Innovations in Healthcare Supply Chain Contracting: Part V

Judy Lipscomb at BayCare Health System
– Building a case for change

When Tampa-based BayCare Health System went searching for supply chain best practices, the materials managers and executives assumed they would eventually end up outsourcing most of their supply chain and distribution activities to gain efficiencies and save money.

Instead they found they were in a prime position for something quite opposite: full self contracting and self distribution.

Judy Lipscomb, BayCare's VP of Materials Management, and her team began implementing the new model – amounting to a full overhaul of the system's supply chain – in 2007.

As part of our series on innovative supply chain contracting, we asked Judy to share how BayCare has managed this change.

MediClick: What was BayCare's business case for going to self contracting and self distribution?

Judy Lipscomb: A few years ago, in researching best practices from other organizations, we realized that our centralized procurement and AP, one checkbook, and very tight geography could work to our advantage.

In writing our business case, we found that only 23% of our $200 million of supply chain spend was going through distribution. We managed the requisitioning, procurement, receipt, and delivery of everything else ourselves. Then, of the $200 million going through our GPO, we were re-contracting $80 million.

The whole question became, if it was financially viable, could we do these activities ourselves to the scale that we needed. At first we looked at just central distribution. The more that we talked to others, the more we heard that we really needed to get as close to manufacturers as possible. If we didn't do our own direct contracting, we'd be missing savings and efficiency opportunities that would lead to new revenues.

We created the structure for our own primary GPO to put us in a better position with the manufacturers so that we could address the full delivered cost of the supply chain. There's inherent value in owning that relationship ourselves. The value comes when we show our suppliers that we want to know how to do business with them in the most cost effective way.

MediClick: How did manufacturers first react when you brought the self-distribution and self-contracting models live?

Judy: There was considerable skepticism from some who had seen this model fail in other areas. On the other hand, there was enthusiasm from others who jumped at the chance to work with us.

Our only retort to the skeptics was "Look at that distribution center, do you think we would have made the investment if we didn't think it would work?" We told them this isn't just about us. It's about them, too. Our whole objective is to try to find new ways to work with manufacturers in the most efficient manner so they benefit also.

After a couple of fairly large conversions we were able to convince a number of people, internally and externally, that we were able to work in this market.

MediClick: What words of wisdom – or warning – would you share with other organizations that talk about emulating your model? What do they need to have in place to be successful?

Judy: There is no cookie-cutter model. There were challenges we were fortunate to not have to address. For example, although there are those that are very successful, the location of the hospitals can be a challenge. The more geographically spread out, especially if they cross state lines, the more logistical considerations and operating expenses they'll have. I also think their challenges are far greater if their hospitals are not on a common ERP system or if they don't have their item masters synchronized. If you create a GPO, you will need a decent contract management software system. You cannot manage a GPO by Excel spreadsheet for long if your contracted spend grows quickly.

Also, support from the highest levels of the organization is critical.

MediClick: How do you build credibility and support from within your organization?

Judy: Job one is listening to the physicians', clinicians' and executives' needs and concerns about supply chain operations. Be flexible and balanced. Respond by explaining what you can do to address what you've heard from them. It's critical for them to believe you're honestly, genuinely hearing their needs, trying to meet their needs when you can, compromising if necessary, and providing credible reasons when you can't.

We try to be reasonably inclusive in decision making on our supply spend. We try to have fair system-side representation on our product selection teams. We also make sure that we alert the senior management team on the decisions and ask them to support us. And we communicate in every channel we can.

Some standardization opportunities seem simpler that they really are. One of BayCare's president's council members once asked me why I didn't standardize toilet paper. He figured we shouldn't have to get input from anybody on those items. But the fact is, converting toilet paper means converting toilet paper holders and that has impact on every bathroom across the system. So you can't arbitrarily say we will now use this. Some of the things that seem to be slam dunks aren't.

We look at standardizing not only on the commodities side, but on the physicians' side. We have checks and balances on new technology to make sure that just because it's the greatest thing since sliced bread that it has enough clinical efficacy and operational impact to bring it in. New technology is typically where you lose control of your supply chain because there isn't the breadth of timely information about how good something is or isn't. Much of the product analysis is funded by manufacturers. The new products need scrutiny.

