Provider Supply Chain Management: A Medical Device Perspective

PROVIDER SUPPLY CHAIN MANAGEMENT: A MEDICAL DEVICE PERSPECTIVE PATIENTS

INSURANCE

MANUFACTURERS

EMPLOYERS GPOs

PROVIDERS

DISTRIBUTORS

GOVERNMENT

Leading the conversation.

速

PROVIDER SUPPLY CHAIN MANAGEMENT: A MEDICAL DEVICE PERSPECTIVE Copyright Š 2015 by LifeScience Alley. All rights reserved.

Please direct correspondence to: Cheryl Matter, PhD / LSA Vice President of Intelligence & Research cmatter@lifesciencealley.org | 952. 746. 3817 Lead Author: Briana Vogen, PhD / LSA Applied Business Training Fellow Contributing Authors: Tim Pearce, PhD / LSA Applied Business Training Fellow Lindsay Young, PhD, MBA / LSA Applied Business Training Fellow Joel Burrill, PhD / LSA Applied Business Training Fellow Ben Teplitzsky / LSA Applied Business Training Fellow Karuna Giri / LSA Applied Business Training Fellow Visualization + Design: Amanda K Weber / LSA Design & Research Associate

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BY OUR FOUNDATIONAL& SUSTAINING MEMBERS. FOUNDATIONAL

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ABOUT LIFESCIENCE ALLEY LifeScience Alley is a global leader in enabling health technology and care organizations to innovate, succeed, and influence the evolution of healthcare. By influencing policy, delivering actionable information and intelligence and connecting members with critical resources, we work to ensure that Minnesota's Medical Alley remains the world's strongest health technology community.

EXECUTIVE SUMMARY 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. GOVERNMENTINSTITUTED 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.

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-frommanufacturer 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 carerelated entities in successfully adapting to these changes.

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

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

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

PRODUCT ENTRY & ADOPTION IN TODAY'S PROVIDER SYSTEM

45

Factors Involved in Product Adoption

49

CHANGING ENVIRONMENTS The Shift toward an Increased Influence of Payers in the Decision Process

51

5.2

New Product Approval / Value Analysis Committee

55

5.3

The Shift in Physician Environment

55

5.4

Novel Strategic Relationships

57

RECOMMENDATIONS & SUMMARY

60

6.1

Recommendations

60

6.2

Summary

61

6.3

References

63

SECTION 2:

SECTION 3:

SECTION 4: 4.1 SECTION 5: 5.1

SECTION 6:

53

FIGURES FIGURE 1

Key Supply Chain Components

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

5

MAPPING THE U.S. HEALTHCA

ARE PROVIDER SUPPLY CHAIN >>

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 continue 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 government-instituted reform. In particular, the preparation for and implementation 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 simultaneous pursuit of improving care, improving the overall health of populations, 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 incentives in the form of reimbursement for 3

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 valuebased health care system has been demonstrated to be less costly than the previously used “test-and-treat”, feefor-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 measuring hospitals by the number of beds filled with patients being treated for illnesses, the hospital of tomorrow will be judged more by its ability to maintain a community’s health”.6 In addition, 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 purchasing methods to decrease costs for providers, the subsequent decrease in price providers are willing to pay manufacturers for their products, decreasing reimbursement prices, and the growing reliance on supply chain management (SCM) to cut costs in the system.

Provider SCM: A Medical Device Perspective | LifeScience Alley

/ 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 management 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 clinics, integrated delivery networks (IDNs), and accountable care organizations (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.

1.1. U.S. Healthcare Provider Supply Chain

4

FIGURE 1.

KEY SUPPLY CHAIN COMPONENTS Arrows illustrate direction of Goods [G]; Services [S]; and Money [$].

Æ SÆ

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Provider SCM: A Medical Device Perspective | LifeScience Alley

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6

KEY SUPPLY CHAIN COMPONENTS: DEFINITIONS PM

PM

PRODUCT MANAGEMENT

HP

HEALTHCARE PROVIDER

PY

PAYER

1a. MANUFACTURERS Manufacturers include component manufacturers and the OEMs. This is the first step in the proccess of the U.S. Healthcare Supply Chain.

PM

1b. GROUP PURCHASING ORGANIZATIONS (GPOs) 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.

PM

1c. DISTRIBUTORS 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.

