4. THE U.S. HEALTHCARE SYSTEM IS THE MOST EXPENSIVE IN THE
WORLD, SPENDING A RECORD $2.8 TRILLION IN 2012 ALONE.
THIS AMOUNT IS PROJECTED TO INCREASE TO $5 TRILLION BY
2022. HEALTHCARE SPENDING CONSUMES 42% OF FEDERAL
REVENUES AND 6% OF HOUSEHOLD INCOME. UNSUSTAINABLE
HEALTHCARE COSTS IS DRIVING MAJOR U.S. GOVERNMENT-
INSTITUTED HEALTHCARE REFORM, SPECIFICALLY THE
ENACTMENT AND STEP-WISE IMPLEMENTATION OF THE
PATIENT PROTECTION AND AFFORDABLE CARE ACT (ACA).
THE ACA IS THE PRIMARY DRIVER OF CHANGE IN THE U.S.
HEALTHCARE INDUSTRY TODAY. HEALTHCARE REFORM AND
ITS SUBSEQUENT EFFECTS HAVE CAUSED LARGE SHIFTS IN
THE WAY MANY ENTITIES IN THE HEALTHCARE SUPPLY CHAIN
FUNCTION INTERNALLY AND DO BUSINESS. IN PARTICULAR, THE
ACA HAS SIGNIFICANTLY AFFECTED HEALTHCARE PROVIDERS
BY CREATING INCENTIVES TO REDUCE COSTS WHILE
IMPROVING PATIENT OUTCOMES.
EXECUTIVE SUMMARY
5. Changes that impact medical device original equipment
manufacturers (OEMs) include:
+ Increases in value-based healthcare payment systems.
+ An increasing provider demand for truly innovative and
disruptive new technologies, in respect to patient outcomes and/
or cost effectiveness.
+ An increasing need for clinical and cost effective data, in addition
to patient outcomes data, for new product adoption in healthcare
provider systems and for reimbursement pricing.
+ An emergence of collaborative partnerships and strategic
Healthcare supply chain costs are only second to labor and are
an increasingly popular target for increasing efficiency while
decreasing costs. Providers are taking direct action to increase
supply chain efficiency to decrease overall costs, particularly in the
area of order and inventory management.
Several of these changes that affect OEMs include:
+ An increasing use of value analysis and strategic sourcing for all
product entry into provider systems.
+ The stanardization of supplies by providers, particularly PPIs.
+ An increasing use of RFID-based inventory systems as well as
just-in-time (JIT) and/or logical unit of measurement (LUM) delivery
processes.
+ An increasing large provider use of multi-product direct-from-
manufacturer bulk purchase orders.
The goal of this report is to elucidate the drivers of change and
corresponding practice changes within the U.S. healthcare
industry to support medical device OEMs and other heath care-
related entities in successfully adapting to these changes.
6. TABLE OF CONTENTS
SECTION 1: MAPPING THE U.S. HEALTHCARE PROVIDER SUPPLY CHAIN 1
1.1 Overview Of U.S. Healthcare Provider Supply Chain 3
1.2 Product Management 9
1.3 Healthcare Providers 14
1.4 Payers 25
SECTION 2: THE ROLE OF SUPPLY CHAIN MANAGEMENT IN U.S. HEALTHCARE 29
2.1 Introduction to Supply Chain Management (SCM) 31
2.2 Initiatives to Decrease SCM Costs 34
SECTION 3: TRANSITIONS IN NEW PRODUCT INTRODUCTION PROCESSES 37
3.1
Physician- versus Organization-based Product Approval Processes in
U.S. Healthcare Provider Systems
39
3.2 Key Decision Points and Decision Makers 43
3.3 Additional Considerations 44
SECTION 4: PRODUCT ENTRY & ADOPTION IN TODAY'S PROVIDER SYSTEM 45
4.1 Factors Involved in Product Adoption 49
SECTION 5: CHANGING ENVIRONMENTS 51
5.1
The Shift toward an Increased Influence of Payers in the Decision
Process
53
5.2 New Product Approval / Value Analysis Committee 55
5.3 The Shift in Physician Environment 55
5.4 Novel Strategic Relationships 57
SECTION 6: RECOMMENDATIONS & SUMMARY 60
6.1 Recommendations 60
6.2 Summary 61
6.3 References 63
7. FIGURES
FIGURE 1 Key Supply Chain Components 5
FIGURE 2 Five Largest U.S. GPOs 11
FIGURE 3 Top Five Healthcare Provider Systems 15
FIGURE 4 Top Five Healthcare Provider Systems in Minnesota 17
FIGURE 5 Number of U.S. ACOs, 2013 - 2015 20
FIGURE 6
Number of Non-Medicare Patients Cared for by ACOs in CMS Programs
and Percentage of Medicare Beneficiaries Covered by ACOs
21
FIGURE 7
Distributor-Mediated Product Line versus Direct-Delivery of Product,
with and without a GPO
23
FIGURE 8 U.S. Health Spending Distribution by Payer, 2012 26
FIGURE 9
Percent of SCM Annual Operating Costs for Major Entities in U.S.
Healthcare Supply Chain (2009)
32
FIGURE 10 Physician- versus Organization-Based Product Approval Processes 41
FIGURE 11
Four Major Factors Involved in Successful Product Adoption in
Healthcare Provider Systems
47
FIGURE 12 Regulatory Approval Summary of Class I, II, and III Devices 50
FIGURE 13 Approaches to Changing Environments: Novel Strategic Relationships 56
10. 3 Provider SCM: A Medical Device Perspective | LifeScience Alley
U.S. HEALTHCARE PROVIDER SUPPLY CHAIN
The U.S. healthcare system is the most
expensive health care system in the
world, and costs are expected to con-
tinue to rise faster than inflation and
the economy.1
In 2012 alone, $2.8
trillion was spent on health care in
the U.S., which is almost 4 times the
amount spent in 1990 ($714 billion).1,2
This amount is projected to increase to
$5 trillion by 2022. In addition, health
care spending consumed 42% of
federal revenues and 6% of household
income.3
Although Americans spend
twice as much on health care costs per
capita compared to citizens of other
comparable developed countries, U.S.
health outcomes are no better.1
The
dramatic increase of health care costs
without an increase in the value of care
in recent decades has driven the U.S.
government to implement major health
care reform, thus causing many entities
involved in health care to reevaluate
and change the way they do business.
The primary driver of change in the U.S.
healthcare industry today is govern-
ment-instituted reform. In particular,
the preparation for and implemen-
tation of the Patient Protection and
Affordable Care Act (ACA), signed into
effect on March 23, 2010 by President
Barack Obama. The ACA was aimed to
reinvent U.S. healthcare in stages over
the course of ~4.5 years.4
The triple
aim of the ACA involves the simul-
taneous pursuit of improving care,
improving the overall health of popu-
lations, and reducing the per capita
health care cost. One major way the
ACA seeks to achieve this triple aim is
by implementing value-based health
care, which provides financial incen-
tives in the form of reimbursement for
providers that encourage them to shift
their focus from the volume of health
care services/visits to the quality of care
and improving outcomes. This value-
based health care system has been
demonstrated to be less costly than the
previously used “test-and-treat”, fee-
for-service type of care.5
Dr. Kenneth
L. Davis, M.D., CEO and President of
the Mount Sinai Health System in New
York City, explains, “Instead of mea-
suring hospitals by the number of beds
filled with patients being treated for ill-
nesses, the hospital of tomorrow will
be judged more by its ability to main-
tain a community’s health”.6
In addi-
tion, other recent changes in the U.S.
healthcare system have been driven by
the ACA: the demand for reliable data
and its utilization in decision-making
and clinical effectiveness evaluations,
the increased use of aggregated pur-
chasing methods to decrease costs for
providers, the subsequent decrease in
price providers are willing to pay manu-
facturers for their products, decreasing
reimbursement prices, and the growing
reliance on supply chain management
(SCM) to cut costs in the system.
11. 41.1. U.S. Healthcare Provider Supply Chain
/ PRO·VID·ER SUP·PLY CHAIN /
DEFINED FROM A MEDICAL DEVICE PERSPECTIVE
A supply chain can be broadly defined as “three or
more entities (organizations or individuals) directly
involved in the upstream and downstream flows
of products, services, finances, and/or information
from a source to a customer”. 7
The main entities in the U.S. healthcare supply chain are defined here
as: PRODUCT MANAGEMENT, PROVIDERS, and PAYERS. Product man-
agement encompasses the production and assembly of parts into a
final product as well as the contracted sale of that product whether
it be a direct sale from the manufacturer or more indirectly through a
distributor and/or group purchasing organization (GPO). Providers are
entities such as hospitals, physicians, out-patient and ambulatory clin-
ics, integrated delivery networks (IDNs), and accountable care organi-
zations (ACOs). Payers are entities and people who pay for the services
and goods needed for patient care; they include the U.S. government
in the form of reimbursement and government-sponsored health care,
employers and their employees (patients) subsidizing health insurance
costs, and insurance companies.