In addition to the typical value analysis team, we have technical review teams to provide that scrutiny. Anything with an annual aggregate cost of $10,000 or more goes in front of physician committees. Then it goes in front of a multi-disciplinary technical review committee that researches the product and either challenges or supports its clinical use.

The product finally goes to an administrative committee which asks: Can we afford it? Can we afford it now? And are there limitations?

MediClick: It's often difficult to get people to change if you don't have a true burning platform that forces change. How do you get this on top of peoples' lists at BayCare?

Judy: If we could convert exam gloves and save $200,000, that's a slam dunk despite the fact that converting gloves involves a lot of people. Sometimes you can only save $80,000 on a conversion, which could be spread out as $10,000 at two hospitals, $20,000 at another hospital and $40,000 at a third. So then you're challenged with the individual hospitals asking, "what's in it for me? You want me to go through the pain of conversion for only $10,000 worth of savings?" Those giant, hundreds of thousands of dollars in savings are not always easy to find so you have to look at the sum of the parts.

We've fortunately had enough places where we've actually saved clinical folks money. They're now willing to look at things where, historically, it would not have been worth it for them.

If there's any opportunity for savings over $100,000 that our VAT teams ignore or turn down, they have to go and present it to the supply chain oversight committee and tell them why they don't think they can do it or why they don't want to do it. If it's between $50,000 and $100,000 worth of opportunity, we work with them to see what would make it palatable to switch.

MediClick: How has your clinical background informed your approach to the clinical elements of the supply chain and the relationship to the clinicians?

Judy: I was trained as a radiology tech and worked in the OR, the cath labs, radiation therapy and nuclear med. That experience actually helps me understand things from a clinician's perspective. When you singularly work in the supply chain you can forget it's all about the patient. And if you can meet the needs of the patient then you've met the needs of the clinicians.

Replenishing supplies is number 47 on the daily to-do list of a nurse who's dealing with a patient, a family, a doctor, and government regulations. If you can make the supply chain as low cal and invisible for them as possible, you will have made their day.

Our new electronic health record (EHR) is an example of us changing our practice to facilitate the system. We had a 40,000 item master file, but because the item master database is used to feed the EHR database for supplies, clinicians need to be able to go into that EHR and find that supply. We've ended up doubling the size of our item master file to make it easier for the clinicians to find the item in the EHR System. And it'll probably grow even more.

For instance, we need to have various screw sizes for spinal cases so nurses can find the right one and populate the implant log in the EHR during the case and simultaneously create the log for patient billing. They'll ultimately be creating the purchase order for those products.

We could look selfishly at those screws and say that, since they're not used more than once or twice a year, we're not putting them in the item master file because it requires additional steps. But when you're in an OR – and I used to work in an OR – you want things to work like clockwork. Exception and variation are not good things.

Bob Barbier at University Hospital in Louisville, Ky.: Advancing Medical Technology While Managing Costs

Working at an academic teaching hospital, Bob Barbier is dedicated to the facility's mission of helping advance the practice of medicine. An important job of the supply chain, he believes, is supporting that mission by making sure clinicians have the tools and equipment they need to develop and test new medical technologies.

Despite his passion for high-tech healthcare, Bob doesn't work on the clinical side of medicine; he's in charge of making sure the hospital can pay the bills for it. As Senior Vice President and CFO at University Hospital, part of University of Louisville Health Care in Louisville, Ky., it's Bob's job to keep the bottom line in check while making sure the hospital keeps up with the best medical advancements.

"There is some remarkable technology being used in medicine today," Bob explains. "It's the kind of industry this country needs to sustain. Our ability to do research and development needs to continue in order to improve the practice of medicine."

With dwindling hospital margins and an increasing indigent patient population, Bob admits it's a challenge. But he is determined to win that battle. We sat down with him to find out how he balances rising supply chain costs with those of the ever changing medical advances.

MediClick: How do you balance your mission as an academic teaching hospital with the need to control supply costs?

Bob Barbier: Technology will continue to change. In an academic environment you at least get to see some of those changes as they happen. Our ability to do research and development needs to continue because you don't want to be lagging in the market.

