When it comes to new technology, purchase prices hide real cost.

TAMPA, FL -- There's no doubt about it. Hospitals have a thing about new technology.

Clinicians love it (although they may be giving it a more discerning eye than they did, say, 10 years ago). But those in administration, finance and materials management don't. When they see new technology, they see dollar signs, where �cost� equals �acquisition price.� And, truth be told, many - perhaps most - new technologies do indeed cost more than those they are replacing.

But there's a lot more to cost than acquisition price, says Nancy Reaven, president of La Canada, CA-based Strategic Health Resources, who gave a presentation at the 38th Annual Conference and Exhibition of the Association of Healthcare Resource and Materials Management on �Proving the Value of New Technology.� Reaven's presentation was sponsored by IMDA, the Mission, KS-based association of specialty sales and marketing dealers.

Reaven's company helps makers and buyers of new technology make their case regard-ing the value of new technology. Both camps need to do it today more than ever, for the following reasons:

• Medical technology is growing rapidly, and so are the costs associated with it.

• Patient demand for the latest technologies is rising, because today's consumers are exposed to all kinds of information they never had access to before, primarily through the Internet.

• While the pace of new technology accelerates, the ability of hospitals to afford it is shrinking. Operating margins are at a serious low, and no one is sure when or if they will rise again.

To muddy the picture even more, purchasing decision-making in hospitals is complex. Layers of stakeholders with sometimes contradictory interests are charged with making important technology decisions. Clinicians may promote technology regardless of its cost, while department administrators and purchasing people may take a very narrow financial view of it.

But rather than dismiss new technologies out of hand or buy them without careful consideration, hospitals need to manage their acquisition of new technology. Reaven calls it �innovation management,� or using information to be proactive about technology decisions instead of reactive and defensive.

Considerations

Manufacturers and others have routinely tried to examine the financial impact of their devices. But while these studies are useful, they're of limited value in terms of understanding the projected bottom-line impact of technology on hospital margins, says Reaven. There are more practical ways of doing so.

But before hospitals examine these methods, they need to answer some fundamental questions:

• Whose perspective will they use? Some argue that new technology should only be judged by how it will benefit society at large. The difficulty with this approach is that it doesn't take into account hospitals' purchasing decisions. On the other hand, hospitals are usually concerned with a person's inpatient stay, not with his or her long-term recovery and health. Meanwhile, payers have other considerations in mind.

• What does �value� mean? Is it essential that a technology be cost-neutral? Should it actually reduce costs? What intangibles should be considered? For example, can acquiring a new technology help a hospital retain or attract top-flight clinicians.

• Finally, what outcomes measures should the hospital subscribe to?

Having answered these questions, hospitals need to understand the impact of technology on their operating margins. And that depends on a number of variables, including:

Payer Mix - What percentage of the facility's patients are Medicare, Medicaid, commercial, HMO, PPO, indemnity? All these factors will affect the profitability of a procedure.

Reimbursement - Simply put, billed charges allow the provider to generate revenue from new technologies, while DRGs and other fixed-payment systems do not.

The cost/service structure of the hospital - Will the device be used primarily in inpatient or outpatient settings? What effect will that have on reimbursement? (For example, with the implementation of prospective payment for hospital out-patient procedures, the cost of technology will be folded into the ambulatory payment classification groups, or APCs, which is the outpatient equivalent to DRGs.)

Patient Population - What is the size, age/gender mix and expected disease burden of the target population? Taking this information into consideration, providers need to focus on evaluating technologies that will affect the majority of their patients. Having considered all these variables, the facility has to consider the impact of the technology on each of the following:

Admissions.

Length of stay - (Many hospitals assume that reducing length of stay is a good thing. But if managed care contracts reimburse facilities on a per diem basis, shorter isn't necessarily better.)

Per-procedure direct cost.

Unit operating costs.

Efficiencies within the hospital that the technology may bring about. (For example, if a technology helps reduce the length of a procedure, can the hospital bring in more patients and hence, more revenue?)

Complications or errors.

Evidence-of-Value Modeling

Reaven's models - called �Evidence of Value�� Models - take into consideration all of these factors to determine the financial bottom line of new technologies for a hospital. She demonstrated for the materials managers how it works by citing a study her company did on vascular sealing devices used on cardiac cath patients in recovery.

Conventional recovery calls for manual compression of the femoral artery following cardiac catheterization. Although the procedure is effective, it calls for the patient to remain immobile for several hours. From a clinical point of view, the new devices are just as effective as the conventional manual technique. So, the real question for the hospital to answer is this: Do the benefits justify the cost of the devices, which typically cost a few hundred dollars?

After analyzing work flow, labor and supply costs, Reaven found that the new device would indeed add expenses to the hospital's bottom line on a per-case basis (although somewhat less on diagnostic catheterizations than the acquisition price of the device, and even less on interventional procedures - because the device requires fewer supplies and less nursing labor). But by using the device, the hospital could discharge patients in 3.5 hours as opposed to six to 10 hours using the manual technique.

The bottom line for the hospital is this: If it could convert that time difference into more cases, the device would be a financial winner. If not, the device would not be a cost-saver (although conducting the kinds of studies that Reaven suggests would at the very least give the hospital a very good idea of what to budget for the new device).

Can hospitals perform these kinds of analyses? Actually, the data that Reaven collects is relatively easy to get, she says. All hospitals have it.

But even if they don't do formal analyses, providers should keep in mind that acquisition price is far from the whole story. And their suppliers should remind them of that fact frequently.

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