12. 5 Provider SCM: A Medical Device Perspective | LifeScience Alley
KEY SUPPLY CHAIN COMPONENTS
FIGURE 1.
Arrows illustrate direction of Goods [G]; Services [S]; and Money [$].
X
GPO
1a. MANUFACTURERS
1c. DISTRIBUTORS
1b. GPOs
$Æ
SÆ
Å S
G Æ
Æ
GÆ
ÅS
$ Æ
$Æ
S Æ $ Æ
G Æ
13. 61.1. U.S. Healthcare Provider Supply Chain
3b. PATIENTS Å$
2. PROVIDERS
3a. GOVERNMENT
3a. EMPLOYERS
3a. INSURANCEÅ$
Å $
Å $
Å$GÆSÆ
Å $
Å$
Å $
Å$Å$
14. 7 Provider SCM: A Medical Device Perspective | LifeScience Alley
PM
PRODUCT
MANAGEMENT
HP
HEALTHCARE
PROVIDER
PY PAYER
1a. MANUFACTURERSPM
Manufacturers include component manufacturers and the OEMs. This is the first
step in the proccess of the U.S. Healthcare Supply Chain.
1b. GROUP PURCHASING ORGANIZATIONS (GPOs)PM
GPOs are an optional route for either Manufacturers, or sometimes Distributors, to
take. They are solely a services organization and therefore never touch the goods
that are moving from the Manufacturers / Distributors to the Providers / Patients.
GPOs in the end help their customers to avoid unwanted negotiation costs with
healthcare providers and also provide access to data in order to ensure better
decision-making among Manufacturers and Distributors.
1c. DISTRIBUTORSPM
Manufacturers may opt to not sell directly to the Healthcare Provider and/or Patient,
and rather sell to a Distributor who will move their goods to the wanted destination.
Distributors primarily are managers of product sale, inventory and logistics.
KEY SUPPLY CHAIN COMPONENTS: DEFINITIONS
15. 81.1. U.S. Healthcare Provider Supply Chain
2a. HOSPITALS, PHYSICIANS, CLINICS, NON-ACUTE CARE
CENTERS
HP
The largest product consumption in the healthcare supply chain is accounted for by
the providers. Providers are situated in the middle of the supply chain with money,
goods and services flowing both in and out.
2b. INTEGRATED DELIVERY NETWORKS (IDNs)
& ACCOUNTABLE CARE ORGANIZATIONS (ACOs)
HP
IDNs and ACOs are networks of healthcare organizations that focus their collabora-
tive care on specific geographic regions while attempting to improve quality of care
simultaneously.
3a. GOVERNMENT, EMPLOYERS, INSURANCE
COMPANIES
PY
Payers including the Government, Employers and Insurance Companies subsidize
the costs of the goods and services that the healthcare providers are offering to
their patients. These payers only handle money surrounding the exchange.
3b. PATIENTSPY
Patients are the final receiver of the goods and services that travel to them either
directly from the Manufacturer or via the Healthcare Provider.
16. 9 Provider SCM: A Medical Device Perspective | LifeScience Alley
PRODUCT MANAGEMENT
1a. MANUFACTURERS
There are two main types of product manufacturers: component manufacturers
and OEMs. A component manufacturer and supplier generally manufactures parts
or components that are sold to other manufacturers including OEMs for use in the
production of a more complex product. As Figure 1 illustrated, manufacturers are
then able to directly sell their products to distributors or the health care providers
themselves.7,9,10
One recently increasing trend is for manufacturers to sell direct-to-consumer (DTC)
and do-it-yourself (DIY) products. DTC or DIY products can save costs because they
bypass the need for a GPO, distributor, provider, and a physical visit with a physi-
cian as well as reimbursement and all other payers with the exception of the end
consumer. These types of products include mobile apps and/or devices that perform
genetic testing, monitor vital signs, and analyze bodily fluids.11,12
APPROXIMATELY 86% OF CLINICIANS BELIEVE MOBILE APPS WILL BECOME AN
IMPORTANT PART OF PATIENT HEALTH MANAGEMENT IN THE NEXT 5 YEARS.12
One example of a recent product includes the first FDA-approved DTC DIY genetic
carrier test, manufactured by 23andMe, which became available in February 2015.11
In terms of future products, a global XPRIZE competition for the creation of a personal
medical kit able to diagnose 16 conditions and measure five real-time vital signs is
currently underway. Not only would consumers enjoy such a tool for at home use,
but approximately 52% of U.S. clinicians would support the use and data provided
by such a high-tech personal medical kit.12
However, several disadvantages of this
approach include out-of-pocket cost, reimbursement limitations, technical appropri-
ateness, feasibility, technological considerations, and user error.
1b. GROUP PURCHASING ORGANIZATION (GPO)
GPOs are seen as an essential facilitator (and money-saver) to the U.S. healthcare
supply chain for several key reasons:
17. 101.2. U.S. Healthcare Provider Supply Chain
+ GPOs allow providers to focus their resources on patient care while saving them (or even directly
making them) money for little to no cost.
+ GPOs aid manufacturers and distributors in avoiding significant costs associated with individual
negotiations with thousands of hospitals.
+ GPOs store and provide access to data, promoting utilization of data-driven decisions on products
and practices.14,17
A GPO generates cost savings by leveraging the bulk-buying power of a group of members,
primarily providers, to obtain preferred or discounted pricing on goods and services by aggre-
gating purchasing volume for both commodity and physician preference items (PPIs).17,18
GPOs
provide services to manufacturers, distributors, and providers, but never buy or physically
handle any product. GPOs also save providers time and money by negotiating and executing
multiple (in some cases, thousands) of individual contracts.19,20
The vast majority of hospitals in
the U.S. (~96%-98%) utilize GPO contracts, and it is estimated that, on average, U.S. hospitals use
2-4 GPOs per facility.20
GPOs save hospitals 10-15% of their purchasing costs and generate more
than $36 billion in savings annually for U.S. healthcare providers.14,20
Approximately 75% of all
hospital purchases are made using a GPO.17
Generally, GPOs provide negotiation services for providers at no cost; their revenue is gener-
ated by charging vendors (manufacturers, distributors, etc.) an administrative fee of up to 3%
of the total purchase price for facilitating contracts with providers, some of which is oftentimes
rebated to the provider.17–19
In addition to contract negotiation, GPOs are increasingly providing value to the healthcare
supply chain with auxiliary services including:
+ Functioning as DATA WAREHOUSES (for data-driven decision making purposes). This includes
the storage of and access to benchmark and clinical outcomes data, as well as the facilitation of
participation in and access to product evaluations.
+ CONSULTING SERVICES that consist of direct input on product and service selection, predictive
analytics, and clinical expert and data support for value analysis.
+ EDUCATION through safety improvement, standardization of product use, management of pur-
chasing procedures, and best practices demonstrations for clinicians.
+ Brokering STRATEGIC ARRANGEMENTS with the formation of strategic partnerships and informa-
tion of / access to innovative products.
+ E-COMMERCE SOLUTIONS 17,18
The five largest U.S. GPOs are shown in the following visual. MedAssets is currently the largest
GPO by its number of hospitals, non-acute providers, and affiliate beds; additionally, it is the most
popular GPO as it is used by 4 out of 5 U.S. hospitals. MedAssets and, more recently, Premier
have publicly traded stock whereas Amerinet, Novation, and HealthTrust are privately held.21,22
18. 11 Provider SCM: A Medical Device Perspective | LifeScience Alley
4,500 HOSPITALS; 123,000 NON-ACUTE PROVIDERS; 510,940 AFFILIATE BEDS
Significant affiliate providers & organizations: Kaiser Permanente; Richmond University Medical
Center in New York
3,474 HOSPITALS; 78,569 NON-ACUTE PROVIDERS; 389,551 AFFILIATE BEDS
Significant affiliate providers & organizations: Health Resource Services; Hospital Services Inc. (HSI);
SupportHealth Hospital Associations in Alabama, Florida, Louisiana and Mississippi
FIGURE 2.