We take medical technology for granted now. Think back to medicine 20-30 years ago; we didn't even have MRI back then. And medicine will be much different in another 20 years.

The process of medicine will advance, too. Today, surgeons can perform hip replacements without cutting through the muscle. Through a laparoscopic approach, physicians make a tiny incision and work their way to the bone without damaging muscle. You can walk a whole lot faster because your muscles aren't being torn.

At University Hospital, we want our physicians to be aware of these new things. Some of our physicians actually work with companies around the world to develop new technologies and supplies. So they're going to use a bit of new stuff along the way, which kind of moves the whole practice forward. We recognize we're going to have to pay for some of that.

You have to be careful not to challenge the physicians on everything. Probably 89% of what they do is perfectly fine. Those are the times when we simply try to negotiate the best price for their supplies.

Other times, we explore the new technology. That's when we have to get the conversations going with physicians. We recognize there is a high level of sensitivity around the whole quality topic. So we need to ask a number of questions. What is the recovery period? How does the patient deal with this type of implant or process? Is it a week in the hospital or three days? What is the infection rate? Is there a recall?

MediClick: As CFO, what are some of the challenges you see University Hospital face as it provides quality care to its patients while you maintain the margins?

Bob: I think folks want what a good delivery system for the science that healthcare can provide. You want your family to have the best healthcare experience with a fast recovery and no infections.

But healthcare is more transactional rather than a cohesive system. If you're feeling bad you go see a doctor. He sends you to a specialist, who sends you to get an MRI and blood drawn. It's very transactional. If you're sick or injured, you come to the hospital; but if you're feeling fine, you don't think about us.

This thing people call a "system" is actually an amazing array of technology, education, science, art form, experience, preference, bias, competence, with an overlay of an administrative nightmare.

Our job is to provide quality healthcare that makes people healthy and productive. However, if we're not treating sick people, we're not bringing in any money. So it's a double-edged sword.

Plus we have a steady 30% indigent care patient population. Last year, that number rose slightly. An outside service reviews our uninsured patients and works to get them on Medicaid or disability. They have moved about 5% of that 30% to a government-based system, bringing in a little more than $20 million in collections on accounts.

MediClick: What role does the supply chain play in University Hospital?

Bob: At the University of Louisville, we created an executive level position for the supply chain because utilizing supplies is a big cost driver. Physically moving all of the supplies is difficult. Simply being able to get the appropriate pharmaceuticals in and distributed is a big trick. You have to order it, get it here and deploy it to nine floors of clinical space. That's in addition to all of the other non-clinical supplies we have throughout the house.

We've already moved to an inpatient robot in the pharmacy to perform unit dose distribution. A pneumatic tube system picks up the drugs and drops them off where they are needed. We also went to a low unit of measure format here recently so we could shut down our warehouse. Now supplies come in and move directly to the floors.

To help facilitate communication between buyers and payers, we've combined our purchasing and accounts payable groups under one executive. Have you ever ordered something on one side of the building and paid for it on the other? Getting the two sides to communicate is a huge task.

Together, buyers and AP clerks have created efficiencies in invoice discrepancies, which has saved us a great deal of money. We don't want to pay the wrong price and have to go find it later.

MediClick: Is there anything University Hospital has done in the past 18 months to reduce costs or to tighten the belt in response to the economy?

Bob: We're an incredibly thin organization with a lean staff. Not only do we have the hospital with the emergency room, but we also have an outpatient cancer center, a world-renown radiation oncology department and an accredited stroke center.

In a new building on the University of Louisville campus, we installed an outpatient surgery area with a full array of radiology, pharmacy and lab in support of 8-9 floors of physician practices. Unfortunately the economy flipped when we had this big capital project and cash going to debt services. Demand fell off.

At that time the hospital execs went to the management to gather savings ideas. We stopped non-essential travel, eliminated unnecessary office expenses, cut back in some of our computer replacements. We adjusted our contracts where we could.

The hospital successfully created a nurse staffing model that eliminated the expense of our outside nurse staffing agency. We want to have nurses at the bedsides, we just don't want to have too many.

