2. Medical Devices Hit the Radar Screen
If buyers and sellers don’t check the rising cost of implantable medical devices,
the government just might do it for them.
By Bill McIlhargey and John Murray
(In the Winter issue of The Journal of Healthcare care. Drug-eluting stents would be an example.
Contracting, national accounts veteran Bill McIlhargey Driven by innovation at its best, these products tend to
pointed out the need for buyers and sellers to get to “yes” have short life cycles, with new technology and prod-
when contracting for physician-preference items. In this ucts always one step behind. Obviously, such products
article, McIlhargey and John Murray of Premier point live and die on the speed of getting to market.
out the consequences of the industry’s failure to do so.)
Skill-based. These products are much more evolution-
When it comes to healthcare products, physician- ary and deal with incremental changes. They are more
preference items capture more than their fair share of technique-oriented, like orthopaedic reconstructive
attention, either because of the excitement of break- joints, and rely on one-to-one training and support,
through technology or the less exciting business aspects which spawn the supplier/surgeon relations that become
of buying and selling. a basis for product dependence.
Implantable medical devices are a $14.6 billion In the aggregate, the products resulting from both
industry, representing such products as pacemakers, technologies are highly physician preference. Because of
heart valves, stents, hip and knee replacements, defibril- regulations, such products demand that suppliers bear
lators (ICDs) and a host of other technical marvels. They the responsibility for costly educational support to the
are projected to command an 11 percent average annual clinical community.
increase in U.S. demand through 2007, according to the
Freedonia Group (“Implantable Medical Devices to Why the Attention?
2007,” October 2003). Despite the hype surrounding Implantable medical devices improve the quality of life.
these products, however, more and more attention is now Procedures involving vascular stents, reconstructive
shifting to the business practices surrounding them, par- joints, cardio defibrillators and spinal instrumentation
ticularly their contribution to the high cost of healthcare. have captured the imagination of every physician eager
The Journal of Healthcare Contracting/Summer 2004
Central to the discussion is the high SKU price of to become the regional expert for their delivery. With
implantable medical devices (keeping in mind that favorable reimbursement policies, hospitals, surgery
medical devices cannot be benchmarked against centers and now specialty hospitals are clamoring to be
traditional commodity products). To visualize the impact the facility of choice in their area. (The New York Times,
of these devices, think of technology employed under the “Barred as Rivals, Doctors See Some Hospitals in Court,”
following two platforms, both of which influence the April 2004). However, consistent economic pressure is
business dynamics underpinning manufacturers’ go-to- catching up to these “pearls of profit.” Consider:
market strategies: According to IMS data (IMS Hospital Supply Index,
Plymouth Meeting, Pa.), there is a 10.7 percent com-
Pure play. Products dubbed as “disruptive technology” pound annual growth rate on pricing for medical-surgi-
bring a revolutionary contribution to the next level of cal products since 2001. Of these products, implantable
36

3. medical devices represents 89 percent if that person is charged with reducing
of the dollar spend and 11.8 percent of overall supply costs.
the average growth rate, while the However, it should be noted that
remaining products show a 2.6 percent as providers continue to struggle with
rate. Most notable are: grafts and fab- the economic pressures of reimburse-
rics (23.8 percent), orthopedics (17.5 ment, they are recognizing that supply
percent), pacemakers (12.9 percent) chain executives must bridge clinical
and diagnostic and therapeutic (11.2 attitudes with economic realities. In fact,
percent), although the last includes several hospitals have initiated successful
dramatic price erosion of bare metal service line teams, comprised of surgeons,
stents, offset by higher priced drug nurses, supply chain and hospital execu-
eluting stents. tives, which focus on process and utiliza-
The issue for providers is not tion of good comparative information for
the increased price of Bill McIlhargey decision making.