FIVE LARGEST U.S. GPOs*
* based on number of affiliate beds21-29
19. 121.2. U.S. Healthcare Provider Supply Chain
3,100 HOSPITALS; 100,000+ NON-ACUTE PROVIDERS; 293,611 AFFILIATE BEDS
Significant affiliate providers & organizations: Children’s Hospital Association; Provista; VHA, Inc.;
University HealthSystem Consortium (UHC)
3,400 HOSPITALS; 110,000 NON-ACUTE PROVIDERS; 290,627 AFFILIATE BEDS
Significant affiliate providers & organizations: Adventist Health System; Geisinger Health System;
Banner Health; University of Texas M.D. Anderson Cancer Center in Houston
1,400 HOSPITALS; 10,600 NON-ACUTE PROVIDERS; 189,488 AFFILIATE BEDS
Significant affiliate providers & organizations: Hospital Corporation of America (HCA); Health Man-
agement Associates (HMA); Community Health Systems; Lifepoint
20. 13 Provider SCM: A Medical Device Perspective | LifeScience Alley
1c. DISTRIBUTORS
Distributors generally manage the physical product sale, inventory, and logistics
between manufacturers and providers. In short, a distributor buys product from a
manufacturer at a discounted price and then proceeds to hold and/or sell product
to a provider after increasing the product’s price. For a manufacturer, the value in a
distributor holding inventory lies in reducing the manufacturer’s inventory-carrying
costs, handling the logistics of delivering product when and where as needed by
the provider, and, in many cases, providing the sales force that promotes product
to providers.13,14
The percent of average sales price (ASP) is dependent on the type
of distributor needed by the manufacturer. However, as the amount of services
increases, the added cost/mark-up increases. Due to the significant cost of providing
an in-house sales team, smaller manufacturers may seek the use of a distributor’s
sales force and expertise.15,16
Distributors have many manufacturers supplying them with a variety of products
allowing them to broker advantageous contracts for providers that allow the sale of
products from multiple manufacturers in a single transaction (i.e., a single purchase
order), which saves time and labor. Another valuable function distributors provide is
the extension of trade credit, generally very liberally, to their manufacturer customers,
acting as a “lubricant” and a catalyst for sales in the supply chain. In addition, due to
their“middleman”position,distributorsoftenprovidesalessupportformanufacturers
while providing product expertise and/or training for providers. Distributors offer
providers a number of benefits including: a diverse array of products that can be
purchased using a single purchase order; providing competitive pricing on products
due to the amount and variety of manufacturers; and guaranteed inventory options
(vendor managed inventory programs).13,14
Inaddition,distributorsutilizetheservicesofGPOstobrokercontractswithproviders.14
21. 141.3. U.S. Healthcare Provider Supply Chain
2a. HOSPITALS, PHYSICIANS, CLINICS & NON-ACUTE CARE CENTERS
Health care providers account for the largest product consumption in the healthcare
supply chain.14
Providers are entities such as hospitals, physicians, clinics, and non-
acutecarecentersinadditiontolargenetworksofproviderssuchasIntegratedDelivery
Networks (IDNs) and Accountable Care Organizations (ACOs) that provide medical
services and health care for individuals (discussed further in the current section).
Non-acute care centers such as out-patient/ambulatory clinics provide medical
care outside of a hospital. These clinics provide various ancillary services including
diagnosis; observation; consultation; treatment including radiation, chemotherapy,
and out-patient/same-day surgery; intervention; diagnostic procedures; emergency
visits;rehabilitationservices;andmostrecently,telephoneandwebconsultations.38,39
The top five U.S. healthcare provider systems are listed on the following pages.42–47,
40,41
Out of the top five healthcare provider systems in Minnesota, the Mayo Clinic and
Allina Health System were both been named in the 2015 Top Health Systems by
Truven Health Analytics due to outstanding performance in achieving reliable
patient outcomes in all member hospitals. Measured performance factors included
care quality, patient safety, use of evidence-based medicine, operational efficiency,
and customer perception of care.50
HEALTH CARE PROVIDERS
22. 15 Provider SCM: A Medical Device Perspective | LifeScience Alley
162 HOSPITALS; 117 NON-ACUTE PROVIDERS; $36.9B 2014 OPERATING REVENUE (FOR-PROFIT)
80 HOSPITALS; 200+ NON-ACUTE PROVIDERS; $28B 2014 OPERATING REVENUE (FOR-PROFIT)
FIGURE 3.
TOP FIVE HEALTH CARE PROVIDER SYSTEMS*
* based on annual operating revenue40-47
24. 17 Provider SCM: A Medical Device Perspective | LifeScience Alley
$9.76B / INTEGRATED ACADEMIC MEDICAL FACILITY; MAYO CLINICS IN AZ, FL & MN
$5.20B / PARK NICOLLET METHODIST HOSPITAL; REGIONS HOSPITAL; LAKEVIEW HEALTH;
HEALTHPARTNERS MEDICAL GROUP; PARK NICOLLET MEDICAL GROUP
FIGURE 4.
TOP FIVE HEALTH CARE PROVIDER SYSTEMS
* based on 2014 annual operating revenue, including largest facilities and programs48,49
IN MINNESOTA
*
25. 181.3. U.S. Healthcare Provider Supply Chain
$3.42B / ABBOT NORTHWESTERN HOSPITAL; ALLINA HEALTH CLINICS; BUFFALO HOSPITAL;
CAMBRIDGE MEDICAL CENTER; MERCY HOSPITAL; PHILLIPS EYE INSTITUTE
$3.37B / UNIVERSITY OF MINNESOTA MEDICAL CENTER; FAIRVIEW SOUTHDALE HOSPITAL;
FAIRVIEW RIDGES HOSPITAL; FAIRVIEW NORTHLAND MEDICAL CENTER
$1.74B; ESSENTIA-HEALTH-ST. MARY’S MEDICAL CENTER; ESSENTIA HEALTH-DULUTH; ESSENTIA
HEALTH-ST. JOSEPH’S MEDICAL CENTER
26. 19 Provider SCM: A Medical Device Perspective | LifeScience Alley
2b. INTEGRATED DELIVERY NETWORKS (IDNs) &
ACCOUNTABLE CARE ORGANIZATIONS (ACOs)
IDNs and ACOs both consist of a network of healthcare organizations that work
together in providing a continuum of care to a specific geographic area or commu-
nity with the ultimate goal of reducing the cost of providing health benefits while
improving the quality of care. They can include short- and long-term hospitals, groups
of physicians, ambulatory/out-patient clinics, rural health care clinics, home health
care clinics, hospice services, retirement centers, behavioral health centers, etc.
GENERALLY, THE MAJORITY OF IDNs STILL USE THE TEST-AND-TREAT FEE
MODEL FOR HEALTH CARE WHEREAS THE NEXT STEP IN THE EVOLUTION OF
HEALTH CARE IS THE ACO. An ACO consists of a health care provider network
partnered with a payer (such as Medicare) that dispenses coordinated and seam-
less care for patients. ACOs work together to treat a community and be proactive
in disease prevention.51
The ACA defines an ACO as a legal entity consisting of both
physicians and hospitals that has at least 5,000 Medicare lives under contract, has
the ability to pay participants, and includes both Medicare and commercial lives.52
Although Medicare does not require providers to participate in ACOs, to qualify for
shared savings, the ACO must continue as a Medicare ACO for at least 3 years.51
Effective January 1, 2012, if ACOs reach certain benchmarks set by the Centers for
Medicare & Medicaid Services (CMS) in providing more coordinated, more efficient,
and generally higher quality care while reducing cost and/or spending healthcare
monies wisely, they are rewarded with financial bonuses (Medicare Shared Savings
Program).4
Currently, there are approximately 426 Medicare-based ACOs that serve
~5.6 million beneficiaries, which is an estimated 11% of all Medicare beneficiaries.53
Medicare ACOs also currently serve an estimated 35 million non-Medicare patients
through commercial and non-CMS ACO contracts.54
Non-CMS ACO contracts have been and are currently being developed by commer-
cial payers including United Healthcare, Cigna, Aetna, and Blue Cross & Blue Shield
as well as state governments.54,55
The number of commercial ACOs is difficult to pin-
point because no standard definition or central list exists, but a recent study suggests
that there are approximately 159 as of April 2015.53
The following figures show the
growth in the total number of ACO beneficiaries, non-Medicare patients cared for by
ACOs in CMS programs, and the total number of ACOs over the past several years.
ACOs now serve between 15-17% of the U.S, and almost 70% of U.S. citizens now live
in areas served by ACOs.53
27. 201.3. U.S. Healthcare Provider Supply Chain
2013 2014 2015
*
Figure adapted from Source 53
0
100
200
300
400
500
600
124
154 159
134
258
522
585
368
426
NUMBER OF U.S. ACOs*
, 2013 - 2015
Medicare ACOs
Non-CMS ACOs
FIGURE 5.
28. 21 Provider SCM: A Medical Device Perspective | LifeScience Alley
NUMBER OF NON-MEDICARE PATIENTS CARED FOR BY ACOs
IN CMS PROGRAMS / PERCENT OF MEDICARE BENEFICIARIES
COVERED BY ACOs *
0%0
5 M
10 M
15 M
20 M
25 M
30 M
35 M
2%
4%
6%
8%
10%
12%
2013 2014 2015
*
Figure adapted from Source 53
FIGURE 6.
29. 221.3. U.S. Healthcare Provider Supply Chain
PROCUREMENT IN PROVIDER SYSTEMS
In general, there are three major pathways for healthcare providers to obtain the necessary
products for patient care (see pages 10-11). These include buying the product directly from the
manufacturer, distributor, and/or using a GPO to negotiate these contracts. Providers generally
utilize the pathway that provides them with the best overall price and/or value while also main-
taining their current procurement relationships.