We picked targets, looked at them with the docs and did what was best for the care of the patients. We're not quite at a clinical utilization model where we can use statistical analysis to determine patient outcomes with each product, but we're getting there.

The bottom line is we want to make sure we're advancing the practice of medicine in the right way. So we're hoping to implement some type of medical supply committee to vet some of these new wonderful ideas. That way, we have enough useful information to work with the doctors to cut costs.

Kerry Gillespie at Ardent Health: It All Starts With Quality

MediClick met with Kerry Gillespie a few weeks ago at HFMA's ANI Conference in Seattle. Kerry is CFO at Ardent Health, a for-profit network with 11 acute care hospitals in Oklahoma and New Mexico.

For Ardent, establishing a culture of savings starts with a focus on quality. Ardent always talks with its clinicians about how to improve quality and patient outcomes before discussing cost reductions. Kerry says this shows his clinicians that Ardent shares their priorities, and it helps align the interests of the clinical staff with the teams responsible for driving costs out of the supply chain.

Kerry also argues that medical device suppliers need to hold themselves to a higher quality standard: If they're increasing prices 20, 30, 40 percent and justifying it with claims that their new technology is generating better patient outcomes, give us the proof. Show us how quality outcomes have improved at least as much as you've increased the costs to our hospitals.

Below, we talk with Kerry about how his organization fosters and benefits from a culture of savings.

MediClick: How do you involve your clinicians with Ardent's culture of savings activities?

Kerry Gillespie: We rarely talk with clinicians about cost without talking first about quality. That resonates with them. If all they hear is "cost, cost, cost", they think all you care about is process and money. But if they hear "quality and cost; quality and cost", then they know this is an organization that cares about me and cares about my obligations to the patient. They know we're focused on doing the right things.

Managing costs in a quality organization is easier than managing costs in an organization where your nurses and other clinical staff don't think you care about quality. It affects their willingness to participate in your savings initiatives.

There's a business purpose to quality, too. At Ardent, we know we have to stay healthy from a patient volume perspective. It's really easy to manage out your costs when your volumes are there, but it's tougher to manage costs out as volume drops. There's a circular nature to it: we believe that in driving quality up, we'll keep the volumes coming in. If the volume comes in, we're more confident we can manage the costs.

MediClick: Physician preference items present an ongoing struggle for hospitals trying to rein in costs. What is Ardent's approach to the challenge, and what results have you seen?

Kerry: We've come to realize that vendors try to sell us a lot of extraneous supplies, especially for total knees, total hips, and cardiac services. For example, they insist on selling us high-end catheters even when a lower cost product would produce the same quality outcomes.

These vendors are driving the cost factors through our physicians and taking control away from the hospitals. The medical device companies put their reps on aggressive commissions, so they go out and build these great relationships with the doctors. Before you know it, you're using stuff in your operating rooms you didn't have a clue were being used. It's a ton of money, and it's driving up the costs of your services.

So, we're working hard to address this.

We're part of the Acute Care Episode [ACE] Demonstration project through CMS which allows us to work with our physicians to reduce costs. It lets them participate in the up-side of cost reductions through gainsharing. We're able to substantially improve their payments on individual cases.

In terms of engaging physicians, if you can give them an appropriate economic incentive that includes an enhancement to the quality of care delivered, they will work with you every time. We're exploring this through the ACE Demonstration project. 

We also stay very focused on the top 20 most expensive med/surg items in all of our facilities. The individual hospital's CFO, materials manager and department heads have conversations with the physicians about utilization and alternative items they might use. Our regional materials managers are ultimately responsible for reducing costs on these items and they report monthly to the corporate office. It's part of our ongoing supply chain operational review.

This process has been very successful. In 2008 alone we took almost $4 million out of supply costs.

MediClick: Does Ardent blaze its own trail, or do you subscribe to a particular process improvement methodology?

Kerry: We recently introduced Lean to our revenue cycle management and realized we had significant waste in our upfront registration processes. We're going to take out 60 percent of the steps and 30 to 40 percent of the costs associated with registration.

