Commentary: Price Transparency Critical to Success Under Bundled Payment

April 7, 2016

This article was originally published at on April 7, 2016. 

By Michael Alkire  | April 7, 2016

Starting this month, 800 hospitals will participate in an alternative payment program for hip and knee replacement surgery. 

Using a bundled payment, this program holds providers accountable for the quality and cost of a hip or knee replacement from the date of admission through 90 days post discharge. If spending is below target, hospitals will be able to keep the savings as a bonus. If higher, they will have to repay the government.

Moving to bundled payment represents a sweeping change for most health systems. On one hand, bundled payment poses financial risk at a time when health systems have been squeezed with $302.8 billion in payment reductions. On the other, it offers an opportunity to crack one of the toughest nuts in healthcare cost—the world of physician preference items, or PPIs. 

In joint replacements, implantable hips and knees are the most expensive part of the procedure. Within the traditional Medicare system, physicians rarely know how much PPIs cost, and have little incentive to choose less-expensive options. According to a study in Health Affairs, when asked to guess the costs of PPIs, physicians were wrong 81% of the time. This blind spot comes at a major cost, where prices for hips and knees can range from $2,000 to $16,000.

As we've learned through our bundled payment collaborative, incentives go far to build alignment, shift behavior and inject price sensitivity into the PPI decision. However, we've also learned that standardizing around a single device will never be a winning proposition.

Particularly in joint replacements, the populations served cross a wide swath, and the hip or knee chosen for an obese patient in their 20s will be different from the one for the 70-year-old with a fracture. In cases where choices must be preserved, a different strategy is needed.

Part of the answer lies in transparency. Today, data on implants are fragmented because of inconsistent approaches to price metrics, utilization and outcomes.

Without reliable benchmarks, vendors charge whatever the market will bear. Analysts at Sanford Bernstein looked at the prices paid for orthopedic implants at 100 hospitals and found facilities paying up to three times more than others, with no correlation to volume.

To get a handle on pricing, access to reliable data is critical. Providers need help understanding pricing using marketplace data, organized by product codes and disease states. Somewhat analogous to the TrueCar app for auto purchases, these data sets compare purchasing trends regionally, by device, volume and other filters to compare pricing, giving health systems leverage in their negotiations. 

With the right data, benchmarked pricing alone can shave up to 15% savings off PPIs. However, when providers start to build alignment with their physicians and engage them around making smarter, more cost-effective choices, those savings balloon to 30% or more.

At Tri-State Memorial Hospital in Clarkston, Wash., supply-chain leaders used price comparison data from SymmedRx to shave $1.4 million off their orthopedic spend, a 28% reduction. 

Similarly, Doctors Community Hospital in Lanham, Md., used the app to achieve $1.5 million in PPI savings, a 30% reduction. 

In the world of mandatory bundled payment, those are PPI savings that can mean the difference between a penalty and a bonus.

Michael Alkire is chief operating officer at Premier. 


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