ONE EFFECTIVE METHOD TO DRIVE DOWN COSTS INVOLVES PURCHASING LARGE
VOLUMES OF VARIOUS PRODUCTS DIRECTLY FROM AN OEM, WITHOUT A GPO OR USE OF A
DISTRIBUTOR.Largeprovidersarebestabletonegotiatetheirownrateswithoneorseverallarge
OEMs because they are able to commit to purchasing a pre-determined, high product volume at
an overall fixed price for multiple products and/or suites of products.14,30
Smaller providers may
not have this ability due to their smaller product volume. However, transportation and purchase
order line costs can be up to 3X higher when ordering directly from a manufacturer, according
to a recent survey. In addition, providers can use electronic ordering systems with almost all
distributors (96%) whereas most manufacturer-direct orders must be conducted manually.
(Approximately only 33% of manufacturers have electronic ordering systems in place.)56
Smaller providers more frequently utilize GPOs to attain the best price for products over the other
two pathways; GPOs are able to negotiate lower product prices by leveraging the aggregate
purchasing power of their members.14
A recent survey (2014) indicates that hospitals route 75%
of purchases through GPO contracts and the remainder of their purchases (25%) via self-negoti-
ated contracts and off-contract buys.17
Many providers require manufacturers/vendors to use a
provider-approved GPO (or distributor) before they commit to purchasing product.30
The following pages show a generalized breakdown of which products are purchased by
providers using distributors, GPOs, and without the use of either (direct from the manufacturer
to the hospital).
30. 23 Provider SCM: A Medical Device Perspective | LifeScience Alley
DISTRIBUTOR-MEDIATED PRODUCT LINE VERSUS
DIRECT-DELIVERY OF PRODUCT, WITH AND WITHOUT A GPO*
*
Figure adapted from Source 57
FIGURE 7.
MANUFACTURER
È
DISTRIBUTOR
È
HEALTHCARE PROVIDER
CONTRACT WITH GPO
Medical-surgical products of low value & high
volume, and generic drugs
NO CONTRACT WITH GPO
Some branded drugs (oncology, cardiovascular),
small-volume arcane items, and generic drugs
MANUFACTURER
È
HEALTHCARE PROVIDER
CONTRACT WITH GPO
Lower-end implants and medical devices, and
branded drugs
NO CONTRACT WITH GPO
Higher-end implants and medical devices, and
specialty items of high value and low volume
31. 241.3. U.S. Healthcare Provider Supply Chain
PROVIDERS
ACCOUNT FOR
THE LARGEST
PORTION OF U.S.
HEALTHCARE
COSTS.
The largest U.S. healthcare expense comprises the services
and goods provided by health care providers. The costs
associated with hospitals, physicians, and clinics alone
encompass slightly over half of the total U.S. annual healthcare
costs (~52%); it is these provider-related costs that the ACA
aims to decrease the most.3
For providers, supply chain-asso-
ciated costs are second only to the cost of labor.58
Thus, one
of the most popular strategies for total cost reduction around
the world is through better use of supply chain management.14
In addition, the qualitative interviews performed during this
research have indicated that supply-chain related costs are
much easier to decrease than labor costs.15,59,60
Therefore, the
ability to cut supply chain costs is intrinsic for the viability of
providers today.
32. 25 Provider SCM: A Medical Device Perspective | LifeScience Alley
3a-b. GOVERNMENT, EMPLOYERS, INSURANCE COMPANIES, PATIENTS
Although goods and services are directly provided to individuals (patients), a
variety of different payers finance these goods and services, including the govern-
ment, employers, insurance companies, and the patients themselves, as shown in
Figure 5. Government-funded public insurance pays for the majority of health care
costs (39%), which includes Medicaid (15%), Medicare (20%), and other smaller
public health insurance entities such as the Department of Defense, Veterans
Affairs healthcare, and Children’s Health Insurance Program (4%). Private health
insurance pays for the next largest portion of health care costs (33%), which is
funded via insurance premiums paid by a patient’s employer and/or the patient.
Out-of-pocket expenses are paid by the patient (12%) and include consumer-paid
copays, deductibles, and goods and services not covered by insurance (but not
insurance premiums). Other payers include specific entities such as worksite health
care, Indian Health Services, workmans’ compensation, maternal and child health,
and vocational rehabilitation. Investment (6%) and general public health activities
(3%) comprise the remaining spending.3
PAYERS
33. 261.4. U.S. Healthcare Provider Supply Chain
PRIVATE HEALTH INSURANCE | 33% | $924 BILLION
OTHER PUBLIC HEALTH INSURANCE | 4% | $112 BILLION
MEDICAID | 15% | $420 BILLION
MEDICARE | 20% | $560 BILLION
INVESTMENT | 6% | $168 BILLION
PUBLIC HEALTH ACTIVITIES | 3% | $84 BILLION
OTHER PAYERS | 7% | $196 BILLION
OUT-OF-POCKET | 12% | $336 BILLION
PUBLIC HEALTHCARE SECTOR
$2.8 T
U.S. HEALTH SPENDING DISTRIBUTION BY PAYER, 2012 *
FIGURE 8.
*
Figure adapted from Source 3
34. 27 Provider SCM: A Medical Device Perspective | LifeScience Alley
REIMBURSEMENT
Reimbursement is the process of obtaining payment for goods, procedures, and/or services,
generally by a provider from a payer. The three pillars for successful public and private insurance
reimbursement include coverage, coding, and payment. Manufacturers must be aware if and
how their device will be reimbursed otherwise it may not be adopted by the provider. However,
reimbursement is still decentralized and involves a surprising number of payers and factors,
such as provider location, in order to determine the amount to be paid to the provider.30–32
COVERAGE is defined as the criteria under which a product, service or procedure will be paid
for by the payer. Generally, it is necessary to ensure that Medicare, Medicaid, and most private
insurerscovertheprocedures,goods,andservicesinvolvedwiththeparticularproductaswellas
under what circumstances this product can be covered.32
In Medicare and Medicaid, coverage
is determined largely on a local level by Medicare/Medicaid contractors that pay these claims.
For an item to be covered by Medicare or Medicaid, it must: be eligible for a defined Medicare/
Medicaid benefit category; be “reasonable and necessary” for the diagnosis or treatment of an
illness or injury or to improve the functioning of a malformed body member; and meet all other
applicable Medicare/Medicaid statutory and regulatory requirements.31
Private insurers often,
but not always, follow Medicare coverage decisions, and generally private insurers will pay
more for services than Medicare.32
Reimbursement criteria is different from FDA approval, where
the product approval is based on being “safe and effective”.33,34
Medicare and Medicaid provide
health care benefits to approximately 1 in 3 Americans while the remainder are covered by other
government sponsored insurance programs, private insurance providers, or not covered by
insurance at all.34
CODING can be defined as the mechanism by which a product, service, or procedure is
identified.34
Codes are alphanumeric and the common language between payers and providers
that enable them to process and pay claims efficiently. When a product is assigned to a code,
that code can then be used to communicate diagnoses, medical services, procedures, drugs,
devices, laboratory tests, and supplies to the payer from the provider in order for the provider
to receive proper reimbursement.35
Examples of “codes” include procedure codes/services by
health care providers (CPT) and diagnosis codes (ICD-9).33
Payers generally have a maximum
allowed payment for every code; however, the price for the service charged by the provider is
not necessarily the price the payer reimburses for that code.36
35. 281.4. U.S. Healthcare Provider Supply Chain
PAYMENTistheamountofmoneythatistransferredfromthepayertotheproviderforahealthcare
product, service, or procedure based on coverage and coding.34
Payment amounts depend on
the perceived clinical value of the product/service/procedure and do not often depend on the
manufacturer’s price.35
Payments vary by provider setting (hospital, ambulatory center, clinic,
etc.) and may be paid separately or packaged/bundled. Medicare is the largest single payer, and
private insurers often, but not always, follow Medicare coverage decisions.32
Payment also has
a separate coding system for actual payment to the provider system. For example, in Medicare,
in-patient reimbursement is based on diagnostic related groups (DRGs) in which payments are
made based on a patient’s diagnosis and not on what procedures are actually performed, and
for outpatient and ambulatory care, CPT codes are mapped to an ambulatory payment classi-
fication (APC) code that is associated with a particular payment rate.33
For successful product
launch in the U.S. health care system, manufacturers and vendors must have a good grasp of
the specific payer mix for their product.30,31,35,37
This will allow provider entities to evaluate and
maximize reimbursement.