We're beginning to bring Lean into our clinical departments, too. Right now we're building a value stream map of the emergency room of one of our biggest facilities, and we'll implement Lean processes there soon.

For people who say Lean works well in manufacturing but not in the patient care setting, I see that as an excuse. It's true that every patient is different, and we're not making simple widgets. But you can use the same principles: pull out the steps that don't add value, reduce the variability, etc. All those things make complete sense in any environment, not just manufacturing.

As I've mentioned, quality is a critical part of the equation. The interesting thing is that when you reduce cost and reduce variability, you improve quality. It's a Six-Sigma concept, and while we haven't implemented that specific methodology, we're borrowing heavily from its ideas. It's making us considerably better and improving our quality metrics.

MediClick: There's been a lot of talk lately about Harvard Business School Professor Clayton Christensen's The Innovator's Prescription. It has renewed dialogue about the true definition of "integrated delivery network." Tell us about Ardent's approach to providing integrated healthcare.

Kerry: I'm familiar with Dr. Christensen and his works, and we're trying to follow a true integration model.

For example, Ardent has a pretty good-sized health plan in our Albuquerque market with about 40 percent market share. We've developed the program so we can sell insurance to organizations at a significantly reduced cost. We pass that cost down to the hospitals, so they're motivated to reduce their costs in order to continue to maintain their budgets.

Albuquerque represents a single market inside of Ardent. It includes the hospitals, the health plan, and all the other services we provide. These are all rolled up into an overall market budget with an earnings target. A significant portion of compensation for the managers is tied to the success of the entire market as well as their individual business units. So it creates aligned incentives. They're motivated to make the health plan successful by containing costs, and they're also responsible that the hospitals keep costs in check.

We don't own physician practices, so the doctor side of it can be a challenge. But everything else is integrated very well.

MediClick: What challenges do you see for the future of the healthcare supply chain? 

Kerry: If the industry is really going to reform itself, the suppliers have to come along. They have to participate and sacrifice, too, or reforms are going to be real problematic and put too heavy a burden on the hospitals.

There's something wrong with a medical device company making a 40 percent gross margin on their business and we're doing well to be at seven percent. What's wrong with that picture?

Every time I turn around there's a new pacemaker or new defibrillator. I can't keep a lid on hips and knees because all these joints are always getting a new tweak and being marked up more each time. The device manufacturers are pushing them on the doctors saying they provide better care for their patients. So the doctors are bringing the new products into the hospitals, and we don't have a say in the matter.

The hospitals have to ask: do the innovations improve outcomes at the same rate their prices increase? I'm not seeing new devices producing 20, 30, 40 percent better outcomes. Then how can we justify their prices going up at that rate? We must look at effectiveness when addressing rising costs.

MediClick: Thanks for sharing, Kerry!

Open Letter XII: Motorcycle Daydreams & the Evolution of Cooperation

Spring is the most fleeting of North Carolina's seasons. It's not uncommon for winter to morph directly into the brutal 90/90 days of summer (that's 90 degrees Fahrenheit and 90 percent humidity). So, when nice, temperate weekends present themselves, I take full advantage by getting on my motorcycle and touring the countryside.

I logged over 1,000 miles in the latest trip, winding through the back roads from Raleigh to western North Carolina and down into the mountains of north Georgia. All that time in the saddle means a lot of time to think…a potential hazard to the committed readers of my blog.

I was reminiscing on a recent conversation with the supply chain executive of a large IDN. He spoke of changing the culture of his contracting teams in their approach to suppliers. All too often, he said, it's easy to slip into an antagonistic mindset where you make negotiations a zero-sum game. Your gain is my loss, and my loss is your gain. He sees merit in creating true partnerships with key vendors, and so he spends a lot of time with his contract specialists talking about the kinds of collaboration that produce wins for both sides.

More and more hospitals are talking about the advantages of cooperation. The trend is a good one, and I'm confident we all benefit from investing in partnerships rather than looking to gain an edge from each transaction. But cooperation only works as a two-way street, and it's most effective when, to paraphrase Teddy Roosevelt, the hospital can speak softly but carry a big stick. This is especially true when it comes to relationships involving expensive physician preference items (PPIs).

Let me explain.