these devices, but
rather, providers’ in- The dominating influence and Problematic
ability to quantify
resulting control resides with th e Issues
their impact on the Before declaring
level of care. As sys- physician, partly because it is he or that the healthcare
tem insiders
agree, a primary con-
will
she who bears the liability for th e system is moving
toward a solution to
cern and challenge is surgical procedures in which these the business chal-
measuring the quality devices are used. lenges surrounding
of care, and then bal- implantable med-
ancing that against the perception of the consuming pub- ical devices, we need to have a well-grounded under-
lic. This may encourage movement beyond the current standing of the underlying problems.
model, which separates fiscal and clinical decision-mak- First and foremost is the issue of liability, which is
ing, to one that aligns the two. Unfortunately, we fear the responsibility of the physician, and which is depend-
this alignment will require a dramatic increase in finan- ent on the skill they employ during procedures.
cial responsibility for the consumer. Second is the dilemma surrounding “best practice,”
clouded by the very nature of physician preference as well
Why Is This Difficult? as supplier marketing. Equally concerning is the lack of
Why is it so difficult to obtain an economic solution for benchmarks for revolutionary vs. incrementaladvances,
products that clearly contribute so much to the health- particularly in techn o l o g i e s s u c h a s biologics.
care system? One reason is the traditional application of Third are the supply chain implications of The Journal of Healthcare Contracting/Summer 2004
buying and selling practices. The more widgets you buy, implantable medical devices, which are not only unrecog-
the greater the buyer’s expectation for a lower price. This nized, but also undervalued by the purchasing communi-
is true, of course, only if supply chain dynamics are ty. Unlike other products, suppliers have been required
determined and controlled by the purchaser. to control the inventory and instrumentation used dur-
But in the case of implantable medical devices, the ing delivery. Providers have grown accustomed to this
dominating influence and resulting control resides with service, and in some cases have abdicated nursing support
the physician, partly because it is he or she who bears for this activity.
the liability for the surgical procedures in which these Fourth, the various components in the healthcare
devices are used. Because of this, the purchaser plays system lack alignment in financial incentives. The pay-
the role of facilitator –an uncomfortable role at best, ment process has divided the providers of care (hospi-
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4. Medical Devices Hit the Radar Screen
tals) from those who deliver care (physicians), leading to political process.
a struggle for resources and paving the way for specialty Looking further, one can see that years of negoti-
hospitals and ambulatory surgery centers to capture the ating with managed care companies have left
more lucrative procedures. hospitals with little in the way of margins. In fact, it
Fifth, economic buyers are concerned about the is our belief that threats from hospitals to walk away
acquisition and consolidation of start-up medical device from the negotiating table have led insurers to grant
companies, providing a never-ending supply of new products yearly cost increases to hospitals, effectively making
from fewer companies, i.e. those with deep pockets and the insurers dependent on the business prowess of
finely tuned distribution channels. the hospitals. This would be a major contributor to
Sixth, the frustration levels of the buyer and seller the double-digit rate increases for health insurance
have polarized the two. Buyers’ lack of familiarity with, experienced in the past several years by corporations
and training on implantable medical devices make them and consumers.
ill equipped to balance their administration’s cost con- Would it then be far fetched for this industry, given
cerns with the clinical needs of the staff. At the same its regional strengths, to pursue direct supplier contract-
time, supplier’s ability to align with surgeons and win ing with manufacturers of implantable medical devices?
continual price concessions has shielded many of them What’s more, why wouldn’t large corporations want do
from the ever-deepening financial plight of the health- the same thing? Consider the $5.1 billion cost projected
care industry. Meanwhile, consumed by the demands of for this year’s healthcare claims of General Motors,
their investors, sup- the largest private
pliers face mounting provider of healthcare
pressures to grow
First and foremost is the issue of benefits in the United
margins. liability, which is the responsiblity States.