7

Provider SCM: A Medical Device Perspective | LifeScience Alley

HP

2a. HOSPITALS, PHYSICIANS, CLINICS, NON-ACUTE CARE CENTERS 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.

HP

2b. INTEGRATED DELIVERY NETWORKS (IDNs) & ACCOUNTABLE CARE ORGANIZATIONS (ACOs) IDNs and ACOs are networks of healthcare organizations that focus their collaborative care on specific geographic regions while attempting to improve quality of care simultaneously.

PY

3a. GOVERNMENT, EMPLOYERS, INSURANCE COMPANIES 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.

PY

3b. PATIENTS Patients are the final receiver of the goods and services that travel to them either directly from the Manufacturer or via the Healthcare Provider.

1.1.  U.S. Healthcare Provider Supply Chain

8

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 physician 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 appropriateness, 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:

9

Provider SCM: A Medical Device Perspective | LifeScience Alley

+

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 aggregating 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 generated 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 purchasing procedures, and best practices demonstrations for clinicians.

+ Brokering STRATEGIC ARRANGEMENTS with the formation of strategic partnerships and information 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

1.2.  U.S. Healthcare Provider Supply Chain

10

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1.2. U.S. Healthcare Provider Supply Chain

12

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, distributors often provide sales support for manufacturers 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 In addition, distributors utilize the services of GPOs to broker contracts with providers.14

13

Provider SCM: A Medical Device Perspective | LifeScience Alley

HEALTH CARE PROVIDERS

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 nonacute care centers in addition to large networks of providers such as Integrated Delivery 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; rehabilitation services; and most recently, telephone and web consultations.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

1.3.  U.S. Healthcare Provider Supply Chain

14

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Provider SCM: A Medical Device Perspective | LifeScience Alley

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1.3. U.S. Healthcare Provider Supply Chain

16

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Provider SCM: A Medical Device Perspective | LifeScience Alley

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1.3. U.S. Healthcare Provider Supply Chain

18

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 community 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 seamless 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 commercial 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 pinpoint 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

19

Provider SCM: A Medical Device Perspective | LifeScience Alley

FIGURE 5.

NUMBER OF U.S. ACOs *, 2013 - 2015 Medicare ACOs Non-CMS ACOs

600

585

522

500

400 426 368

300 258

200

134

100 124

154

159

2014

2015

0 2013

*

Figure adapted from Source 53

1.3.  U.S. Healthcare Provider Supply Chain

20

FIGURE 6.

NUMBER OF NON-MEDICARE PATIENTS CARED FOR BY ACOs IN CMS PROGRAMS / PERCENT OF MEDICARE BENEFICIARIES COVERED BY ACOs *

35 M

12%

30 M

10%

25 M 8% 20 M 6% 15 M 4% 10 M 2%

5M

0

2013

2014

2015 *

21

Provider SCM: A Medical Device Perspective | LifeScience Alley

0%

Figure adapted from Source 53

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 maintaining 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. Large providers are best able to negotiate their own rates with one or several large 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-negotiated 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).

1.3.  U.S. Healthcare Provider Supply Chain

22

FIGURE 7.

DISTRIBUTOR-MEDIATED PRODUCT LINE VERSUS DIRECT-DELIVERY OF PRODUCT, WITH AND WITHOUT A GPO * CONTRACT WITH GPO

MANUFACTURER È

Medical-surgical products of low value & high volume, and generic drugs

DISTRIBUTOR È

NO CONTRACT WITH GPO

HEALTHCARE PROVIDER Some branded drugs (oncology, cardiovascular), small-volume arcane items, and generic drugs

CONTRACT WITH GPO

MANUFACTURER

Lower-end implants and medical devices, and branded drugs

È HEALTHCARE PROVIDER

NO CONTRACT WITH GPO

Higher-end implants and medical devices, and specialty items of high value and low volume

*

23

Provider SCM: A Medical Device Perspective | LifeScience Alley

Figure adapted from Source 57

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-associated 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.

1.3.  U.S. Healthcare Provider Supply Chain

24

PAYERS

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 government, 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

25

Provider SCM: A Medical Device Perspective | LifeScience Alley

FIGURE 8.