Robert Axelrod, a professor at the University of Michigan, wrote The Evolution of Cooperation in 1984. It's a fascinating study of why cooperation makes sense in almost any setting. His argument starts with a simple game (think Rock, Paper, Scissors) in which there are two players, each of which has two choices in each round: cooperate or defect. If both players cooperate, both get three points. If both defect, both lose one point. If one cooperates and the other defects, the defecting player wins a big five points and the naïve, cooperating player gets zero.

The game was played out in computer simulations with various academics submitting strategies in an attempt to get the most points.

Given the scoring system, defectors stand to win big, right? In a one-time transaction, yes, both parties are motivated by a "winner-gets-all" strategy…I can win a major five points if I defect and make a sucker out of my opponent.

But the game was played in multiple rounds where participants engaged each other over and over again. And in the iterations, a player who defected would get punished by his opponent who would also begin to defect. Soon, both sides would figure out it's in their best interest to start cooperating with each other. In Axelrod's experiments, the most stable approach was continual cooperation.

But there was one catch. Cooperation only works in the long run if players are willing to punish their opponent if he defects. So, if the other player defects, you show him you won't tolerate being taken advantage of and you defect right back. It's the stick you must wield in order to keep everything in its proper check and balance.

Okay, at this point I've probably been on my motorcycle far too long. Let's bring this back to the real world and see if there's anything practical to learn from it.

Hospitals can find a lot of benefit from cooperating with key suppliers. Over time, it tends to reduce overhead costs (e.g., you're managing fewer vendors) and minimize administrative burden (e.g., you have less vendor turnover and get longer term pricing locked in). But it has to be mutual. You can't afford to cooperate only to find your supplier is defecting.

This is where hospitals run into problems, especially when dealing with PPIs. All too often, we enter into agreements based on complicated market share assumptions. When it's time to demonstrate that we're living up to our side of the bargain, we find ourselves unable to produce data that proves our position. The supplier has the data, but he's not sharing with you.

That puts you at a real disadvantage. You may think you're cooperating, but in reality the supplier has defected and you don't even know it. You need to invest in the tools to keep your data capabilities at least as good as theirs.

Even worse, we might spend months negotiating a price with a PPI supplier. When we're ready to sign the contract, it's filled with all sorts of confidentiality restrictions that threaten hefty punishment if we share our special pricing with any of our colleagues. The supplier probably used the term "partnership" all through the sales process and promised us we were getting a great deal. But how can we trust that we're not getting the sucker's end of the bargain if they won't even let us benchmark against our peers? There's something about that practice that just doesn't add up for me.

In the end, if we're to achieve true cooperation and true partnership with our PPI suppliers, we must wield our big sticks. We must make sure we can hold them accountable by tracking on our own whether we're meeting the market share requirements. We must not let them keep important benchmarking information from us and stop doing business with them if they do.

Only then can we enter into a truly stable, cooperative relationship with our suppliers.

Open Letter XI: Comparative Effectiveness and…Porsche Makes Knives?!

Supply chain and finance executives are so attuned to the bottom-line that I wasn't sure what kind of response to expect when injecting a policy issue into this email/blog series. But last week's entry on comparative effectiveness generated some good discussion.

The key theme was this: we care about price, but our greatest responsibility is providing high quality patient care. How will comparative effectiveness balance the need for quality outcomes against our need to hold down costs?

Consumer Reports comes to mind. I'm a subscriber and a much more informed buyer because I take seriously its recommendations on a wide range of products. Why? Because in its 70+ years, Consumer Reports has established itself as an honest broker of information that balances quality and price. Subscribers know that it conducts thorough tests that are not influenced by manufacturers.

The June issue arrived at my home last week. One article evaluates kitchen knife sets, comparing 49 separate products from a variety of companies. Nine of the products made the cut (should I take credit for this pun?) for the "Select Ratings" list because they demonstrated the best combination of quality and price. The seal I look for, "CR Best Buy," is reserved for the lowest cost products that don't sacrifice quality. The best values.