38. 31 Provider SCM: A Medical Device Perspective | LifeScience Alley
SUPPLY CHAIN MANAGEMENT (SCM)
Recently, SCM has become a target in health care because costs can
be reduced and efficiencies gained while maintaining the current
labor force.61
SCM was originally defined as spanning “all movement
and storage of raw materials, work-in-process inventory, and finished
goods from point-of-origin to point-of-consumption” by Keith Oliver
in 1982.62
However, as we transition to a digital world, the definition
of healthcare SCM is expanding to include the use and storage of
data. This was exemplified by a medical device data and solutions
industry expert who recently defined the modern healthcare supply
chain to also include the data generated by the product/device
throughout its entire lifetime - from its production through its even-
tual use/implantation - ending only at the explantation of the device
or patient death.63
Supply chain costs account for approximately one- to two-thirds
of the annual operating costs of the main entities in the healthcare
industry according to a survey of 1381 healthcare supply chain pro-
fessionals: Manufacturers (36%), Distributors (67%), GPOs (57%) and
Providers (31%), as shown in Figure 6.64
OVER HALF OF SCM COSTS CAN BE ATTRIBUTED TO ORDER AND
INVENTORY MANAGEMENT FOR EACH ENTITY. Mismanagement
of either the ordering process or inventory can result in either an
inventory glut or inventory shortage, both of which have the ability to
cause significant financial problems for any entity.64
39. 322.1. The Role of SCM in U.S. Healthcare
X
GPO
PERCENTAGE OF SUPPLY CHAIN MANAGEMENT ANNUAL
OPERATING COSTS FOR MAJOR ENTITIES IN U.S.
HEALTHCARE SUPPLY CHAIN (2009) *
FIGURE 9.
35% 14% 11% 7%
67%
31% 4% 4% 18%
57%
19% 3% 4% 5%
31%
16%
36%
8% 5% 7%
ORDER & INVENTORY MANAGEMENT
OTHERSHIPPING / RECEIVING
TRANSPORTATION
*
Figure adapted from Source 64
PROVIDERS
GROUP PURCHASING ORGANIZATIONS
DISTRIBUTORS
MANUFACTURERS
40. 33 Provider SCM: A Medical Device Perspective | LifeScience Alley
INCREASING SUPPLY CHAIN
EFFICIENCY IS A RECENT
TARGET OF DECREASING
PROVIDER COSTS. NOT ONLY
CAN PROVIDERS REDUCE COSTS
THROUGH MORE EFFICIENT SCM,
THEY ALSO HAVE THE ABILITY
TO GENERATE ADDED REVENUE
BY IMPROVING SUPPLY CHAIN
EFFICIENCY.58
IMPROVED ORDER
AND INVENTORY MANAGEMENT
HELPS PREVENT STOCK-OUTS,
OVERSTOCKING, LOSS OR
MISPLACEMENT OF INVENTORY,
AND EXPIRATION OF INVENTORY
BEFORE USE.65
Popular initiatives to decrease supply chain costs include enhancing
efficiencies in Order and Inventory Management through . . .
41. 342.2. The Role of SCM in U.S. Healthcare
INITIATIVE #1: STANDARDIZATION OF SUPPLIES /
PURCHASING DISCIPLINE
The first step toward supply chain cost reduction is purchasing discipline and the standard-
ization of supplies/compliance. Efficient providers generally order products that offer the best
value aligned with the best outcomes while minimizing the amount of vendors for all supplies
(for general, commodity, and PPIs). In addition, consistent purchasing of products from a pre-
approved formulary reduces costs as well as non-patient related staff time.56
INITIATIVE #2: DECREASING ON-HAND INVENTORY COSTS
The owning, storage, and handling of product drives cost. The most efficient hospitals own and
store as little inventory as possible to maintain optimum service levels. Many use just-in-time
delivery (JIT) and/or logical (or low) unit of measure (LUM) processes to control costs. In JIT
delivery, inventory is purchased just before it is consumed and the correct products are deliv-
ered at the right place at the right time. A LUM process provides health care providers with
“ready-to-use” products in the lowest unit of measure, i.e., “each” or a box of multiple products
for a single purpose/procedure. These methods, either implemented by themselves or com-
bined, allow providers to significantly reduce their receiving personnel and dock space while
directly delivering products to the end user within the provider facility.65–67
INITIATIVE #3: USE OF AUTOMATION TO CREATE PURCHASE ORDERS
Many hospitals with highly efficient supply chain practices utilize periodic automated replen-
ishment (PAR), which replaces routine non-stock orders of high velocity commodity items
(dressings, catheters, needles, etc.) without any manual intervention when in-house inventory
becomes low.56
INITIATIVE #4: USING PRECISE KNOWLEDGE OF PRODUCT NEEDS TO
BUY IN BULK
Providers that are able to predict annual to semi-annual volume of devices and other products
in bulk can save money due to bulk-purchasing discounts.67
One related strategy is for providers
to merely commit to buying a year’s worth of products, which guarantees a bulk discount for the
provider but does not necessarily mean products are shipped in bulk.30
42. 35 Provider SCM: A Medical Device Perspective | LifeScience Alley
INITIATIVE #5: VALUE ANALYSIS COMMITTEES AND
STRATEGIC SOURCING GROUPS
Increasingly, providers are implementing value analysis committees and/or strategic sourcing
groups to reduce product costs.30,60,65
One particular area of focus has been on reducing the
use and/or controlling the cost of PPIs, which can account for up to 40% of a hospital’s supply
expenses.68
Systems that minimize PPI costs can produce up to 7:1 returns.65
INITIATIVE #6: RFID-BASED INVENTORY SYSTEMS
Because the number of procedures, medications, medical devices, and equipment a facility
uses is immense, processes in tracking these items as they are ordered, received, stored, and
used can be extremely cumbersome as well as error-prone if these processes are performed
manually. Efficiencies can be improved through the implementation of RFID-based tracking/
inventory systems. “RFID”, which stands for “radio frequency identification”, is a barcode that
contains product and/or patient information. The use of RFID tags along with RFID readers and
inventory management software can streamline the process of order and inventory manage-
ment in the following ways:67
AUTOMATIC INVENTORY TRACKING
Inventory can be tracked from stockrooms to operating rooms to waste areas. RFID scan
ning decreases staff time for both clinicians and materials management staff in cata-
loguing and locating products as well as reduces risk of errors from manual input.65,67
EFFICIENT EXPIRATION DATE MONITORING
Staff receive automated notification of about-to-expire or expired inventory and its
location without needing to travel to every store room to manually check products for
expiration.67
MORE ACCURATE BILLING AND ORDERING
Order and inventory data provided by an RFID tracking system provides precise
knowledge of product needs for more accurate billing and ordering. This information
is also helpful in purchasing products in bulk and/or in maintaining minimal on-hand
inventory.65,67
43. 362.2. The Role of SCM in U.S. Healthcare
INCREASING SUPPLY CHAIN EFFICIENCY,
DECREASING THE AMOUNT OF PROVIDER
STAFF-BASED LABOR INVOLVED IN SUPPLY
CHAIN,
AND REDUCING THE AMOUNT OF CAPITAL
DETAINED IN THE SUPPLY CHAIN
INCREASES PROVIDERS' FLEXIBILITY TO
MAKE CLINICAL IMPROVEMENTS,
THUS BETTER SERVING PATIENTS.65,67
Çefficiency
= Çflexibility
Jpatients
Èlabor
Ècapital
45. ECISION MAKERS?The process of introducing new products into
provider systems is currently in transition.
Major industry shifts include: the transition from physician-based
product approval process to organization-based product approval
process; an increased number of decision makers; and an added
emphasis on product value to the health care system.
46. 39 Provider SCM: A Medical Device Perspective | LifeScience Alley
PHYSICIAN-BASED
PRODUCTAPPROVAL
Historically, the decision to introduce new medical products into
a U.S. provider system was made by the physicians providing
patient care (Figure 7). The introduction of a new product was
often driven by a personal relationship between the physician
and a sales representative from a product’s vendor (OEM, GPO,
or distributor) who would introduce the new product to the physi-
cian and describe its capabilities and value. This was particularly
true for PPIs such as cardiac rhythm management products, hip
and knee implants, and spinal implants.30,60,69
Oftentimes, a clinic
or hospital would first become aware of a new product entry into
their provider system when they received a bill for its use (shown
by the dotted arrow in Figure 7) despite the fact they were respon-
sible for its payment and for seeking reimbursement for it.30,60,70
Although this type of relationship is still the primary way for a
product to enter the majority of European hospital systems71
and
many small clinics/hospital systems in the U.S.,30
an increasing
amount of large U.S. hospital systems are moving toward an orga-
nization-based product approval process (Figure 7) that involves
additional decision makers and decision points.
47. 403.1. Transitions in New Product Introduction Processes
ORGANIZATION-BASED
PRODUCTAPPROVAL
Many large provider systems are shifting from physician-based
product approval processes to organization-based product
approval processes in response to increasing financial pressures
and incentives introduced by recent health reform and reductions
in Medicare and Medicaid reimbursement (Figure 7). Increasingly,
new product approval committees are tasked with evaluating new
productstoensuretheyprovidethebestpatientoutcomespossible
while demonstrating fiscal responsibility. The compositions of
committees responsible for reviewing new product applications
can differ between provider systems and also between different
members of a provider system. In general, the committees are
composed of supply chain and business professionals along with
relevant physicians/clinicians.30,60
Following committee review
and approval of a new product, the product is added to the list of
the provider-approved products and becomes available for use
within the hospital system. This new organization-based process
ensures that the provider system and an active decision maker is
intimately involved in the product approval process.30,72,73
48. 41 Provider SCM: A Medical Device Perspective | LifeScience Alley
PHYSICIAN-BASED PRODUCT
APPROVAL & USE PROCESS
VENDOR / OEM SALES REP.
