In a recent conversation with a device industry professional, it became clear how the reality on the ground for device vendors has shifted in the last few years.
The gentleman enlightened me that the nonprofit Fairview Health Services, a large health system in Minnesota, had dramatically reduced the number of orthopedic vendors.
“I would love to know why they did that,” said Shaye Mandle, President & CEO of Lifescience Alley, in a recent interview.
Mandle knows the answer of course - every hospital and health system in the country is scrutinizing costs, and in many cases either pressuring vendors to lower their cost or share in some operational risk.
Nonetheless, it’s still an interesting exercise to know how hospitals are making these decisions.
Fairview is one of the the three largest health systems in Minnesota, along with Allina Health and the Mayo Clinic, according to Allan Baumgarten, a health market consultant based in Minneapolis. In 2012, Fairview had revenue of $2.1 billion, excluding revenue from physician clinics, and profits of $169 million, according to an analysis by Baumgarten.
In December 2012, Fairview Health Services started a new contract whereby at two hospitals the health system cut its orthopedic trauma vendors, which excludes makers of joint replacement products, from four to two said Sue Walters, Supply Chain Integration Project Manager. [Turns out that Mandle had different info - he said Fairview reduced 13 vendors down to 2, which he found shocking.]
Starting in January 2013, the health system also cut stent vendors from three to two, Walters said. She declined to name who the winning device vendors were for ortho trauma and stent contracts, but added that the process followed for each category was quite different.
In general, there are two contracting models that Fairview follows. One is the so-called all-play model where all vendors’ products are used at different hospital sites allowing for a certain amount of physician preference, Walters said. Where possible, the hospital also makes an effort to review outcomes data of different devices to make sure that there are no major variations between them.
The other contracting model is the primary-source or dual-source method of contracting where the goal is to reduce treatment variation, ironically also in products that show no major variation.
The stent contracts followed this latter model.
“We saw that there were significant variation in price of products but they were comparable in terms of clinical outcomes," said LeAnn Born, Vice President of Supply Chain at Fairview. "For cardiac stents there are a limited number of vendors and there is clinical research and some comparative effectiveness to suggest that there is lot of similarities in the product that the limited number of vendors offer. So it makes sense to reduce the number and know what price points are and know that the prices are comparable."
So, the health system worked with physicians to review the products and tapped into its group purchasing organization to access clinical research data and comparative effectiveness information.
In the end, it wasn't that one device vendor's stents did not measure up and that was the one that lost contract, Walters said.
"The other two vendors were a little more aggressive in their pricing," she said. Fairview purchases about 1,900 stents a year.
The top stent makers worldwide are Abbott, Boston Scientific and Medtronic.
For the orthopedics trauma contracts, a different process was followed. That's mainly because orthopedic trauma products are not standardized in the same way as stents are.
"It seems like in today’s world, there’s still a little bit more physician preference around that trauma piece as compared to the there being more standardization that’s been done industrywide on the stent side," Born said. "One hip implant isn’t exactly identical to the next one because of how you got into that situation."
Therefor, Fairview worked with eight physicians who heard presentations from several orthopedics vendors both about product and service capabilities. They also took into consideration pricing of products, Walters said.
"The physicians made the decision based on the breadth of the product line that these two vendors had. Service was very important to that." she noted.
Last year, Fairview saw significant cost savings from this new contract = In 2013, savings from reduced number of orthopedics trauma vendors exceeded $350,000.
"I would say almost on any project that we work on, we try and save between 5% and 15%," Born explained, noting that physicians' readiness to work with health systems to tackle costs and treatment variation were key in providing good quality care to patients while managing costs.
Ultimately what they want from device vendors is not for them to push product and sell more but to take a partnership approach. She pointed to a partnership model involving Covidien, the medtech company that sells higher risk surgical products as well as commodity items such as electrodes, underpads, bandages and the like. This partnership included the latter group of commodity products.
"We have identified a variety of products that we purchase from Covidien and we’re trying to move from a relationship where they try to sell us more to a relationship where they help us more appropriately utilize their products," Born explained. "Covidien is going at risk with us. So there’s an amount that we’ll pay for an appropriate amount of product. if we use too much, then they lose out. If we use too little but deliver the same patient outcomes, then we both won. It puts an incentive on them helping us appropriately utilzing their products rather than them having an incentive to sell more."
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