HCA will submit its orthopedic implant gainsharing proposal to the HHS Office of the Inspector General by June 1.

The for-profit hospital group expects the gainsharing program to boost orthopedic surgeons' compliance with HCA's "vendor list concentration" purchasing practice.

The firm recently completed negotiations on contracts with Zimmer, J&J/DePuy and Stryker. Those arrangements will be effective from June onward.

Vendor list concentrations occur when a hospital or other purchaser decides to procure higher volumes of product exclusively from certain manufacturers in exchange for price concessions (¹ Also see "Ortho Firms Feel DoJ Probe Price As Stocks Fall In Q1; Will Zimmer Diversify?" - Medtech Insight, 11 April, 2005., p.14).

HCA says voluntary gainsharing will allow participating physicians to share hospital savings from consolidated vendor contracts. However, those docs will be restricted to orthopedic implants manufactured by Zimmer, J&J/DePuy and Stryker.

The hospital group maintains that physicians who opt out of the initiative will always have the ability to use products that are off-contract.

Despite HCA's defense of the program, critics assert that with gainsharing in general, small device firms are unfairly barred from competing in the hospital market.

Conversely, physicians' independent arrangements with orthopedic suppliers could curb compliance with hospital vendor lists. Such deals are currently facing Department of Justice investigation.

Quality Monitored By Physicians Under HCA Program

In addition to saving money, HCA says the gainsharing strategy will improve clinical outcomes. Physicians signing on to gainsharing will be required to participate in several quality improvement aspects of the program, such as tracking infection and revision surgery rates.

The internal quality improvement part of the program will feature teleconferences and panel meetings to promote the sharing of ideas.

To develop the program, HCA solicited advice from its physicians. The hospital company says it organized several meetings and panel discussions with hundreds of caregivers to assess interest and acquire tips on how to design the program.

HCA claims broad internal support for the program. Based on those discussions, physicians worked with HCA to decide which vendors to contract and what concepts to incorporate in quality improvement.

According to the hospital chain, the program enables physicians, instead of HCA's HealthTrust Purchasing Group, to make procurement decisions. HCA says Zimmer, DePuy and Stryker were named by its physicians as manufacturers of the best hip and knee implants.

Those three firms, which are the world's largest orthopedic manufacturers, have the ability to distribute enough products to HCA physicians, the majority of which are already using one or more devices from the firms, the hospital group claims.

Vendor List Consolidation: Can It Work?

HCA emphasizes that the success of gainsharing ultimately will depend on whether the cost savings and financial incentives realized by physicians are strong enough to incite continued compliance with the consolidated vendor contracts.

The hospital group characterizes today's health purchasing scene as one in which orthopedic surgeons are employed not by hospitals, but by device firms through large contracts and consulting arrangements.

Sonnenschein Nath & Rosenthal attorney Gadi Weinreich represents Tenet Healthcare, among other clients. At a Stanford Washington Research Group meeting May 5, he suggested that physician contracts with manufacturers could hinder adoption of gainsharing in orthopedics.

A physician who resists gainsharing might say, for example: "I've got very strong ties to a particular manufacturer that supplements my income rather dramatically," Weinreich conjectured.

Because physician compliance levels have remained low, prior attempts to implement vendor list consolidation contracts have failed. Another for-profit hospital, HealthSouth Corporation, which has a contract with Smith & Nephew, notes that it has experienced physician compliance problems.

HCA says it instituted vendor list consolidation and gainsharing to trim supply costs, which have escalated over the past few years.

The group estimates that devices account for 30%-35% of its medical supply costs, with orthopedic products claiming a significant majority. Overall, prices for devices have increased 13%-17% over recent years, HCA maintains.

Within the orthopedics industry, hip and knee implant vendors have contributed to the climb, with an estimated 4%-6% yearly price increment.

Consulting Arrangements Viewed As Cost Driver

Given the reported price hikes, orthopedic firms are increasingly open to charges of extracting physician loyalty to certain products through consulting contracts.

The relationships between physicians and those firms is the subject of federal scrutiny. On March 30-31, the five largest orthopedic hip and knee players - Biomet, Johnson & Johnson/DePuy, Smith & Nephew, Stryker and Zimmer - all received subpoenas from DoJ (² Also see "DoJ Probe Into Orthopedic Industry Could Rattle Upward Pricing Trend" - Medtech Insight, 4 April, 2005., p. 3).

The subpoenas requested all consulting contracts and certain other agreements dating back to 2002 that involved orthopedic surgeons using the firms' joint reconstruction products.

Should the orthopedic industry be forced to change its policy on physician contracts, loyalty to individual firms might suffer. In that event, the notion of replacing lost contract revenue by participation in gainsharing might prove attractive.

Despite their price concessions, larger firms included in vendor list concentration stand to benefit from the new strategy because of their increased volume and market share gains.

Zimmer CEO Raymond Elliott approved of the vendor contract consolidation strategy during an April 26 earning call. Describing the agreement as "mutually satisfactory," he explained it should improve profitability for both HCA and Zimmer in exchange for increased compliance.

"The opportunity to chase several millions of dollars in new business with a less crowded field of competitors is always welcome - provided real compliance is delivered," Elliott observed. "It is a very high level of compliance that HCA is committed to." Therefore, "we believe our downside risk is minimal and immaterial."

Elliott placed the HCA opportunity at $50 mil.-$60 mil., commenting, "I just love the idea of going after that along with Stryker and J&J."

The CEO's perspective on HCA's concomitant gainsharing program is less sanguine. "Perhaps we differ with HCA on the probable outcome of gainsharing.... Whether they will get it and where they are in the process, I do not know," he said. On balance, though, gainsharing "creates more issues than solutions," Elliott concluded.

For instance, physicians may reject the program because of liability concerns. "Surgeons are not going to change what they believe is right for a patient, relative to some minimal amount of dollars incoming to them, particularly when those dollars would be associated with potential risk from liability," he stated.

Elliott predicted that gainsharing "will have an immaterial effect on orthopedic profitability and, failing that, virtually no impact beyond the first year in any institution."

Physician Preference Would Be Unchallenged - HCA

In addition to Zimmer, executives from Biomet and DePuy have publicly questioned whether physicians participating in gainsharing will be exposed to liability issues due to restricted access of orthopedic products.

HCA asserts that liability will not be an issue for its physicians. The hospital group reiterates that most of its docs already use one or more of the products from the three firms under contract. Therefore, the firm says, the program will not mark a radical departure from HCA clinical practice.

Moreover, while critics contend that physicians may move to other hospitals due to restricted access to products, HCA disagrees, as the program is strictly voluntary.

At the May 5 meeting, Weinreich suggested it may be difficult for gainsharing arrangements with orthopedic surgeons to be approved while the DoJ probe continues. OIG typically does not issue advisory opinions for topics under active investigation, he reasoned. Should the probe result in the elimination of consulting contracts, physicians may be more likely to participate in gainsharing, he opined.

Large Ortho Firms Balance HCA Market Opportunity With Gainsharing Pitfalls

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