PHYSICIAN
NOTIFICATION OF HOSPITAL /
PROVIDER SYSTEM
PHYSICIAN-BASED VS. ORGANIZATION-BASED PRODUCT
APPROVAL PROCESS IN U.S. HEALTHCARE PROVIDER
SYSTEMS (ARROW DENOTES PRODUCT APPROVAL /
MOVEMENT / NOTIFICATION) 30,72,73
FIGURE 10.
49. 423.1. Transitions in New Product Introduction Processes
ORGANIZATION-BASED PRODUCT
APPROVAL & USE PROCESS
VENDOR / OEM SALES REP.
"CHAMPION"
(PHYSICIAN OR SC REP.)
NEW PRODUCT
APPLICATION PROCESS
NEW PRODUCT APROVAL
COMMITTEE
PRODUCT ADDED TO APPROVED
LIST OF PRODUCTS
PHYSICIAN
NOTIFICATION OF HOSPITAL /
PROVIDER SYSTEM
50. 43 Provider SCM: A Medical Device Perspective | LifeScience Alley
KEY DECISION POINTS & DECISION MAKERS
NEW PRODUCT APPROVAL APPLICATION
A new product approval application must be submitted by a manufacturer/vendor in order to
initiate the official review of a product for inclusion in the provider system. While this document
describes general information about the new product, the most influential information con-
tained within new product approval applications is data related to the value-added services of
the product. This includes demonstrated clinical and cost effectiveness data resulting in shorter
hospital stays, shorter diagnosis time, etc., in addition to demonstration of improved patient
outcomes and applicable reimbursement codes and amounts for both public and private
payers. Other information contained in the application includes: the product’s physical features,
frequency of product use, how and where the product has been used, marketing material, a
description of the completed clinical testing, FDA approval status, proposed unit price based on
cost analysis and reimbursement, and manufacturer/vendor financial information such as finan-
cial revenue.30,72,73
PHYSICIAN OR SUPPLY CHAIN "CHAMPION"
Identifying physician or supply chain “champions” that can articulate the clinical value of a new
product is critical to receiving approval from the new product approval committee. The opinions
provided to the committee by these champions about the clinical benefits and cost-effectiveness
of a new product are highly important to the committee.30,60,70,73
According to several C-suite
executives involved in the product approval process, in the majority of successfully approved
cases,productsareintroducedtothenewproductapprovalcommitteebytheproductchampion,
eitheraphysicianorsupplychainrepresentativedependingonthesystem,whobelievesstrongly
in the value of the product.30,60
According to a health care product approval industry expert, an
application for a new product can be submitted to the provider system without a champion, but
very few of these applications are approved without a champion’s support.60
NEW PRODUCT APPROVAL COMMITTEE / VALUE ANALYSIS COMMITTEE
The decision to add a new product into a provider system is ultimately made by the new product
approvalcommitteefollowingareviewofthenewproductapprovalapplication.Thiscommitteeis
generallycomprisedofhealthcareprofessionalsfromthesupplychainandbusinessdepartments
of the hospital as well as relevant clinicians. These committees are increasingly being used
by large provider systems to make value-based decisions regarding new product approvals,
particularly for new PPIs. The goal of this committee is to implement new products and practices
that already have data to support (1) improved patient outcomes, (2) they are financially more
sustainableoradvantageousthancompetingproductsandpractices,or(3)both.Inaddition,this
system aims to decrease the amount of time clinicians spend outside of patient care (researching
products, interacting with sales representatives, etc.), thus allowing them to focus their time on
patient interaction, health, and outcomes.30,73
According to a provider product approval expert,
approximately 80-90% of providers have some type of product approval process currently in
place, and each provider system or clinic has their own procedures in place for commodity items
and PPIs.60
It is not uncommon for different hospitals within a provider system to have approval
processes as well as approved product formularies that differ between hospitals.1,30,60
However,
generally, if vendors of PPIs are granted product approval in one hospital of a provider network,
the product is added to the master list for all its member organizations.59,60,70
51. 443.3. Transitions in New Product Introduction Processes
ADDITIONAL CONSIDERATIONS
INCREASING USE OF WEB-BASED SUPPLY CHAIN SOLUTIONS
The new product review/value analysis process is increasingly being implemented using web-
based supply chain solutions. One such solution is MedApproved, which is used by Allina,
Fairview, and a number of academic medical centers.30,60,73
This software helps streamline and
standardize the application and value analysis process for new product introduction as well as
produce a highly efficient system for product approval from each committee member without
the need for a physical meeting. After the application is submitted, the submitting vendor is able
to see where their application is in the approval process. Depending on the item, the approval
process can take anywhere from a few days to years, depending on the complexity of the
product and the data provided.72,73
APPROVAL BY PROVIDER SYSTEM AND FDA ≠ PRODUCT ADOPTION
Despite the fact a product has successfully been FDA approved as well as approved for use in
a provider system, product adoption by physicians and clinicians is not necessarily guaranteed
- this new product approval process is only the first step in driving product adoption. A major
hurdle in product adoption is to achieve a favorable reimbursement rate from government-
funded agencies such as the CMS as well as from private insurance companies.30,32,34
APPROVAL PROCESS IS DIFFERENT FOR GENERAL SUPPLIES / COMMODITY PRODUCTS
Generally, the product approval process is different for general/commodity products in which
the provider supply chain pre-approves one or several high value options from which clinicians
are allowed to choose. Limiting physicians’ device choices in this way has been tied to decreased
overall costs while improving patient outcomes.68
This type of system aims to decrease costs by
aggregating high-commodity purchase volume and implementing products that have already
demonstrated some degree of clinical and cost effectiveness.30
56. 49 Provider SCM: A Medical Device Perspective | LifeScience Alley
FACTORS INVOLVED IN PRODUCT ADOPTION
CLINICAL EFFECTIVENESS DATA & DEMONSTRATION OF PRODUCT VALUE (TIED)
Increasingly, both providers and insurers require quantifiable data that effectively demonstrates
how a manufacturer’s product improves patient outcomes and/or reduces costs, in addition to
being safe, effective, reasonable, and necessary. For providers, the product being introduced
mustout-performtheproduct(s)theprovidercurrentlyusesinoneormoreofthesecategories.30,59
For reimbursement, particularly for Medicare or Medicaid, the product must be eligible for a
definedMedicare/Medicaidbenefitcategory,be“reasonableandnecessary”forthediagnosisor
treatment of an illness or injury, or to improve the functioning of a malformed body member, and
meetallotherapplicableMedicare/Medicaidstatutoryandregulatoryrequirements.31
Generally,
other public and private insurers follow Medicare reimbursement approval.32
Both providers and
payers desire clean, non-complicated data that demonstrates how a product improves actual
patient outcomes (length of stay, decreased recovery time, increased comfort, etc.) while being
cost-effective.30
Many products are rejected by providers because these products simply do not
have actual data to support the OEM or vendor’s patient outcomes claims. In addition to clinical
efficacy, other significant factors providers consider include patient safety, product uniqueness,
and cost analysis including reimbursement.30,72,73
FAVORABLE REIMBURSEMENT
The achievement of a favorable reimbursement rate from government-funded agencies such as
the CMS as well as from private insurance companies is essential for gaining entry to a provider
system due to their increased focus on their financial bottom line.32,34
Although many private
insurers follow the CMS-based pricing system, providers generally require reimbursement data
from various private payers. OEMs and vendors must have an excellent grasp of the specific
payer mix for the provider systems in which they wish product adoption.30,31,35
Many products are
rejected by providers because they would not result in sufficient reimbursement from payers.30
REGULATORY APPROVAL
A medical device must be registered or approved by the FDA before it can enter U.S. provider
systems. The process of obtaining FDA approval for a new medical device varies depending
on the device classification: Class I, II, or III. The general differences in steps to approval are
shown in Figure 9.74,75
(For more information, please visit www.fda.gov/medicaldevices and the
references cited.) Notably, FDA approval is the one step for successful product entry. Although
it is necessary for product entry into provider systems, it in no way guarantees reimbursement or
product adoption by the provider.30,32,34
Although FDA approval is legally the only requirement for product adoption in provider systems,
medical device products generally must be approved by a physician or by a new product
approval committee prior to use in the provider system. (This process is described in-depth in
Section 3.2). Generally, the physician or committee considers the clinical study data in addition
to clinical effectiveness and product value data to determine if a product will be adopted by the
provider and/or provider system.
57. 504.1. Product Entry and Adoption in Today's Provider System
MEDICAL DEVICE CLASS: I
ex. examination gloves & elastic bandages | low risk | less than 1 month process
Registration via the FDA website required (generally does not require formal FDA approval)
I.
MEDICAL DEVICE CLASS: II
ex. infusion pumps, bone fixation screws, & blood pressure kits | medium risk | 4-10 month process
510k pre-market notification submission process required: bench and animal testing required
to determine efficacy and safety; and in select cases, may also require clinical data or product
testing prior to approval
II.
