COUNTERVAILING STRATEGIES TOWARD EARLY ADOPTION OF A MEDICAL DEVICE IN A LIMITING REIMBURSEMENT ENVIRONMENT
AM Carlson, SE
Williams, RJ Carlson
BACKGROUND
Cost control underlying DRGs, and increasingly commercial insurance, result in limits on access to medical treatments and devices according to a judgment of their efficacy and affordability within prospective payment limits. Under a fee-for-service system various levels of providers could assume that with sufficient insurance, and/or private financial resources, the ability to purchase new medical technologies was certain. However, in an environment where the price of new technologies and devices escalates due to increased costs of innovation, testing, production and marketing, and the added burdens of liabilities, the purchase price can exceed the ability to pay even with health insurance and private financial resources.
While there will always be a group of patients with adequate financial resources to afford costly medical care, over time the size of that group will decline relative to the larger population, particularly with age. A declining proportion of private pay patients is not sufficient to support the introduction of high-end technologies because the reduced volume cannot support the capital investments that might be needed by health care facilities, the experience levels needed for health care providers to participate effectively in the use of technologies or the market demand necessary for the production of a device. This means that ultimately the ability of a new device to enter the market and receive adequate levels of use is dependent on a much larger group of patients relying on health insurance coverage. The net result is that access to new medical technologies and devices, particularly those intended for treatment of chronic debilitating diseases in an older population, is determined by the reimbursement structure of DRGs under the prospective payment system currently in place. For medical devices that require initial surgical procedures the costs of the device must be subsumed into the surgical DRG reimbursement.
Newly approved device technologies may be at particular disadvantage in such circumstances. The device costs alone can consume a large portion of the prospective reimbursement, resulting in an unfavorable distribution of the expense to the hospital. Physicians and hospitals could be confronted with treatments whose high costs, but low reimbursement rates, result in disproportional financial risk sharing. In some cases reimbursement may result in hospitals limiting or denying admissions for the therapy, unless alternate means of payment are available resulting in inequitable access for patients.
In considering such a potential scenario, we hypothesize that early adoption of new, high-end medical device technologies may be dependent on strategic negotiations that will result in reciprocal leveraging toward a best net-cost picture for all concerned. Each party's initial stance would be determined by its desire to be as near to optimal reimbursement as possible. Physicians with large practices may use the importance of their patient volumes to the hospital to admit a patient with low margin in the reimbursement structure. The hospital, on the other hand, might propose that the physicians, in cases in which they use competing hospitals, mortgage some portion of future business in exchange for admitting less marginally profitable cases now. In either case both parties could place the burden directly on the patient, who is then left to assume the costs in cases where the device is deemed an appropriate and superior alternative to other therapies but nonetheless elective treatment.
To investigate the strategies that may be employed by physicians faced with the issue of hospital hesitancy or denial to admit patients with high-end medical technologies we included an open-ended, probe question, "If a hospital in which your neurosurgeons have surgical privileges decides that it is not profitable to admit patients for a specified elective procedure, how does your office treat patients who need the procedure?", in a study of medical device use in specialist based offices. A small, pilot, qualitative study using a purposive sample of specialist physicians identified as using a new, high-cost device technology (deep brain stimulation) for the treatment of a neurological disorder was executed. One researcher (SW) conducted unstructured phone interviews of approximately 30 minutes in length with eleven neurosurgical offices who agreed to participate. The probe question was used to engage office contacts in a discussion of reimbursement problems surrounding the specific device without any prompts or examples of strategies to lead the respondent.
Content analysis of responses provided evidence of the potential for strategic negotiations, from the physician perspective, that could take place in the event a hospital took a limiting action. The office representatives identified several viable strategies for ensuring patient access to a technology in the face of hospital hesitancy or resistance. Leveraging of patient volume, as we conjectured, was one option. Other strategies included leveraging of physicians' professional reputations as leaders in the treatment of neurological conditions, directing patients to specific hospitals known as sites for treatment of neurological conditions (i.e. directing patients to a niched market), and identifying alternate sources of funding to help subsidize hospital borne losses. Most frequently identified were research and charitable funding. Every participating office noted that if all strategies failed responsibility for finances would revert to the patient as we also conjectured would be the case for an alternate treatment.
Our analysis of responses indicates that there are informal strategic negotiations to address reimbursement issues that might take place between key stakeholders in the health care market. The identified strategies are consistent with the resource exchange and dependence perspective identified in management literature (Zuckerman and D'Aunno, 1990). Two underlying assumptions are identified in this perspective that reinforce our original contention that negotiations would take place. The first is that, in the face of complex and constrained environmental conditions (limited reimbursement in a government defined prospective payment system), organizations (physician offices and hospitals) will develop adaptive strategies and structures that will decrease their uncertainty and ultimately allow them to stabilize and manage their environment. Due to complexity, however, a single organization usually cannot generate all of the necessary resources or functions needed to achieve environmental stabilization and management, thereby leading to the second assumption. That is, physician offices and hospitals will enter into an exchange relationship that secures for them access to critical resources and stabilizes relationships between the parties while at the same time ensuring their survival.
