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The American Journal of Managed Care September 2014
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Quantifying Opportunities for Hospital Cost Control: Medical Device Purchasing and Patient Discharge Planning
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Quantifying Opportunities for Hospital Cost Control: Medical Device Purchasing and Patient Discharge Planning

James C. Robinson, PhD, and Timothy T. Brown, PhD
The authors quantify the potential reduction in hospital costs from adopting best local practices in supply chain management and discharge planning within a major metropolitan market.
To quantify the potential reduction in hospital costs from adoption of best local practices in supply chain management and discharge planning.

Study Design
We performed multivariate statistical analyses of the association between total variable cost per procedure and medical device price and length of stay, controlling for patient and hospital characteristics.

Ten hospitals in 1 major metropolitan area supplied patient-level administrative data on 9778 patients undergoing joint replacement, spine fusion, or cardiac rhythm management (CRM) procedures in 2008 and 2010. The impact on each hospital of matching lowest local market device prices and lowest patient length of stay (LOS) was calculated using multivariate regression analysis controlling for patient demographics, diagnoses, comorbidities, and implications.

Average variable costs ranged from $11,315 for joint replacement to $16,087 for CRM and $18,413 for spine fusion. Implantable medical devices accounted for a large share of each procedure’s variable costs: 44% for joint replacement, 39% for spine fusion, and 59% for CRM. Device prices and patient length-of-stay exhibited wide variation across hospitals. Total potential hospital cost savings from achieving best local practices in device prices and patient length of stay are 14.5% for joint replacement, 18.8% for spine fusion;,and 29.1% for CRM.

Hospitals have opportunities for cost reduction from adoption of best local practices in supply chain management and discharge planning.

Am J Manag Care. 2014;20(9):e418-e424
Insurers are implementing designs that channel patients toward low-price facilities. CMS has proposed payment reductions. Many hospitals must reduce costs. Three high-margin services are joint replacement, spine surgery, and cardiac rhythm management (CRM). Adopting best local practices in device purchasing and discharge planning may yield savings.

• Device prices and length of stay exhibited wide variation.

• Devices accounted for 44% of variable costs for joint replacement, 39% for spine fusion, and 59% for CRM.

• Total potential cost savings from implementing best local practices are 14.5% for joint replacement, 18.8% for spine fusion, and 29.1% for CRM.
In the past decade, many hospitals have covered rising costs by merging with erstwhile competitors and demanding ever-higher payment rates from insurers.1-4 This focus on revenue growth now appears to be of declining value. Private insurers are experimenting with narrow networks and consumer cost-sharing incentives that will channel patient volume away from facilities charging the highest prices.5,6 CMS has proposed reductions in Medicare hospital payment updates.7,8 Many hospitals are thus finding they need to shift to a focus on cost reduction to preserve their operating margins.

The changing economic environment presents opportunities as well as challenges. Both public and private insurers are experimenting with bundled “episode-of-care” methods of payment that allow hospitals to retain the savings they achieve through cost-control initiatives.9-12 The Medicare accountable care organization initiatives use shared-savings payment methods that reward efficiency and cost reductions achieved by hospitals.13

There is substantial cost variation among hospitals, after adjusting for differences in case mix, suggesting that significant savings can be obtained through adopting best practices. While cost variation across geographic regions often is due to factors outside the control of individual facilities—such as regulatory requirements and the cost of living—variations within regions are more likely to be due to factors under the control of hospital management, if it can identify and adopt best practices from neighboring facilities. This paper identifies opportunities hospital face for cost control and quantifies the potential savings. It focuses on 3 major classes of inpatient procedures: orthopedic joint replacement, neurosurgical spine fusion, and cardiac rhythm management (CRM). These procedures account for a substantial share of hospital revenues and offer important opportunities for hospital cost savings through reduced device prices and patient lengths of stay.



We obtained data on 9778 patients receiving acute care procedures in 10 hospitals in 1 metropolitan region in 2008 and 2010. The market is a major suburban area with 4.5 million residents. The focus on 1 market eliminates influences on hospital costs of factors outside the control of any 1 facility, such as the cost of living, and permits a quantification of potential savings from adopting local best practices.

The hospitals agreed to supply data from their patient records, operating room logs, and cost accounting systems as part of their participation in initiatives by the Integrated Healthcare Association (IHA) to improve purchasing and utilization of implantable medical devices.14 The IHA is an association of hospitals, physician organizations, and health insurance plans in California, whose mission is enhancing quality and efficiency of care. Data were supplied by each hospital to Aspen Healthcare Metrics, a data intermediary and consulting firm that created data files to be used by IHA. Patient identifiers were removed by the hospitals prior to transferring the data.

Orthopedics, neurosurgery, and interventional cardiology were selected because they constitute high volume, revenue, and margin service lines for most hospitals. Orthopedic joint surgery is represented in this study through total primary knee and hip replacement; partial, bilateral, and revision joint procedures were excluded. Spine neurosurgery and orthosurgery are represented by lumbar and cervical spine fusion. Interventional cardiology is represented through procedures to implant pacemakers, defibrillators, and cardiac resynchronization therapy devices, which collectively are referred to as CRM devices.

The outcome of primary interest was the hospital’s total variable costs for each patient’s admission, as derived from the hospital’s cost accounting system. This represents the direct costs of treating the patient, and does not include administrative overhead, the cost of providing charity care, and other indirect costs. The procedures included in this study represented 4.6% of the total revenue received by these 10 hospitals for patient care.15

We obtained the prices paid by the hospitals to device manufacturers and distributors for the implantable devices used for each patient. These prices are the sum of the amounts paid for each component of devices that have multiple components. We do not have data on brand names or device types, only on the total amount spent by the hospital. For each hospital we also measured the volume of joint replacement, spine fusion, and CRM procedures performed each year.