These issues pose For our health-
formidable barriers
of the physician, and which care system to
between buyers and is dependent on the skill they venture down this
sellers, with danger-
ous implications.
e mploy during procedures. path could be much
more painful than
the dilemma in
Where Will this Lead? which we currently find ourselves. Supplier margins
What will happen if buyers and sellers fail to build a would probably be the early victim, although it is con-
business model for implantable medical devices, which ceivable that suppliers could gain early efficiencies by
allows both of them to meet their objectives? At some partnering more closely with consumers. However, in
point, an outside influence with a financial interest will the long run, we believe the market would eventually
step in. revert to an all-play, all-vendor situation, which
The Journal of Healthcare Contracting/Summer 2004
The government would seem to be the likely can- would then demand higher SG&A expenditures from
didate, considering that it contributes more than 50 the suppliers. Mean while, buyers will have abdicated
cents of every dollar spent on healthcare. Given the profitable margins on lucrative procedures, while
precariousness of the Medicare Trust Fund, it is clear further distancing themselves from their physician
that CMS – the agency that administers Medicare – staffs.
has the ability and the motivation to “reset” the The final stage of this economic cascade could come
process, perhaps interjecting a bureaucratic method- in the form of “passed down co-payments” to the con-
ology that could seriously jeopardize the productivity sumer – you and me. And does this not eventually lead to
needed in a competitive system. Dramatic costs tiered care, which is delivered based on the individual’s
increases during the past couple of years have made ability to pay?
healthcare costs a prime target in the 2004/2005 Continued on Page 40 ➬
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5. Medical Devices Hit the Radar Screen
➬ Continued from Page 38
Solutions
We believe that solutions do exist
that salvage existing parameters,
and that a buyer/ seller model can be
created to embrace the multiple
influences that one finds with
implantable medical devices.
The first is the development
of benchmarks. Evaluating the
cost of quality has been a moving
target that avoids our best
efforts. Yet devising measurable
quality standards is doable –
not across medical conditions, but
rather by specific clinical treatments. For example, costs and good physician relations.
the Hospital Quality Incentive Demonstration Project Finally, all employers should “set the stage” for
launched by CMS and Premier has identified five responsible decision making by their health consuming
conditions, four of which involve implantable medical workers. Amending the Internal Revenue Code
devices. This effort rates hospitals by individual (Medicare Prescription Drug and Modernization Act –
performance and then financially motivates them December 2003) provides consumer tax advantages to
to a higher performance. This is a positive step save for individual care needs. The creation of Health
toward aligning incentives, albeit between only two Savings Accounts (HSAs) is a direction toward consumer
components. financial responsibility. For effective implementation, it
The second solution is subsidizing medical mal- is imperative for employers to not just communicate
practice insurance. Physicians continue to be finan- available options, but also educate consumers on the
cially challenged by ever increasing premiums, and impact of their decisions.
are looking for relief. This is a clear opportunity for Readers are free to agree or disagree with our
partnering. Provider organizations such as HCA, observations. However, realizing that we must
along with individual facilities like Grand View sustain the enormous contributions that implantable
Hospital in Sellersville, Pa., and Akron General in medical devices have made to improved health, let
Akron, Ohio, are developing and/or offering liability us at least agree that our healthcare system
coverage through risk retention groups and captive- requires more attention and involvement from all
insurance companies. Such an approach can help its constituents.
motivate physicians to participate in comprehensive
The Journal of Healthcare Contracting/Summer 2004
risk-management and quality improvement pro- Bill McIlhargey is currently consulting suppliers
grams. Furthermore, make no mistake about it: This and buyers in the area of physician-preference
has the far reaching potential of rebuilding surgeon contracting. He spent the last 12 years developing
relations, long at issue in building collaboration with strategies and teams for national accounts with DePuy
administration. and Smith & Nephew. He can be reached at
A third solution involves intensifying collabora- 978/500-9666 or dodmcilhargey@comcast.net.
tion between the hospital and its physicians. Of ben-
efit to the physician is better patient outcomes/satis- John Murray negotiates contracts for
faction, more efficiency for his or her practice and, of cardiovascular and surgical supplies as vice president
course, greater income. Benefits to the hospital for Premier. He has spent over 20 years in the industry
include increased market share, reduced procedure from both the provider and GPO perspectives.
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