Heart Association estimated that in 2007, about 68 percent of the total 106,000 valve replacement operations performed in U.S. hospitals involved patients 65 years old and older (Circulation 2011;123:e18-e209). And valve operations for elderly patients have been on the rise. They rose 26 percent between 1999 and 2006, and are projected to increase steadily.

Given these trends, Medicare has a keen eye on valve-related developments, according to Robinson. “Anyway to bring the cost down, Medicare will be watching,” he says. “Medicare would love to bring the reimbursement cost down as well.”