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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.
Potential Cost Savings From Adopting Local Best Practices

The importance of device prices and patient LOS as potential targets for hospital cost control can be observed in their contribution to explaining total variance in variable cost per procedure (the R2 statistic). To highlight this association, we calculated regression specifications similar to those reported in Table 2 but that excluded device price and LOS. These specifications explained 38% of the variance in procedure costs for joint replacement, 45% for spine fusion, and 70% for CRM procedures. Addition of device price to the specifications increased the variance explained by an additional 30 percentage points for joint, 32 points for spine, and 6 points for CRM procedures. The addition of both device price and patient LOS increased the percentage of variance explained to 80% for joint replacement, 80% for spine fusion, and 93% for CRM (as reported in Table 2). The hospital’s performance on device purchasing and discharge planning thus accounted for one-fifth to two-fifths of its performance on variable procedure costs.

Table 3 presents the potential savings for each hospital in percentage terms. These estimates were calculated on the assumption that each hospital could reduce its price per device and patient LOS to the lowest average achieved by any facility in its local market.

The potential savings from device purchasing ranged across hospitals up to 29.3% of costs for joint replacement, 40.5% for spine fusion, and 21.1% for cardiac rhythm management. By construction, 1 hospital received no savings, as it already has implemented best local practice. The potential savings from reductions in patient LOS ranged across hospitals up to 8.8% for joint replacement, 17.7% for spine fusion, and 21.2% for CRM. The hospital with the greatest potential savings from supply chain management was not the one facing the greatest potential savings from discharge planning. The combined potential savings from device prices and patient LOS range up to 35.2% for joint replacement, 61.8% for spine fusion, and 36.5% for CRM.

Table 4 presents procedure costs and potential savings for the 10 hospitals combined, under the assumption that all match the best local practices in supply chain management and discharge planning. Total potential savings are $9.9 million for joint replacement, $6.4 million for spine fusion, and $8.8 million for CRM. This accounts for 14.5%, 18.8%, and 29.1%, respectively, of total variable costs incurred by the 10 hospitals for these 3 procedures.

STUDY LIMITATIONS

This study should be evaluated in light of its limitations. We have data from only 10 hospitals in a single major suburban area. They cannot be fully representative of the national hospital population. Nevertheless, these facilities are similar to many community-based, nonacademic urban hospitals in terms of size, mix of nonprofit and for-profit ownership, and payer mix. We focus on 3 classes of major acute care procedures, rather than the full range of medical and surgical care offered in hospitals. Orthopedic joint replacement, spine fusion, and interventional cardiology are important sources of volume and expenditures at most acute-care hospitals, however, and must be among the targets for hospital management seeking to manage costs.

We did not have access to data that would permit insight into why particular hospitals paid higher prices for implantable devices or experienced longer patient LOS than comparable local facilities. It is possible that part of the observed variance is due not to lack of adoption of best processes that generate offsetting improvements in quality or efficiency. It is possible, for example, that hospitals paying higher prices for device implants receive better service from the manufacturers and distributors in the form of staff training, technical support, and inventory management, which should increase efficiency and result in lower total variable costs per procedure. However, our data indicate that hospitals paying more for implantable devices incur higher, not lower, variable costs per procedure.

It is possible that the observed differences in procedure costs, device prices, and patient LOS are associated with unmeasured differences in patient outcomes. We did not find any association between device costs, patient LOS, and our measure of surgical complications, but we have no data on outcomes after discharge. It also is possible that the observed differences in costs, prices, and LOS are due to unmeasured differences among hospitals in case mix severity. We were able to adjust for many of the major case mix indicators relevant for these procedures. Interviews with executives and managers at several of the included hospitals indicated that the hospitals compete vigorously with one another for the same doctors and patients, and no interviewees believed that there were systematic differences in case mix between facilities.

DISCUSSION

This paper used detailed data from patients undergoing joint, spine, and CRM procedures in 10 hospitals within the same local market to quantify the variance in costs per procedure and 2 major contributors to those costs: prices for implantable medical devices and the length of the patient’s stay. Our results permit the quantification of potential savings from improvements in hospital efficiency. According to our estimates, the adoption of best local practices in supply chain management could reduce procedure costs across hospitals by up to 29.3% for joint replacement, 40.5% for spine fusion, and 21.1% for CRM procedures. The potential savings from adoption of best practices in discharge planning and patient LOS could reduce procedure costs across hospitals by up to 8.8% for joint replacement, 17.7% for spine fusion, and 21.2% for CRM procedures.

The potential for hospital cost savings is not limited to better management of medical device purchasing and patient LOS. Two recent case studies have highlighted the potential savings from improved patient scheduling, operating room staffing and turnaround, post surgical rehabilitation, orchestrated administration of drugs and physical therapy, and other factors.18,19

The challenge facing hospital management is to identify potential efficiency improvements and then actually capture them. Opportunities can be identified with the help of consultants with industry experience, including consulting firms associated with the hospitals’ Group Purchasing Organizations. Many of these are now strongly focused on improving medical device procurement and pricing. Management in particular hospitals also can benefit from internal consultations with managers from affiliated facilities, one advantage of mergers and membership in multihospital delivery systems. Some hospital systems are supporting research initiatives on quality and efficiency improvement, sometimes in collaboration with health insurers and sometimes with industry associations.