MEDICAL DEVICE CLASS: III
ex. pacemakers & heart valves | high risk | 3+ years
Must complete rigorous pre-market approval (PMA) process, including: bench, animal, and
human studies to first establish effectiveness and safety; and if these initial studies are suc-
cessful, the development and implementation of a clinical trial protocol is required for approval
III.
REGULATORY APPROVAL SUMMARY OF CLASS I, II, & III
DEVICES 74,75
FIGURE 12.
CLASS RISK PROPORTIONATE LENGTH OF TIME
DEVICE
EX.
60. 53 Provider SCM: A Medical Device Perspective | LifeScience Alley
THE SHIFT TOWARD AN INCREASED INFLUENCE
OF PAYERS IN THE DECISION PROCESS
The U.S. has seen a shift from a physician-based decision making
process to an organization-based decision process for product
implementation in the past several years.37
Previously, insurance
companies and employers managed virtually all of the health benefit
decisions for the patients and employees while providers and insur-
ance companies (who reimburse the providers) generally had little
involvement in how much they paid and for what products they paid.
These decisions were made by physicians on behalf of their patients
based on their perceptions of quality (which were not necessarily
data-driven) and their personal relationships with the device manu-
facturers and/or distributors, which often included financial kick-
backs for the physician. Physicians paid little attention to cost and
little to no data was provided in addition to FDA approval.30,76,77
Payers, particularly insurers and consumers (patients), now have an
increasingly important role as primary decision-makers in U.S. health care
due to several recent shifts in the industry . . .
61. 545.1. Changing Environments
SHIFT #1: CONSUMERS' RISING PAYMENT & DECISION-MAKING
RESPONSIBILITY
Consumers are now more sensitive to health care costs due to their rising payment responsi-
bility. Consumer payments to providers have increased by 72% since 2011. In addition, con-
sumers are no longer limited to choosing from only a few plans; they can now choose from a
wide variety of health care plans.77
SHIFT #2: DECLINING REIMBURSEMENT
The amount providers are reimbursed for products, services, and procedures by both public
and private insurers is currently declining and is expected to continue to decline over the next
decade. Although CMS controls if and under what code and price range a product, service, or
procedure is reimbursed, public and private payers can pay anywhere within that price range.
Without adequate reimbursement, providers cannot remain viable.30,31,37,73
SHIFT #3: PAYERS NOW HAVE A VESTED INTEREST IN PRODUCT
ADOPTION DUE TO THE INCREASING RATE OF COST- &
RISK-SHARING RELATIONSHIPS BETWEEN PROVIDERS
AND PAYERS
Providers are increasingly shifting away from a “fee-for-service” type of payment system for prod-
ucts, services, and procedures to a value-based and data-based decision making system with
the goal of improving patient and community outcomes while maintaining fiscal responsibility.
In the value-based system, public and private insurers issue health benchmarks that, when met,
are rewarded with financial “kickbacks” for keeping their populations healthy. This system has
caused many provider systems to join an ACO as well as private payers to form non-CMS ACOs,
as previously discussed in Section 1.3.4,6,53
Further discussion of these strategic relationships is
located in Section 5.4.
62. 55 Provider SCM: A Medical Device Perspective | LifeScience Alley
NEW PRODUCT APPROVAL /
VALUE ANALYSIS COMMITTEE
Particularly for PPIs, new product approval committees are used to
determining if the new product would bring value to the hospital or
provider system. Approval requires a significant amount of quanti-
fiable data; the most important of which is to demonstrate product
value: how the product will improve patient outcomes while being
fiscally advantageous. To generate this clinical data, one suggestion
is to attempt product entry at a smaller hospital or clinic or participate
in a clinical trial. Smaller systems generally have less strict guide-
lines for product entry than larger provider systems.30
(This process
is described in-depth in Section 4.1.) An additional strategy to gen-
erate clinical outcomes data is to enter into a risk- and/or cost-sharing
agreement with a provider. (Further discussion of these strategic
relationships is located in Section 5.4.)
THE SHIFT IN PHYSICIAN
ENVIRONMENT
Private practice physicians have increasingly been abandoning their
independent practices and seeking employment in provider systems
and hospitals.78–81
According to a 2012 report from Accenture, the
number of independent physicians has dropped from 57% in 2000
to 39% in 2012, a decrease of approximately 2% per year.80
These
numbers also include physicians, specifically specialists, who have
sold their practice to a provider network, thus becoming part of that
network.81
The most influential factors that physicians considered
when deciding to leave private practice for employment in a hos-
pital/provider network include business costs and expenses; health
care reform; declining reimbursements from insurers, particularly
Medicare and Medicaid reimbursement; the costly implementation
of electronic medical records (EMRs) required by the ACA; health-
care reform; growing regulatory and administrative burdens; and
rising malpractice costs.80,82
Thus, the option of an employment con-
tract with a hospital/provider system that often pays a higher salary
without the worry of these aforementioned pressures has become
increasingly attractive to many physicians who are considering
leaving their private practices.81
63. 565.4. Changing Environments
APPROACHES TO CHANGING ENVIRONMENTS:
NOVEL STRATEGIC RELATIONSHIPS
Novel strategic relationships in healthcare are increasingly becoming the norm. These novel
collaborations include: payers & providers; providers & OEMs; OEMs & other companies
including other OEMs; consolidation of providers & other providers; and consolidation of
providers & payers.
Thegoalsofthesenovelcollaborationsinclude:beingfinanciallybeneficial;havinganincreased
commercial reach; and generating/using clinical effectiveness and patient outcomes data.
Approximately 40% of Fortune 50 companies entered into over 70 new health care partnerships
in 2014 alone. (Several companies entered into multiple new partnerships.) In addition, a recent
survey indicated that 58% of consumers would be more likely to choose health care providers
that were partnering with other entities in order to improve services.12
PAYERS PROVIDERS
OEMs
CONSOLIDATION
OF PROVIDERS
WITH OTHER
PROVIDERS
CONSOLIDATION
OF PROVIDERS
WITH PAYERS
OTHER
COMPANIES
FIGURE 13.
64. 57 Provider SCM: A Medical Device Perspective | LifeScience Alley
NOVEL RELATIONSHIP: PAYERS & PROVIDERS
ACO or ACO-like relationships have the goal of improving patient care and outcomes while
decreasing costs, as previously described in Section 1.3. Generally, certain health benchmarks
are established that, when met, the provider receives a financial bonus or share of the profits
with the payer. These relationships also include risk-sharing relationships in which if the bench-
marks are not met, both the payer and provider share the financial losses.4,53–55
NOVEL RELATIONSHIP: PROVIDERS & OEMs
ACO or ACO-like relationships have the goal of improving patient care and outcomes while
decreasing costs, as previously described in Section 1.3. Generally, certain health benchmarks
are established that, when met, the provider receives a financial bonus or share of the profits
with the payer. These relationships also include risk-sharing relationships in which if the bench-
marks are not met, both the payer and provider share the financial losses.4,53–55
PURCHASING AGREEMENTS
Increasingly, large health care providers leverage their buying power for commodity items or
suites of products directly from an OEM/vendor without the use of a GPO or distributor. One
way in which to do this is to issue a request for proposal (RfP) for a large volume of product or
for specified services over a set period of time. In short, the OEM/vendor that has the lowest bid
for the highest quantity and quality of product wins the RfP.30,59
One recent example of this is
the RfP issued by Mayo Clinic for the installation and implementation of a new EMR and billing
system, which was “won” by Epic Systems Corp. in January 2015.83
Another type of strategic relationship between providers and OEMs/vendors involves a contract
guaranteeing discounted pricing on a portfolio of products in exchange for OEM/vendor loyalty.
In short, the provider agrees to purchase specified products, generally a portfolio of products,
solely from a single OEM/vendor in exchange for decreased product prices over a given amount
of time. Increasingly, more providers are moving away from single-product or small-volume
OEMs because of these types of arrangements and moving toward bulk-ordering discounts
for suites or portfolios of products. Thus, because of the unique nature of these agreements
and their increasing popularity, the use of OEM sales forces in hospitals is declining. Currently,
there is a shift toward an OEM service representative in lieu of a sales representative in order to
manage these types of arrangements and accounts.59
RISK-SHARING AGREEMENTS
Many large medical-device OEMs are partnering with providers in experimental risk-sharing
agreements. Agreements vary in their terms: some stipulate that the manufacturer must return a
percentage of the device price if the device fails or performance goals are not reached, whereas
in others, a provider might pay more for a device when it fulfills the manufacturer’s claimed
quality and economic standards. St. Jude Medical, Boston Scientific, Johnson & Johnson, and
Medtronic are companies currently experimenting with risk-sharing contracts. Medtronic is spe-
cifically interested in risk-based contracts involving their cardiac or vascular device implants.84
65. 585.4. Changing Environments
NOVEL RELATIONSHIP: OEMs & OTHER COMPANIES
Increasingly, long-term strategic collaborations between OEMs and other companies are
emerging, thus extending the commercial reach of both entities. These relationships include,
but are not limited to, partnerships between OEMs and retailers, data analytics companies,
and other OEMs for distribution purposes. Examples of each of these novel collaborations are
described below.
