Is Change on the Way? Hospital CEOs Think So

Martin Gold, Technology Access Partners

Irwin Katz, Technology Access Partners

The orthopedic industry is a relatively mature, well-established industry. While new companies are still entering the market and acquiring market share, the industry is primarily dominated by a few large, seasoned companies such as DePuy Orthopaedics, Stryker and Zimmer. While this solidity might lull some into assuming the orthopedics market will remain status quo for the foreseeable future, a number of demographic and reimbursement pressures could force change in the orthopedic implant market.

There has been much debate as to whether the overall number of hip and knee replacement procedures is expected to increase or decrease over the next several years. Regardless of which side of the debate you stand, it is difficult to ignore the statistics that support a significant upward trend in the expected number of implants.

The Centers for Medicare and Medicaid Services (CMS) projects that the number of Medicare beneficiaries, individuals 65 years of age or older, is expected to double within the next 25 years. This projection is not surprising considering that, in 1999, approximately 34 million Americans were 65 or older, representing 12% of the US population. By the year 2030, it is estimated that one in five individuals (20% of the US population) will be of Medicare age, the primary age demographic for joint replacement procedures.

An analysis of hospital discharge data shows an average increase of 157% in the number of joint procedures between the years 1993 and 2003 (see Table 1 on page 16). While these statistics paint a very positive picture for the orthopedic industry, one cannot ignore that hospital costs are on the rise and reimbursement is far from keeping pace. Although there was a 40% decline in the average number of days the patients remained in the hospital for these procedures, there was a concomitant increase of 168% in average hospital costs (as represented by reported mean hospital charges). Over the same period, however, hospital reimbursement increased less than 19%.

Furthermore, CMS recently an-nounced its intention to revamp the Medicare hospital payment system (see Martin Gold’s previous column, “Change in Medicare Payment Expected to Jolt Orthopedics,” in Orthopedic Design & Technology’s May/June 2006 issue). While the device and hospital industries have remained steadfastly opposed to the proposed changes, hospitals will experience a payment reduction for a number of orthopedic and spine procedures if this proposal is enacted.

Hospital Executives
No Longer Silent

Given these market dynamics, how are hospitals—the principal purchaser of joint implants—going to respond? We conducted interviews with senior hospital executives to gain a better understanding of their perspectives regarding future trends on orthopedic utilization and reimbursement.

Many of the individuals we spoke with acknowledged the increased business pressures their organizations are facing and voiced frustration over the failure of orthopedic device manufacturers to evolve their sales approach with them. These executives describe how manufacturers still view the physician as the “champion” who can carry the flag and close the sale for the orthopedic company, regardless of how much the device costs.  One CEO reacting to this situation said, “I or my CFO must meet with the manufacturer to ultimately discuss and negotiate the acquisition of orthopedic devices, since it is my organization that pays the tab. In the past, our physicians would let me know that if the hospital didn’t acquire a particular device, they would go to the other hospital down the street…that just doesn’t happen anymore…since every hospital is facing the same business pressures.”

Most of the hospital CEOs we spoke with also commented that it is no longer acceptable to purchase a new technology that demonstrates minimal or no incremental improvement over its predecessor when it is accompanied by a major price increase. The hospital sales methodology has to address not just the cost of the product, but also hospital reimbursement and the clinical value of the product. Lacking any one of these three components makes the product—no matter how elegant—of marginal value to the organization.

When it comes to reimbursement, hospital executives felt that many manufacturers have “dropped the ball” with new products. Companies often failed to discuss their products with payers and address reimbursement and hospital managed care contracting issues at either a national or local level. One individual commented, “Marketing the product to consumers and surgeons before addressing reimbursement puts undue financial pressure on hospitals to meet unrealistic goals and weakens their contracting leverage with payers.”

Throughout our discussions with hospital executives, several general themes emerged:
•    Hospitals expect to be included in the sales process and given an opportunity to analyze the reimbursement and clinical efficacy of new orthopedic technologies.
•    Responding to increased costs and declining reimbursement, hospitals expect companies to demonstrate the increased economic and clinical value of newly introduced devices. This is especially true when a device is accompanied by an increase in sales price.
•    Device companies are expected to understand and work within the hospital business model and not circumvent hospital decision-making processes.

What This Means

The concerns voiced by these hospital executives provide a number of new opportunities for companies to strengthen their relationships with customers:
•    Consider both the hospital and physician primary customers and introduce new products in a way that communicates both the clinical and economic value of the product.
•    Educate the sales force so each person understands the hospital business model and is comfortable addressing the reimbursement and operational concerns of customers.
•    Re-position your company as a solutions company that understands the nature of the hospital business—its technology acquisition processes, reimbursement and regulatory environment.
    All of the above will necessitate that companies be creative, flexible, responsive and knowledgeable about the economic and clinical concerns of the hospital customer. This may imply a change in business practices for some device companies, but it is certain to result in increased customer loyalty and satisfaction.