U.S. HEALTH SPENDING DISTRIBUTION BY PAYER, 2012 *

PUBLIC HEALTHCAR

ES

EC TO

R

$2.8 T

PRIVATE HEALTH INSURANCE | 33% | $924 BILLION INVESTMENT | 6% | $168 BILLION PUBLIC HEALTH ACTIVITIES | 3% | $84 BILLION OTHER PAYERS | 7% | $196 BILLION OUT-OF-POCKET | 12% | $336 BILLION MEDICARE | 20% | $560 BILLION MEDICAID | 15% | $420 BILLION OTHER PUBLIC HEALTH INSURANCE | 4% | $112 BILLION

*

Figure adapted from Source 3

1.4. U.S. Healthcare Provider Supply Chain

26

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 insurers cover the procedures, goods, and services involved with the particular product as well as 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

27

Provider SCM: A Medical Device Perspective | LifeScience Alley

PAYMENT is the amount of money that is transferred from the payer to the provider for a healthcare 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 classification (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.

1.4.  U.S. Healthcare Provider Supply Chain

28

WHERE DO YOU DEC

CREASE THE COSTS? The Role of Supply Chain Management (SCM) in U.S. Healthcare

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 eventual 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 professionals: 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

31

Provider SCM: A Medical Device Perspective | LifeScience Alley

FIGURE 9.

PERCENTAGE OF SUPPLY CHAIN MANAGEMENT ANNUAL OPERATING COSTS FOR MAJOR ENTITIES IN U.S. HEALTHCARE SUPPLY CHAIN (2009) * ORDER & INVENTORY MANAGEMENT

TRANSPORTATION

SHIPPING / RECEIVING

OTHER

MANUFACTURERS 16%

8%

5% 7%

36%

DISTRIBUTORS 35%

14%

11%

7%

67%

GPO

GROUP PURCHASING ORGANIZATIONS 31%

18%

4% 4%

X

57%

PROVIDERS 19%

3%

4%

5%

31%

*

Figure adapted from Source 64

2.1. The Role of SCM in U.S. Healthcare

32

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 . . .

33

Provider SCM: A Medical Device Perspective | LifeScience Alley

INITIATIVE #1: STANDARDIZATION OF SUPPLIES /

PURCHASING DISCIPLINE The first step toward supply chain cost reduction is purchasing discipline and the standardization 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 preapproved 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 delivered 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 combined, 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 replenishment (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

2.2. The Role of SCM in U.S. Healthcare

34

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 management 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 cataloguing and locating products as well as reduces risk of errors from manual input.65,67

35

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

Provider SCM: A Medical Device Perspective | LifeScience Alley

INCREASING SUPPLY CHAIN EFFICIENCY,

Çefficiency DECREASING THE AMOUNT OF PROVIDER STAFF-BASED LABOR INVOLVED IN SUPPLY CHAIN,

Èlabor AND REDUCING THE AMOUNT OF CAPITAL DETAINED IN THE SUPPLY CHAIN

Ècapital INCREASES PROVIDERS' FLEXIBILITY TO MAKE CLINICAL IMPROVEMENTS,

= Çflexibility THUS BETTER SERVING PATIENTS.65,67

J patients

2.2. The Role of SCM in U.S. Healthcare

36

WHO ARE THE DE

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.

PHYSICIAN-BASED PRODUCT APPROVAL 39

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 physician 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 responsible 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 organization-based product approval process (Figure 7) that involves additional decision makers and decision points.

Provider SCM: A Medical Device Perspective | LifeScience Alley

ORGANIZATION-BASED PRODUCT APPROVAL

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 products to ensure they provide the best patient outcomes possible 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

3.1.  Transitions in New Product Introduction Processes

40

FIGURE 10.

PHYSICIAN-BASED VS. ORGANIZATION-BASED PRODUCT APPROVAL PROCESS IN U.S. HEALTHCARE PROVIDER SYSTEMS (ARROW DENOTES PRODUCT APPROVAL / MOVEMENT / NOTIFICATION) 30,72,73

PHYSICIAN-BASED PRODUCT APPROVAL & USE PROCESS

VENDOR / OEM SALES REP.