CO-PROMOTION AGREEMENTS AMONG OEMs
Co-promotion agreements involve two or more companies joining forces to promote their com-
plementary product lines together. One such strategic collaboration is that between Medtronic,
Inc., the global leader in coronary stents with an extensive interventional cardiology product
line, and ACIST Medical Systems, Inc., a Bracco Group company and a world leader in providing
advanced contrast delivery systems for cardiology. This agreement, which was struck in August
2014, involves the co-promotion of ACIST’s Rapid Exchange Fractional Flow Reserve (RXi) and
High Definition Intravascular Ultrasound (HDi) technologies in the U.S. for use in cardiac cathe-
terization laboratories, which complements Medtronic’s interventional cardiology product port-
folio by providing rapid and detailed insight prior to placing a stent or other cardiology-based
product into a patient.85
DISTRIBUTION AGREEMENTS AMONG OEMs
A third type of strategic relationship is that of an OEM functioning as a distributor for other OEMs
to enhance competitiveness. Boston Scientific has recently entered into several partnerships in
which it is allowed to distribute other OEMs’ products.
To improve competitiveness and more rapidly drive market adoption, C.R. Bard launched a part-
nership in February 2015 with Boston Scientific in which C.R. Bard’s Lutonix 035 drug-coated
balloon can be distributed in the U.S. for treatment of peripheral artery disease by Boston
Scientific.
In addition, Boston Scientific has entered into distribution agreements with foreign-based firms
to seemingly complement its own product lines. The most recent example of this was a distri-
bution agreement made in April 2015 with the German company Brainlab. In this agreement,
Boston Scientific agreed to distribute Brainlab’s deep brain stimulation surgery (DBS) planning
systems, which appears to compliment Boston Scientific’s Vercise DBS system.86
OEMs AND DATA ANALYTICS COMPANIES
Another strategic OEM partnership is that between OEMs and companies that provide data ana-
lytics.ArecenttypeofpartnershipofthistypeisthatbetweenBostonScientificandTogetherMD,
a health care data analytics software company. Their goal is to strategically optimize the perfor-
mance of Boston Scientific’s cardiovascular products by tracking benchmarking, operational,
and financial performance data of these products in hospitals as well as billing and coding
accuracy. Similar initiatives have demonstrated improved reimbursement and average service
line cost savings of ~ $1.5M in single hospital sites.87
66. 59 Provider SCM: A Medical Device Perspective | LifeScience Alley
OEMs AND RETAILERS
One example of a strategic partnership between an OEM and retailer is that of Theranos and
the drug retailing chain of Walgreen Co., respectively, which was struck in September 2014.
Theranos manufactures innovative blood tests, which can be read by their devices set located
within several Walgreens pharmacies in Arizona and California. These tests are quick, require
only a few drops of blood, are covered by most insurers including Medicare, and are low-cost
(50% of Medicare reimbursement rates or less). Test results are available anywhere from a few
minutes to several hours via a downloadable smartphone app.12
NOVEL RELATIONSHIP: CONSOLIDATION OF PROVIDERS
In response to the ACA and to create more integrated systems in order to provide value-based
health care, providers are consolidating. Consolidation of providers includes any type of acqui-
sition or merger, from the acquisition of a private practice to a merger of two or more provider
systems. Although this change was projected to decrease costs, insurer health care payments
have increased approximately 3% on average. In several cases, hospitals have increased their
prices anywhere from 28% - 44% after a merger.88
Additionally, due to increasing pressures from
the implementation of ACA, smaller practices, clinics, and hospitals can no longer remain viable
and are thus acquired by larger provider systems or must close.89
Predominantly, mergers lead
to a reduction in competition as well, which does not benefit the payer and generally adds to
the provider’s bottom line.88
NOVEL RELATIONSHIP: CONSOLIDATION OF PROVIDERS WITH PAYERS
Consolidation of providers with payers to form a single healthcare organization has the goal of
offering better care while cutting costs. One such organization is HealthPartners, Inc. However,
when hospitals buy insurers, the resulting plans offered have higher premiums; a recent study
determined only 30% of the additional premium cost can be attributed to higher quality care.90
67. TEXT A
RECOMMENDATIONS
PRODUCT ENTRY INTO PROVIDER SYSTEMS FOR PPIs, SERVICES, AND PRO-
CEDURES IS INCREASINGLY BECOMING MORE COMPLEX AND DEPENDENT
ON PRODUCT-GENERATED DATA AND SUBSEQUENT VALUE ANALYSIS. KEY
PIECES OF ADVICE FROM HEALTHCARE SUPPLY CHAIN EXPERTS ARE LISTED
BELOW:
+ Products that are truly innovative and/or disruptive either technologically or financially
have the best chance of being adopted and successful. “Me-too” and/or next generation
products that do not demonstrate significant value over their competitors will not be
successful.30,59
+ Favorable and/or profitable reimbursement for products and procedures is strongly
desired.30,32
An OEM should consider their reimbursement strategy alongside their regulatory
strategy and market analysis to ensure that the predicted reimbursement for their product will
be possible and make their product attractive to providers.32
Manufacturers must also have
a good grasp of the potential reimbursement strategies for the specific payer mix for their
products to have success in the U.S. health care system.30,31,35,37
+ Validated clinical evidence and outcomes data as well as cost effectiveness data
demonstrated in an actual hospital/clinical environment is strongly desired.30,59
These data are
essential in obtaining successful reimbursement and provider adoption.30,31,60
+ Vendor representatives should now treat the new product approval/value analysis
committee in organization-based approval systems just as they used to treat the physician
in physician-based approval systems. Although vendor representatives seemingly have
a decreased role in product adoption, they are still a large part of the equation in selling
products to providers. Instead of the vendor representative having to convince only one
physician for product adoption, they increasingly must convince a member of the value
analysis team to be a champion for the product.70
68. 61 Provider SCM: A Medical Device Perspective | LifeScience Alley
THE PRIMARY DRIVER OF CHANGE IN THE U.S.
HEALTHCARE INDUSTRY TODAY IS GOVERNMENT-
INSTITUTED HEALTH CARE REFORM IN RESPONSE
TO RISING AND UNSUSTAINABLE HEALTHCARE
COSTS. IN PARTICULAR, THE PREPARATION FOR
AND STEP-WISE IMPLEMENTATION OF THE ACA
FROM 2010 TO 2015 HAS REINVENTED AND IS
CONTINUING TO CHANGE THE U.S. HEALTHCARE
LANDSCAPE. THE TRIPLE AIM OF THE ACA
INVOLVES SHIFTING FROM A FEE-FOR-SERVICE
TYPE OF CARE TO A LESS COSTLY, VALUE-BASED
HEALTH CARE SYSTEM IN WHICH PROVIDERS
RECEIVE PAYMENT FOR IMPROVING THE QUALITY
OF CARE AND IMPROVING PATIENT OUTCOMES. IN
SUMMARY, THE SHIFTS IN THE U.S. HEALTHCARE
ENVIRONMENT EITHER DIRECTLY OR INDIRECTLY
RESULTING FROM ACA IMPLEMENTATION
INCLUDE THE FOLLOWING:
69. 626.2. Recommendations and Summary
DIRECT RESULTS OF ACA IMPLEMENTATION
+ Increasing need for clinical effectiveness and patient outcomes data to obtain CMS-
approved reimbursement and provider product adoption
+ Increasing use of value-based healthcare payment systems in comparison to fee-for-service
systems
+ Shift to a payer-based decision process
+ Declining reimbursement rates for products, services, and procedures
+ Emergence of collaborative partnerships and strategic relationships between mixtures of
providers, payers, companies, and OEMs/vendors
+ Increasing consolidation of providers with other provider systems as well as provider
systems with payers
+ Increasing implementation and use of EMRs
+ Increased number of ACOs
INDIRECT RESULTS OF ACA IMPLEMENTATION
+ Providers taking direct action to increase supply chain efficiency to decrease overall costs,
particularly in the area of order and inventory management
+ Increasing use of value analysis committees and strategic sourcing for product entry
into provider systems
+ Shift from a physician-based new product approval process to an organization-based
(value analysis-based) new product approval process
+ Standardization of supplies by providers, particularly PPIs
+ Increasing use of RFID-based inventory systems
+ Increasing use of JIT and/or LUM delivery processes
+ Increasing large provider use of multi-product direct-from-manufacturer bulk purchase
orders
+ Decrease in new product adoption success of “me-too” products and increase in the need
for a new product to be completely innovative/disruptive either for patient outcomes or in
cost effectiveness
+ Increasing role of GPOs to function as data warehouses for product, benchmark and clinical
outcomes data
+ Shift in physician employment from self-employment to employment by larger provider
systems
70. 63 Provider SCM: A Medical Device Perspective | LifeScience Alley
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