Patient characteristics included age, major diagnoses related to the procedure, the presence of complications, the presence of comorbidities, length of stay (LOS) in the hospital, discharge destination (home vs skilled nursing or rehabilitation facility), and insurance coverage (Medicare vs private insurance). Diagnoses for joint replacement included osteoarthritis, rheumatoid arthritis, aseptic necrosis, and fracture. Diagnoses for spine fusion included osteoarthritis, rheumatoid arthritis, fracture, intervertebral disk disorder, and spondylolisthesis. For spine patients we also measured the hospital’s use of bone morphogenic protein (a biopharmaceutical cement to stimulate bone growth). For CRM, we distinguished 4 types of rhythm management devices: single and dual chamber pacemaker, pacemaker with cardiac resynchronization therapy (CRT), and implantable cardioverter defibrillator. Complications were defined by Aspen as inhospital events found in observational studies as serious enough to require at least a 1-day LOS extension. Comorbidities were defined by Aspen in terms of secondary diagnoses associated in observational studies with at least a 1-day LOS extension.

Statistical Methods

We calculated descriptive statistics on procedure costs, device prices, LOS, and patient characteristics. We also calculated each hospital’s average variable costs, device prices, and LOS.

For each of the 3 classes of procedures, we conducted multivariate regression analyses of variable costs per patient as a function of implantable device prices, patient LOS, hospital surgical volume, patient characteristics (age, diagnoses, complications, comorbidities), discharge destination, and insurance coverage. All cost and price data were expressed as constant 2008 dollars. We also included a year dummy variable to identify procedurespecific trends in costs between 2008 and 2010.

For the joint surgery analyses we included a dummy variable indicating whether the procedure was for knee replacement (vs hip replacement). For the spine fusion we included a variable indicating whether the procedure was for lumbar fusion (vs cervical fusion). For CRM we included variables for whether the device implanted was a dual chamber pacemaker, pacemaker with CRT, or defibrillator (vs a single chamber pacemaker). The regression specifications included dummy variables for each hospital to control for facility-specific characteristics that influence variable costs beyond device prices, LOS, procedure volume, and patient characteristics. Standard errors were adjusted for heteroscedasticity.

The impact on each hospital of matching lowest local market costs in supply chain purchasing was measured by computing the difference between its price per implanted device and the lowest average price obtained by any hospital in the market. Similarly, the impact of adopting best local practices in discharge planning was measured as the difference between each hospital’s LOS and the minimum LOS obtained by any local facility.

To estimate the potential cost reductions in dollar terms for each hospital, we multiplied the difference between the average price paid by the particular hospital and the lowest market price paid by any of the 10 hospitals by the coefficient on device price obtained from the regression equation. To determine the potential cost savings in discharge planning for each hospital, we multiplied the analogous LOS difference by the coefficient on LOS in each regression equation. As each of our 3 regression equations contains 2 (for joint and spine) or 4 (for CRM) subprocedures, we used the weighted price per device and weighted average LOS, where weights are the proportion of each type of subprocedure performed in each hospital.


Descriptive Statistics

Table 1 presents descriptive statistics on the patients undergoing each of the study procedures. Average costs range from $11,315 for joint replacement to $16,087 for CRM and $18,413 for spine fusion. There is substantial variation around these average figures, especially for spine and CRM procedures. The coefficient of variation (standard deviation divided by the mean) equals 0.221 for joint replacement, 0.574 for spine fusion, and 0.585 for CRM.

Average prices paid for implantable devices were $4771 for knee and $5534 for hip replacement; $4085 for cervical and $9326 for lumbar spine fusion; and $4984 for single chamber pacemaker, $5903 for dual chamber pacemaker, $10,220 for pacemaker with CRT, and $23,092 for defibrillator. The coefficient of variation for device prices was 0.312 for knee replacement and 0.321 for hip replacement, 0.690 for cervical spine fusion and 0.617 for lumbar spine fusion, 0.284 for single chamber pacemaker, 0.255 for dual chamber pacemaker, 0.268 for pacemaker with CRT, and 0.220 for defibrillator with CRT. Implantable devices account for 44% of procedure costs for joint replacement, 39% for spine fusion, and 59% for CRM.

The average length of patient stay was similar across the 3 sets of procedures, ranging from 3.1 to 3.8 days, but there was substantial variability across patients and facilities. The coefficient of variation for patient LOS is 0.307 for joint replacement, 0.586 for spine fusion, and 0.936 for CRM.

Multivariate Statistical Analyses

Table 2 presents multivariate regression results for the correlates of costs across the 3 procedures. Hospitals paying higher prices for implantable devices and experiencing longer LOS than nearby facilities incurred significantly higher costs per procedure than did hospitals with lower device prices and LOS.

Variability across hospitals in device prices accounted for a large share in the variability in procedure costs. A $1000 reduction in the price of the implantable device would reduce procedure costs per patient by $1160 for joint replacement, $1300 for spine fusion, and $1025 for CRM. Each additional day of patient stay increased hospital costs by $998 for joint replacement, $1570 for spine fusion, and $1254 for cardiac rhythm management procedures. Given the variability in device prices and patient LOS among nearby facilities, the scale of these illustrative reductions would be quite feasible (within 1 standard deviation).

Hospitals with high patient volumes incurred significantly lower costs per procedure than did facilities with low volumes, consistent with the literature suggesting efficiencies from scale and experience with major acute care procedures.16,17 The effect was particularly strong for cervical and lumbar spine fusion. An additional 100 patients per year would be associated with lower average costs per patient of $548 for joint replacement, $2736 for spine fusion, and $1076 for CRM procedures. Patient demographics and case mix were associated with costs for all 3 procedures, as expected.

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