Issue: July 2012
July 03, 2012
3 min read

As the prices of some orthopedic devices get higher, hospitals find ways to go leaner

Issue: July 2012
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Although word is out that increasing prices have led hospitals to put higher priced orthopedic devices on the chopping block, price mix — when providers sell higher priced products over lower priced ones — rather than overall price increases, have motivated supply chain managers to change their implant purchasing procedures and brands, according to senior level executives the field.

Cuts to government-backed insurance, other regulatory pressures and the economic recession have contributed to price mix, according to Michael Matson, CFA, senior analyst of medical supplies and devices at Mizuho Securities USA Inc. in New York.

“First, the volume growth has slowed down. The procedure growth has slowed down, and as that has happened, the company’s only way to grow revenues is by taking market share,” Matson told Orthopedics Today. “They have probably become more aggressive on pricing [to] try to gain some share.”

Negotiating leverage

With decreases in the volume of orthopedic procedures, hospitals have become shrewder about the purchase of orthopedic devices.

Michael Matson 

Michael Matson

“Hospitals are struggling, volumes are down, for them and the economy is difficult,” Matson said. “The surgeons realize that and they are more willing to help out the hospitals at this point. The hospital has more ability to influence what products [orthopedists] are using. As that grows, and it is going to continue to grow, it gives hospitals more negotiating leverage against the companies in terms of trying to get better pricing on the implants.”

Some hospitals use capitated pricing, Matson said, in which they set the price they are willing to pay for a hip or knee system.

The Director of General Surgery, Orthopaedics, Pain Management, and Spine Service Lines at the University of California San Francisco Medical Center, Eula McKinney, MsHA, uses price leveling in negotiations.

“It is imperative that clinical priorities provided by our spine surgeons influence the final decisions. Our vendors have been excellent about collaborating with us to ensure that our prices align with our organization’s cost-savings goals without prohibiting our providers from utilizing their preferred devices,” McKinney told Orthopedics Today.

McKinney also takes advantage of the information exchange her hospital joined years ago, University Health System Consortium (UHC) and ECRI. UHC allows users like McKinney to view comparative data in clinical, operational, physician practice management, financial, patient safety and supply chain areas.

“Health information exchanges such as UHC [or] any of these other organizations are helpful to see how we benchmark on costs, utilization of resources such as pharmaceuticals, risk-adjused calculations for expected lengths of stay for various populations,” McKinney said. “They give us helpful clinical, financial and operational information which benchmarks us with similar programs and allows the flexibility for creating customized cohorts of hospital groups. It provides us an idea as to how we are performing and if there are opportunities, perhaps for high spend, that can be reduced in other areas. More importantly, our efforts have resulted in our spine team strengthening their price competitive index, such that UCSF spine service line has better pricing than 83% of the other 25 hospitals in the UHC consortium.”

Matt Reigle 

Matthew Reigle

Hospitals also apply Lean Six Sigma principles, a management strategy to eliminate defects throughout an organization, in an effort to minimize waste, Matthew Reigle, MBA, principal of Resultant Healthcare in Madison, N.J., told Orthopedics Today.

“In order to properly implement Lean or Six Sigma, it has to be a cultural initiative; it has to permeate the organization and be something that everybody is looking for on a daily basis,” he said. “Eliminating waste has to become part of the culture.”

Future outlook

If the Patient Protection and Affordable Care Act goes forward as written, more people will receive Medicaid, causing hospitals to figure out how to do the same orthopedic procedures for less money.

“In the future, outcomes must be collected,” Reigle said. “This is true for many reasons, not the least of which is the changing reimbursement system and the trend towards value-based reimbursements as opposed to volume-based reimbursements. It will also be critical for manufacturers to begin to collect outcomes, because they will then be able to differentiate their products vs. their higher or lower priced competitors. Right now, comprehensive outcomes data does not exist, making it difficult for manufacturers to accurately predict efficacy or longevity.”

Some small companies have cut out the industry sales representative and sell implants directly to hospitals to save costs.

“I would not say it is catching on right now, at least not in your main markets like hip and knee,” Matson said. “But over time, if reimbursement comes under enough pressure, that is something that could gain some traction. There are some companies doing it in spine and sports medicine. It is something to watch.” – by Renee Blisard Buddle

For more information:
  • Michael Matson, CFA, can be reached at Mizuho Securities USA Inc., 320 Park Ave., 12th Floor, New York, NY 10022; email:
  • Eula McKinney, MsHA, can be reached at General Surgery, Orthopaedics, Pain Management and Spine Service Lines, University of California San Francisco Medical Center, 350 Parnassus Ave., Ste. 404, San Francisco, CA 94143; email;
  • Matthew Reigle, MBA, can be reached at Resultant Healthcare LLC, 17 Holden Lane, Madison, NJ 07940; email:
  • Matson, McKinney and Reigle have no relevant financial disclosures.