Connections : Join the Conversation - The blog of Biomet CEO Jeffrey R. Binder

The hospital industry recently negotiated an agreement with the Senate Finance Committee and the White House to reduce hospital spending cuts by no more than $155 billion over 10 years. The agreement will no doubt result in hospitals applying additional pressure on suppliers to reduce pricing, including-and perhaps especially-medical devices such as orthopedic implants.

While surgeons choose the orthopedic implants they use to treat their patients, hospitals pay for the implants. Friction may arise when surgeons choose implants that cost more than the hospital wishes to pay. Manufacturers, of course, expect to receive a reasonable price for the technologies that they develop and deliver.

Each party has legitimate concerns. Surgeons have every right to choose the implants that they believe will work best in their hands and address each patient's unique conditions and expectations. Hospitals pay the bills, so they have every right to insist on a reasonable price. Manufacturers assume the risk of developing implants, building and consigning inventory, clearing the devices through the FDA, and providing service to the surgeon and hospital. In order to continue assuming that risk, manufacturers-and their shareholders-reasonably expect a return on their investment.

Each party is essential to the delivery of excellent outcomes. Surgeon skill and judgment, implant technology and service, and hospital expertise and efficiency are indispensable components of orthopedic treatment. When these elements are thoughtfully integrated, outcomes and value are optimized.

A common goal: excellent care at a reasonable return

The good news is that surgeons, hospitals and manufacturers all have the same goal: to deliver excellent care to each patient at a reasonable return. The delivery of excellent care is a moral imperative, but it's also good business, particularly as payers increasingly structure reimbursement to reward quality. Hospitals, surgeons, and manufacturers who deliver excellent results can expect to prosper, while competitors who fall short may struggle and eventually disappear.

Ideally, evidence-based guidelines and comparative effectiveness data would illuminate a clear path to excellent outcomes. However, such tools are limited in availability and applicability. Patients define successful outcomes on their own terms, which vary considerably based on their conditions and expectations. A frail patient may simply expect to live independently, while an active, healthy patient may expect to return to a physically demanding job.

The definition of excellent outcomes is determined one patient at a time, through consultation with one surgeon. In order to deliver consistently excellent outcomes, therefore, the surgeons' role as patient advocate, and their freedom to make clinical choices that improve patients' welfare, must be preserved. To optimize outcomes, we must optimize each outcome.

How do we get there?

Balancing cost, choice and outcomes requires collaboration. The ideal situation is one in which hospitals and manufacturers negotiate in good faith and arrive at reasonable prices that provide surgeons with access to the technologies of their choice, allowing them to personalize treatment and optimize outcomes. The key is surgeon involvement in the process. It is critical that surgeons educate hospital managers on the reasons behind their clinical choices. What may appear to be an expensive irrelevancy to a materials manager may be a critical technology to a surgeon. Without an understanding of surgeons' preferences and the value of the technologies they choose, materials managers may understandably become frustrated and, in response, attempt to control implant pricing by restricting access to technologies. Such situations create animosity between surgeons and hospital management and ultimately fail to achieve hospital objectives.

Unfortunately, too many discussions on improving the performance of orthopedic services are contentious in nature. In particular, hospitals often embrace models of contracting for orthopedic implants that restrict suppliers' access to hospitals and limit the availability of technology.

The pitfalls of limited vendor contracts: subordinating clinical judgment in favor of short-term savings

The "limited vendor contract" model is based on the premise that limiting the number of implant suppliers allowed to do business with a hospital will increase the market share of those suppliers, allowing them to provide deeper discounts to the hospital. In order for this model to succeed, surgeons who do not use implants from the chosen suppliers will have to switch implant systems.

While this approach is occasionally successful when surgeons are brought into the process and their needs are met, more often this approach is the antithesis of collaboration. Typically, the hospital mandates which technologies will be used to treat patients, in essence subordinating clinical judgment in favor of financial concerns. While limiting vendors may create short-term savings for hospitals, there may be an expense in terms of diminished patient outcomes. Constraining surgeons' access to technology is inconsistent with optimizing each patient outcome.

Additionally, restrictive contracts strain the hospital's relationships with surgeons, who appropriately and zealously protect their right to choose what is best for each patient. Indeed, hospitals report that surgeons who are forced to seek permission to use new technologies are less supportive of contracting efforts.¹

Teaching institutions: a special case

Limited vendor contracts are perhaps most detrimental in teaching institutions. Residents should learn to evaluate available technology based on the needs of each individual patient. The Accrediting Council on Graduate Medical Education (ACGME) guidelines require that residents receive instruction in "evaluation of new or experimental techniques and/or materials."² Residents who learn to simply follow the dictates of hospitals are limited in their opportunity to exercise the independent judgment required to deliver consistently excellent personalized care. Nor may they be exposed to technologies that provide optimal solutions for the patients they will serve.

Biomet's approach: collaboration with surgeons and hospitals to preserve choice, optimize outcomes

We do not believe it is appropriate for a manufacturer to go over the surgeon's head and negotiate a hospital contract that restricts the availability of technology. We are confident that we can compete effectively on the basis of our product performance and service, and do not want surgeons to use our products because they are forced to do so. There is much more to gain by working with hospitals and surgeons collaboratively to improve outcomes and efficiency. In the long run, Biomet and the orthopedic industry stand to benefit more from optimizing outcomes through freedom of surgeon choice, and from the sustained success of its customers, than from restrictive vendor contracts.

Creating a successful and sustainable supply relationship requires surgeon support and good faith negotiations between the hospital and manufacturer. Hospitals should open their doors to all implant suppliers requested by their surgeons and attempt to negotiate reasonable prices with each. Of course, they maintain the option of restricting access to a particular vendor if that company's prices are significantly out of line with the competition.

As part of this process, hospitals will often create technology categories to compare prices among suppliers. These broad categories sometimes fail to account for significant differentiation between technologies. Hospitals that set price levels without recognizing important distinctions among technologies deprive patients of the advantages of advanced and unique implants. It is important that companies and hospitals arrive at reasonable pricing levels that are sufficient to allow access to high quality companies and products.

Conclusion: Preparing for the boom

The expected growth in demand for orthopedic care, as well as the potential increase in insured patients resulting from healthcare reform, should serve as motivation for hospitals, surgeons, and manufacturers to identify and implement the most effective methods of working together. Demand for total knee replacement, for example, is expected to grow 674% by 2030³. Hospitals and surgeons who are best able to efficiently deliver excellent care in joint replacement will be positioned to benefit from increased volume and profitability. Success will be defined by how well the players can collaborate to balance the value drivers of total joint replacement: surgical skill and judgment, implant technology, and hospital expertise and efficiency. Sacrificing any of the three legs of the stool will result in instability.