Consumables and implant costs are an issue, but these critical areas of expense can be managed as part of a hospital’s overall budgeting strategy. With market insight and negotiation strategies, as well as pricing data and discount ranges, expert guidance will help hospitals achieve maximum discounts on consumables and implants. It’s up to the hospital to do the math.

Healthcare providers agree that keeping supply costs under control is most difficult in the areas of orthopedic and cardiac implants. Some common obstacles to negotiating with vendors include a lack of consensus and resistance to change from physicians and surgeons. They also cite a relative lack of vendors to choose from and a dearth of comparative pricing data. Here are just a few of their thoughts as provided through telephone interviews:

"The major issue that we see is the same problem we have with capital budgeting. Supposedly, we’re getting a discount that is a percentage off list price but we don’t know what list price really is. For example, we were looking at cardiology PACS. The vendor had a ‘great’ proposal that said we were getting 64 percent off of list price but it turned out that the list price wasn’t even close to what we saw on MD Buyline. So I think knowing what the actual list price is would be valuable, as well as knowing what other people are getting in terms of the consumables.

"Being a CFO, I want more precise data rather than ranges of information. A lot of times the model of something has a lot to do with the discounts. I’d like to have information down to that level.

"Data on most consumables would be helpful to us. Every six months or so we start looking at implants and the department managers will say, ‘We’ve already done all we can do. We got the best price we can possibly get; we got the best price of anybody we know of.’ I just want something to be able to back those statements up. If that’s true, that’s great. But usually it’s not."

"I think we have the most difficulty with cardiac and orthopedic implants. Part of the issue is that there are only a few companies to choose from. There is also the fact that some of our physicians take the position that they will not participate in group purchasing agreements. If a particular company is effective at penetrating a certain group of doctors, such as a group of cardiologists or orthopedic surgeons, it can be very hard to make an argument to go with a different company solely for the purpose of a group purchasing opportunity agreement or because there is some advantage to using a different implant. This is because the surgeon, in the case of orthopedics particularly, wants to feel comfortable with what they are putting in a patient."

"The two biggest problem areas are the cardiac devices and the orthopedic devices. The rest of the stuff we can usually come to some consensus on; standardization is easy. But orthopedic surgeons that have been using, for example, the same titanium hip implant and have installed it a couple hundred times — they don’t want to change.

"However, when a facility starts talking about standardizing orthopedic implants the issue becomes all the orthopedic physicians on staff who use them. It is a big political issue. One of the higher-ups in the facility then becomes the pricing point person (the COO, or the Chief Medical Officer) but the physicians have to be involved. You don’t plan for people, you plan with them. There is no way to go in and tell the docs that tomorrow they are going to have to switch to a new implant. It has to be a group consensus."

Consumables represent the next largest line item for hospitals, second only to labor. The majority (60 percent) of consumables fall into three business areas of a hospital: cardiology, pharmacy, and surgery. Thus, these supplies have a very large impact on the cost per patient. They are also commonly seen as physician-driven items due to their direct relation to a prescribed therapy. This can restrict the hospital’s ability to negotiate pricing.

Prior to passage of the Balanced Budget Act of 1997 (BBA), hospital profit margins were much higher than they are today. Profit margins that were once 20 percent are now closer to the 5.05 percent overall profit margin of 2003, according to a survey released by Solucient Inc. In fact, the average profit margin has slipped to approximately 4 percent and these numbers do not reflect the 25 percent of all hospitals that are operating in the red.

Profit margins can be attributed to multiple factors including reimbursement, utilization and costs. Hospitals typically have little influence on utilization and reimbursement; over 40 percent of these areas are dictated by CMS for Medicare and Medicaid patients. That means that costs such as supplies are an important area over which hospitals do have control.

Supply and capital costs vary greatly among facilities, depending on their market and patient mix. These costs represent from 14 percent to 31 percent of a facility’s total operating budget. Of this number, 3 percent to 5 percent involve pharmaceuticals. This means that roughly 10 percent to 25 percent of a facility’s operating budget goes to supplies such as implants, catheters, sutures, and bandages, to name just a few. That said, supplies are a primary target to improve the bottom line.

Relative to volume and cost, a few additional percentage points in a discount on selected consumables can make a considerable impact on a provider’s revenue stream. The first target for savings are large line items in major costs centers such as cardiology (stents, catheters, implantable generators) and orthopedic (knee and hip implants). Other areas to keep in mind are low cost high volume items. Infusion pump tubing and orthopedic shaver blades are examples of these low cost high volume technologies. They typically cost in the $5 to $100 range but when multiplied by several systems across a hospital, these budget items can grow to well over $1 million in savings.

Healthcare executives, administrators, and purchasing managers have begun to address these issues with new concepts and aggressive negotiating practices. But in the "information revolution," whoever has the most accurate, up-to-date data has the power. Vendors know what they and their competitors are charging but buyers have limited resources especially in the world of consumables. This is because providers are not supposed to share their pricing. The lack of competitive data about consumables has made negotiating the families’ next car easier than purchasing implants for a billion dollar health system. This puts the hospital at a distinct disadvantage.