PHYSICIAN

NOTIFICATION OF HOSPITAL / PROVIDER SYSTEM

41

Provider SCM: A Medical Device Perspective | LifeScience Alley

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

3.1. Transitions in New Product Introduction Processes

42

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 contained 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 financial 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, products are introduced to the new product approval committee by the product champion, either a physician or supply chain representative depending on the system, who believes strongly 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 approval committee following a review of the new product approval application. This committee is generally comprised of healthcare professionals from the supply chain and business departments 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 sustainable or advantageous than competing products and practices, or (3) both. In addition, 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 43

Provider SCM: A Medical Device Perspective | LifeScience Alley

ADDITIONAL CONSIDERATIONS INCREASING USE OF WEB-BASED SUPPLY CHAIN SOLUTIONS The new product review/value analysis process is increasingly being implemented using webbased 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 governmentfunded 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

3.3. Transitions in New Product Introduction Processes

44

HOW DO YOU SUCCESSFU

ULLY ENTER THE MARKET? Product Entry and Adoption in Today's Provider System for Producer Price Indices (PPIs)

FIGURE 11.

FOUR MAJOR FACTORS INVOLVED IN SUCCESSFUL PRODUCT ADOPTION IN HEALTH CARE PROVIDER SYSTEMS, RANKING SHOWN IN SIZE

FAVORABLE REIMBURSEMENT

REGULATORY APPROVAL

PRODUCT A 47

DEMONSTRATION OF PRODUCT VALUE CLINICAL EFFECTIVENESS DATA

ADOPTION 48

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 must out-perform the product(s) the provider currently uses in one or more of these categories.30,59 For reimbursement, particularly for Medicare or Medicaid, the product 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 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.

49

Provider SCM: A Medical Device Perspective | LifeScience Alley

FIGURE 12.

REGULATORY APPROVAL SUMMARY OF CLASS I, II, & III DEVICES 74,75 CLASS

DEVICE EX.

RISK

PROPORTIONATE LENGTH OF TIME

I. 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)

II. 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

III. 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 successful, the development and implementation of a clinical trial protocol is required for approval

4.1.  Product Entry and Adoption in Today's Provider System

50

CHANGING ENVIR

RONMENTS

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 insurance 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 manufacturers and/or distributors, which often included financial kickbacks 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 . . .

53

Provider SCM: A Medical Device Perspective | LifeScience Alley

SHIFT #1: CONSUMERS' RISING PAYMENT & DECISION-MAKING RESPONSIBILITY Consumers are now more sensitive to health care costs due to their rising payment responsibility. Consumer payments to providers have increased by 72% since 2011. In addition, consumers 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 products, 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.

5.1. Changing Environments

54

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 quantifiable 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 guidelines for product entry than larger provider systems.30 (This process is described in-depth in Section 4.1.) An additional strategy to generate 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 hospital/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; healthcare reform; growing regulatory and administrative burdens; and rising malpractice costs.80,82 Thus, the option of an employment contract 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

55

Provider SCM: A Medical Device Perspective | LifeScience Alley

FIGURE 13.

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.

PAYERS

PROVIDERS

CONSOLIDATION OF PROVIDERS WITH OTHER PROVIDERS

CONSOLIDATION OF PROVIDERS WITH PAYERS

OEMs

OTHER COMPANIES

The goals of these novel collaborations include: being financially beneficial; having an increased 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

5.4.  Changing Environments

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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 benchmarks 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 benchmarks 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 specifically interested in risk-based contracts involving their cardiac or vascular device implants.84

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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 complementary 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 catheterization laboratories, which complements Medtronic’s interventional cardiology product portfolio 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 partnership 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 distribution 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 analytics. A recent type of partnership of this type is that between Boston Scientific and TogetherMD, a health care data analytics software company. Their goal is to strategically optimize the performance 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

5.4. Changing Environments

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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 acquisition 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

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Provider SCM: A Medical Device Perspective | LifeScience Alley

RECOMMENDATIONS PRODUCT ENTRY INTO PROVIDER SYSTEMS FOR PPIs, SERVICES, AND PROCEDURES 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

TEXT A

THE PRIMARY DRIVER OF CHANGE IN THE U.S. HEALTHCARE INDUSTRY TODAY IS GOVERNMENTINSTITUTED 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:

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Provider SCM: A Medical Device Perspective | LifeScience Alley

DIRECT RESULTS OF ACA IMPLEMENTATION + Increasing need for clinical effectiveness and patient outcomes data to obtain CMSapproved 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

6.2. Recommendations and Summary

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