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;85307-335). 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