Congress has attempted to address this imbalance with the introduction of the "Transparency in Medical Device Pricing Act of 2007" (Introduced in October 2007). Its goal is to post the average and median street price of a medical device on CMS’ website. If passed, it would provide benchmark pricing data for hospitals and help a payor determine the effect of device costs on reimbursement. A study conducted by Criterion Economics LLC and supported by manufacturers notes that a CMS mandatory price disclosure would actually increase consumable prices due to the limitations of the database. However, like the Hospital Price Reporting and Disclosure Act of 2007, which would require hospitals to disclose charges, the Transparency in Medical Device Pricing Act faces major obstacles in becoming law. The bottom line is Congress is looking at ways to control healthcare costs if providers and payors cannot.

"We’re actually going to go down the route of we’re only going to pay a percentage of the DRG. And the other thing is that we only got a 1.8 percent increase in Medicare; we’re not getting a 3 percent increase. We’re going to probably use Medicare as a benchmark. We know we’re getting more from the private payors but 35 percent to 40 percent of our business is Medicare and actually, they’re probably our best payor."

"We have a pretty sophisticated model to budget for supplies. We start with what the diagnosis is, the specific DRG and we know, for that particular DRG, what the quantities are for a particular item. This then drives the quantity of supplies we need at whatever price point they are at. In turn, that drives the supply line. We don’t usually take the historic average from the year before and add the inflation but I know a lot of places do. We start with what our demand will be for a specific diagnostic group and we have a profile for what supplies are typically used for that diagnosis and then we roll that up for the particular supply item in quantities. Then we multiply the quantities times the price of the budget amount. We use a software application to figure much of it for us. Then the manager in the unit will look at the number and determine whether it seems right. If they really think that it wouldn’t be the right number then we spend some time working through the differences."

"I think a typical contract should run over several years but different people have different views on that. I don’t imagine a vendor wants to be thrown out every year and re-bid every year; it would be like changing banks every year. Also, if the facility is constantly changing devices they have to re-train people and that is always disruptive."

A combination of new and old ideas can be applied to most negotiations for consumables. Because they are the primary users of the technology, physicians should be an important part of the negotiating process. To achieve aggressive discounting, vendors typically require hospitals to purchase high volumes of their product. This involves limiting purchases to all but a few vendors. To achieve this, the physician must be placed in the lead when selecting which vendors to bring to the table and to help incentify vendors to provide higher discounts. This will allow physicians to get their preferred technology at the best price.

It is also important to vary the criteria on which discounting is based. "Market share" is commonly used as a basis for discounting. For the hospital, market share can translate to the percentage of a vendor’s product they use. In theory, the higher the percentage used the higher the discount they receive. Market share can also apply to a vendor’s rank in the overall industry. Vendors with a lower market share should theoretically offer higher discounts. The drawback is that industry negotiators can use these terms to their advantage. A larger hospital may commit to 70 percent of a vendors product and still use more than a smaller facility committing to 90 percent. Because of this fact, hospitals should use whichever form of commitment/discounting works to their advantage.

The increased cost of new technology is also an ongoing concern for healthcare providers. Informed healthcare consumers are more aware of the benefits of new technology. This has driven costly technologies such as drug coated stents and high impact orthopedic implants. The problem for the payor and provider is that vendors market these technologies at a premium price and offer only limited discounting when they enter the market. In turn, this gives vendors an incentive to exclude these technologies under existing pricing agreements. Because of the financial impact these new technologies can have, hospitals should also focus their negotiation strategies on including these new technologies. Keep in mind that in an area where technology is moving in leaps and bounds, what is exclusive today may be a very competitive field in as little as six to 12 months.

Finally, discounting percentages can be deceiving. Cardiology and orthopedic implants can make up 20 percent to 40 percent or more of the cost of a therapy. It is the "street price" that affects the provider’s business plan for the procedure. Some vendors start with a high list price and aggressively discount. Others start with a low list price and limit their discounting.

Because of all of these factors, a rapid increase in costs from higher list pricing or lower discounting can quickly put a hospital in the red. This is especially true when reimbursement remains stable (i.e., a 3.3 percent inpatient increase for 2008, a 3.4 percent increase for outpatients) and tied to market basket increases. With this in mind, forward thinking hospitals have begun tying implant costs to a percentage of Medicare reimbursement. This is a unique concept for keeping providers in the positive margins.

If, as they say, "Information is power," then access to the right information is the gateway to the power needed to succeed. Knowing what information is critical and how to use it to gain advantage will separate successful hospitals from the ones mired in a glut of red ink and disappearing profits.

A savvy hospital administrator will enter into vendor negotiations armed with the critical market insight and negotiating strategies necessary to get the best products at the right price under the most advantageous terms. For example, the Comprehensive Calculators available from MD Buyline allows one to do the math that is crucial to accurately analyzing the financial consequences of the key variables of every deal.