The adoption and implementation of best practices can be promoted with the assistance of consultants from both inside and outside the hospital’s larger organizational framework. Most important, however, is close alignment between hospital management and the medical staff physicians who make the clinical decisions that allocate resources within the organization. Efforts to improve discharge planning, reduce LOS, reduce complications, and avoid readmissions all must be led by physicians, as only they have the authority to decide what is to be done with and for each patient. Physicians also must lead hospital technology assessment committees, which decide which medical devices should be allowed into the facility, and must work closely with supply chain management on negotiating prices and conditions of service with device manufacturers.20 Hospitals are strengthening their physician relationships through co-management agreements, joint ventures, and practice acquisition.

Hospitals are under pressure from payers to increase efficiency and reduce expenditures. Fortunately, major components of their cost structure are under hospital control

if management adopts best practices from other local facilities. Imitation of local competitors is never easy. But it cannot be said that it cannot be done.

Author Affiliations: School of Public Health, University of California, Berkeley (JCR, TTB).

Funding Source: This research was supported by the Institute for Health Technology Studies (InHealth) and the US Agency for Healthcare Research and Quality.

Author Disclosures: The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (JCR); acquisition of data (JCR, TTB); analysis and interpretation of data (JCR, TTB); drafting of the manuscript (JCR, TTB); critical revision of the manuscript for important intellectual content (JCR, TTB); statistical analysis (JCR, TTB); obtaining funding (JCR); administrative, technical, or logistic support (JCR); and supervision (JCR).

Address correspondence to: James C. Robinson, PhD, 50 University Hall, MC7360, Berkeley, CA 74720-7360. E-mail: james.robinson@berkeley.edu.
REFERENCES

1. Melnick GA, Shen YC, Wu VY. The increased concentration of health plan markets can benefit consumers through lower hospital prices. Health Aff (Millwood). 2011;30(9):1728-1733.

2. Robinson J. Hospitals respond to Medicare payment shortfalls by both shifting costs and cutting them, based on market concentration. Health Aff (Millwood). 2011;30(7):1265-1271.

3. Cuellar AE, Gertler PJ. How the expansion of hospital systems has affected consumers. Health Aff (Millwood). 2005;24(1):213-219.

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5. Robinson JC, MacPherson K. Payers test reference pricing and centers of excellence to steer patients to low-price and high-quality providers. Health Aff (Millwood). 2012;31(9):2028-2036.

6. Robinson JC, Brown TT. Increases in consumer cost sharing redirect patient volumes and reduce hospital prices for orthopedic surgery. Health Aff (Millwood). 2013;32(8):1392-1397.

7. CMS issues FY 2014 inpatient payment rule [press release]. Washington, DC: CMS; August 2, 2013. http://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-Releases/2013-Press-Releases-Items/2013-08-02.html. Accessed September 21, 2013.

8. Kocher RP, Adashi EY. Hospital readmissions and the Affordable Care Act: paying for coordinated quality care. JAMA. 2011;306(16):1794-1795.

9. Hackbarth G, Reischauer R, Mutti A. Collective accountability for medical care — toward bundled Medicare payments. N Engl J Med. 2008;359(1):3-5.

10. Rastogi A, Mohr BA, Williams JO, Soobader MJ, de Brantes F. Prometheus payment model: application to hip and knee replacement surgery. Clin Orthop Relat Res. 2009;467(10):2587-2597.

11. Chernew M. Bundled payment systems: can they be more successful this time? Health Serv Res. 2010;45(5, pt 1):1141-1147.

12. Miller DC, Gust C, Dimick JB, Birkmeyer N, Skinner J, Birkmeyer JD. Large variations in Medicare payments for surgery highlight savings potential from bundled payment programs. Health Aff (Millwood). 2011;30(11):2107-2115.

13. Fisher ES, Shortell SM. Accountable care organizations: accountable for what, to whom, and how. JAMA. 2010;304(15):1715-1716.

14. Information on IHA programs, including medical device purchasing and episode-of-care payment, is available at www.iha.org.

15. Total patient care revenues for each hospital were obtained from the California Office of Statewide Health Planning and Development for 2008 and 2010. These data exclude nonpatient revenues, such as earnings off endowments, and billed but not collected charges.

16. Ho V, Aloia T. Hospital volume, surgeon volume, and patient costs for cancer surgery. Med Care. 2008;46(7):718-725.

17. Regenbogen SE, Gust C, Birkmeyer JD. Hospital surgical volume and cost of inpatient surgery in the elderly. J Am Coll Surgeons. 2012;215(6):758-765.

18. Robinson JC. Case studies of orthopedic surgery in California: the virtues of care coordination versus specialization. Health Aff (Millwood). 2013;32(5):921-928.

19. Bohmer RMJ, Huckman RS, Weber J, Bozic KJ. Managing orthopaedics at Rittenhouse Medical Center. Cambridge, MA: Harvard Business School Case 607-152; June 2007. Revised March 2010.

20. Robinson JC. Purchasing Medical Innovation. Berkeley, CA: University of California Press. In press 2015.
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