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Tuesday / November 21.

The Coming Tsunami for Medical Device Companies

Approximately 18 months ago, I was asked to serve as the surgical director for Operating Room (OR) services at our children’s hospital. The opportunity has been an eye-opening experience in understanding how a hospital functions.

ORs are like the economic engine room in a large ocean-going vessel. Without them functioning optimally, the boat stops moving, and is batted about by of waves economic disruption. If surgical admissions drop below a certain percentage of total hospital admissions, the margins disappear and we are suddenly taking on debt and sinking.

A corollary to this is that when a budget crunch hits, expenses in the operating room are scrutinized and hard questions are asked about costs.

It’s when you start drilling down on non-fixed costs that things become very interesting.

OR costs can be broken down into those that are generally fixed (lights, air filtration systems, water, labor, other costs of maintaining the physical plant, etc.) and non-fixed (everything else). There is some flexibility with fixed costs, but largely it is the expense of keeping the lights on and having rooms staffed and available.

It’s when you start drilling down on non-fixed costs that things become very interesting.

A majority of non-fixed cost in the OR comes from disposable, one-time use items consumed during the course of an operation. These include different types of sutures (which range in cost from $1.50 to $83.00 per suture), and nifty, one-time use devices such as surgical staplers ($120), surgical ports ($120-$150), and thermal dissecting instruments ($400-600).

These costs are not what the consumer or their insurance companies pays. For example, a hospital pays $444 for an instrument known as a harmonic scalpel, but the patient or their insurer is billed $1,177 or more.

When you start examining disposable costs for a particular procedure you can find wide variation among surgeons who are achieving the same clinical outcomes. For example, the disposable OR costs of a laparoscopic appendectomy can range from $160 to $2,600 with a mean and median around $1,400.

When adding up these costs, case by case for the same outcome, the unnecessary expenses become evident. There are 280,000 laparoscopic appendectomies performed in the United States each year. With a mean OR disposable cost of $1,400, the disposable (and largely unnecessary) expenditures for this procedure become staggering – approaching $400 Million per year for the hospital and close to $1 Billion per year for patients/insurers.

And this is the tip of the iceberg.  There are many other operations performed every year with disposable costs that have not been scrutinized at all.

The truth is that many of these disposable devices are a luxury and there is no evidence of benefit to the patient or improved performance on the part of the surgeon.

One of counter arguments you will hear from surgeons is that eliminating these devices will reduce their efficiencies. With the exception of a handful of hospitals and surgery centers that are models of efficiency, this argument does not hold.

To begin with, efficiencies have more to do with fixed costs and how well you are controlling and utilizing them. Most hospital ORs are inefficient and fail to reach a standard operating capacity of 70% for this argument to apply. And even if they do reach 70% capacity, turnover times between cases, on-time starts, and further tuning of efficiency processes (which require no expenditures) should be undertaken first before spending money on disposables to improve efficiencies.

The second argument is that there are no data on outcomes.  This is an argument people love to resort to when nothing else sticks.

I can only speak from the experience at my hospital, but our lowest cost surgeon in terms of OR disposables has the best outcomes for laparoscopic appendectomies. If one is to make the argument that outcomes are improved with disposable equipment, then they must first present data demonstrating that the disposable product or instrument is responsible for the improvement.

Interestingly, the European Union is already out in front on this issue of proving better outcomes with medical devices. Products undergo a rigorous certification process followed by re-certification every 3 years. Manufacturers must answer a fundamental question: is there unequivocal evidence that the device improves performance and outcomes?

If there is no evidence in the affirmative, then the device is not certified or re-certified.

In the US, government regulators have yet to establish a rigorous certification as that in the E.U. This is likely a result of the fear of big government interference with business.

But device companies should be very concerned that they will be held to a hard audit by a group with a direct, vested interest in this: hospitals.

Without any objective data demonstrating improved performance and outcomes, hospitals are under no obligation to buy products that demonstrate no benefit. And insurance companies will be under no obligation to pay the associated charges.

This hard audit is coming.

This hard audit is coming. It is now occurring in my hospital. The only recourse device companies will have to ensure continued demand for their products is to provide data to support improved outcomes and performance for any device they plan on selling. Hospitals otherwise may not buy it.

PETER F. NICHOL MD/PHD IS ASSOCIATE PROFESSOR OF SURGERY AT THE UNIVERSITY OF WISCONSIN SCHOOL OF MEDICINE AND PUBLIC HEALTH.

This article was initially published on MedAware Systems