One element of the knife evaluation caught my eye and got me thinking about comparative effectiveness and physician preference items. Consumer Reports tested a set from Porsche (who would have thought they made knives?) and found that it was among the best. Its price tag, however, was nearly twice that of any other set of comparable quality. So, Porsche wasn't a good value. It didn't make the Select Ratings list.

A similar evaluation process is part of the vision for the Agency for Healthcare Research & Quality (AHRQ). Develop it into a trusted resource for comparing clinical data on competing products to: 1. Determine quality of patient outcomes when the products are used, and 2. Rank the products' value based on its cost versus its effectiveness. The research must be unassailable both for its scientific integrity and its freedom from influence by medical device and pharmaceutical manufacturers.

So, for a hypothetical situation, say Porsche were to enter the arena of hip implants, introducing its own "new and improved" product; building an army of smart, smooth, Carrera-driving reps that knew how to curry favor with surgeons; and underwriting expensive research praising the clinical value of this implant.

In today's world these efforts and its powerful brand identity might enable Porsche to charge a premium over the competition and still make it onto physician preference lists and your purchase orders. If the docs want it, many of us would have little choice but to procure it for them.

In a different world, AHRQ would present comparative effectiveness research to you and the physicians. It would establish quality rankings by measuring patient outcomes from hip implant procedures. It would collect data on the costs of hips used in those procedures. And it would matrix the highest-quality/lowest-price hips as "Best Buy" in its own version of Consumer Reports Select Rankings.

If Porsche's "new and improved" implant demonstrates a real improvement in clinical outcomes, AHRQ gives it a gold star recommendation and we all buy it feeling confident we're getting value for the price. If, however, it turns out the improvements are more marketing gimmick than clinical reality, then AHRQ's research and ratings educates the physician, the hospital buyer, and the patient by showing that the outcomes don't justify the cost.

I don't see AHRQ and comparative effectiveness taking decisions away from the physicians. Nor do I see it sacrificing quality for lower costs. What I do see is a much needed counterbalance to the existing system.

Rather than relying on manufacturers' own research about the virtues of their products, let's develop AHRQ as a trusted broker of this information. Let's make an investment so it can be the Consumer Reports that guides our value analysis purchasing decisions.

An Open Letter Part III: These Aching Joints

Last week I stepped through a hypothetical scenario in which a hospital CEO instructed his business office to increase revenue 10 percent. They tapped into the trend of a graying America and, anticipating a surge of baby boomer hip and knee replacements, secured an exclusive contract with a surgeon group performing a high volume of joint replacement cases.

We know the IDN will increase revenue as a result. So, this must be a prescription for success, right?

Well, maybe not. He may have put the bottom line at risk.

Let's focus on hip replacements, a procedure on my mind since my father had it done just last month. Over the past 10 years, the average DRG reimbursement for a hip replacement grew from $8,400 to $11,300. That's 35 percent, about a 3 percent rate of inflation. Over the same period, the average cost for a hip prosthesis has grown from $2,800 to more than $6,500. That's 132 percent or a nearly 9 percent annual compounded growth.*

In 1997, if the IDN decided to invest in more hip replacement surgeries, the business model made sense. The average implant cost was only about a third of the expected reimbursement, leaving plenty of room to cover overhead costs and still turn a respectable profit. Today, however, the implant itself accounts for nearly 60% of the average reimbursement, cutting dangerously deep into the potential margins of each procedure.

Perhaps we could live with a reduced margin if costs had stabilized, but the pace of new technology for joint replacements is accelerating. In an effort to increase sales and gain market share, the manufacturers continually introduce premium implant options (like custom ceramic-on-ceramic articulating hip systems) and market them aggressively to surgeons and patients. But it's the hospitals that absorb the additional costs of these competition-driven innovations. Reimbursement, even when outcomes are shown to improve, lags behind. The "state-of-the art" prosthesis can easily cost twice as much as the "previous generation" implant, turning your already slim margin into a loss.

Now take the unprofitable procedure and multiply it by the number of cases performed by your high volume surgeons. Far from a prescription for success, it is a major contributor to your disappearing margins. That's enough to make any hospital executive's joints ache.

(*Data presented by Kevin J. Bozic, MD at the 2008 Integrated Healthcare Association meeting.)