In the short-term the strategies identified during our interviews result in both parties acquiring critical resources and achieving stabilized relationships. Each party also protects and strengthens their position in the health care market place, one of the primary reasons for the formation of an alliance (Shortell, Morrison and Friedman, 1990; Smith, Reid and Piland, 1990; Zuckerman and D'Aunno, 1990; Kaluzny, Zuckerman, Ricketts, 1995). On the physician side, he or she continues the early use of a new and innovative medical device, an opportunity that carries tangible and intangible rewards. The tangible reward is the reimbursement for cognitive services and technical skill expended in the care of the patient. The intangible rewards are less easily identified but of great future (hence strategic) importance. The opportunity to continue the use of an innovative medical device marks the physician as a leader/innovator in medical care, placing them first in the marketplace. Their growing and continued experience with the device and the medical condition that it treats further establishes their credentials and creates the potential for new patient referrals, thereby expanding their practice and increasing their reputation. Further, their association with the hospital, a source of critical and expensive capital resources in the way of high-tech surgical facilities and other health care resources, is maintained.
For the hospital, the short-term rewards they achieve in the exchange relationship are primarily intangible. The financial gains for the care of patients in need of the medical device may not improve in the short run. The level of reimbursement from the DRG determines the margin above initial cost that the hospital has available for negotiation with the physician. That margin is the simple difference between the device cost and the DRG reimbursement level, both of which in early marketing phases are not likely to change. Alternate sources of funds to offset the reduced margin or loss, particularly given that they are research and charitable funds, are not inexhaustible and continued cost-containment initiatives can further erode the financial position.
It is the intangible rewards that provide opportunities for strategic gain for the hospital. First, the hospital gains a continued relationship with an innovative practitioner, who is increasing his or her reputation and experience with an innovative treatment alternative. Such relationships are crucial to the survival of a hospital in today's health care market (Shortell, Morrison and Friedman, 1990; Smith, Reid and Piland, 1990). In addition, the hospital gains a reputation as an innovator, thereby enhancing its image not only in the community it serves but in the medical profession as well. Whether the hospital has already established itself as a center for the treatment of neurological conditions (a niched market) or is seeking to diversify into that specialty, its alignment with recognized medical leaders using innovative treatment alternatives furthers that effort (Kaluzny, Zuckerman, Ricketts, 1995).
While the hospital's short-term, patient-specific margins have not improved in the exchange relationship, financial gains will accrue if the physician agrees to increase other patient admissions or to increase the strength of his or her affiliation with the hospital. Either exchange will improve the hospital's revenue base particularly if the physician(s) involved have other high revenue procedures or generally treat diseases/conditions with high patient volume. The hospital has attained several high-level strategic goals from the exchange: physician relationships have been stabilized, hospital assets are protected, and future hospital revenues have been proactively managed (Shortell, Morrison and Friedman, 1990).
One additional set of intangible rewards, ones identified in the resource exchange and dependence perspective as social effects, also accrue to each party in the exchange relationship. Within the health care market they include increased access to care, increased availability of services, and increased quality of care (Zuckerman and D'Aunno, 1990). In the case of medical technologies an additional social effect is that there is an adequate trial and evaluation of new technologies such that the most promising achieve a wider market. In doing so, technologies receive additional market acceptance. These social effects add an additional dimension we will call "charitable collusion" (i.e. doing good while doing well) that increases the value of the strategic negotiations identified here.
Further inquiry is needed, however, to fully understand the exchange relationship that we hypothesized and had confirmed in our pilot effort. The pilot study only focused on a small, purposive sample of specialist physician offices; a larger sample and samples of other physician specialty and non-specialty offices may reveal more details of these and other strategies. Our impressions regarding tangible and intangible gains in the exchange must also be confirmed. Further, it is necessary to understand how what appear to be informal negotiations are formalized within each organization. There is very possibly some needed level of fluidity to allow for differential responses to market pressures and advances in treatment options, the exact nature of which must be determined.
While we conjecture about one likely response by hospitals to physician negotiations, these must be enumerated. Other researchers have highlighted the need for hospitals to reorient themselves toward a market stance in the face of cost containment. Shortell and his colleagues (1990) identified 3 fundamental changes--movement from a product orientation to a market orientation, conversion from a care taking mentality to a risk taking mentality and the change from an operational management focus to a strategic one--that successful hospitals must make. Entering into a physician-hospital exchange relationship is an opportunity to meet all three change strategies. In addition investigation of the response by physicians to hospital negotiations is needed.
The role of manufacturers of devices must also be identified. In the case of Medicare patients, the level of reimbursement from the DRG determines the margin above initial cost that the hospital has available for negotiation with the physician since the hospital usually purchases the device for placement by the physicians. As stated previously, that margin is a simple difference between price and DRG reimbursement. This fact places the manufacturer and its product marketing practices at the center, rather than at the periphery, of the issue. While the manufacturer's stake in these negotiations depends on the market it chooses to target, it can safely be assumed that the target markets are broader than the community of affluent patients who would be able to defray residual costs out of personal resources.
We have also identified these strategies at a point where medical device costs subsume large portions, but not all, of the reimbursement allowed under the DRG. That is, the hospital is still able to realize some revenue to offset the costs of delivering care to the patient. As additional devices are brought to the market, this may not be the case. The foreseeable future could bring devices that subsume all of the reimbursement.
Finally, the strategies identified occurred during early adoption of a newly approved therapeutic device. The various stages in the product life cycle will have different strategies than those identified here. In the face of greater patient demand and increased market share pressure on hospital finances will be greater, making it less possible for hospitals to forgo patient-specific revenue for future revenue gains. Individual physicians, too, will have less negotiating advantage when additional physicians and hospitals incorporate the device into their practices.
The stakes are important, however. If we allow the logic of limited reimbursement to prevail without allowing for exchange opportunities, that is, if we cannot balance recognition of reimbursement pressures with tangible and intangible market gains and the social effects that result, at the extreme promising medical technologies will disappear from the market place.
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