Girard F. Senn

Physician demands for new technology can be intimidating to CFOs who feel they lack the background to respond knowledgeably. But CFOs need to be able to respond with informed decisions, and that requires specific action.

At a Glance

  • CFOs need to be aware of controversies surrounding some new technologies that are being aggressively marketed to physicians, including well-founded criticisms that justify denial of a physician's request for a technology.
  • In responding to such requests, CFOs should consider intangibles such as potential revenue impacts, good will, internal and external service levels, and outcomes of services.
  • To help in making such decisions, CFOs should identify a clinical confidant and form a materials use evaluation committee.

Everyone in finance is challenged these days to spend less and achieve more, but healthcare CFOs face an especially difficult challenge: knowing how best to respond to physician requests for new technology. Although the technology often is important and necessary, sometimes the answer should be "no," given that what is always most important is what brings the greatest value to both patients and the organization. Yet it's a daunting prospect for any CFO to be able to take a well-informed stand in discussing such requests with physicians, especially when those physicians can back their requests with the full force of their clinical expertise and experience.

How can a CFO credibly speak to physicians' concerns in such instances?

Consider, for example, the case of total joint replacement (TJR). With the aging of the millions of baby boomers, this procedure is an increasingly popular surgery for hospitals, given the well-known tendency of baby boomers to demand whatever treatment they deem is necessary to ensure their long-term health.

Knowing, then, that TJR is an important service line for hospitals, if surgeons demand a new widget to perform TJR procedures, how can the CFO refuse? And should the CFO ever refuse such a request? If a hospital remains committed to developing its TJR service line, how can the CFO make a good financial decision that wisely manages the organization's margins while genuinely supporting high-quality TJR patient care?

There are many factors to consider. In an ideal world, for example, only the most experienced physicians would perform surgeries. But here's the reality: About half of the 500,000 TJR cases annually in this country are performed by orthopedic surgeons who perform fewer than two per month (see Katz, J.N., et al., "Association Between Hospital and Surgeon Procedure Volume and Outcomes of Total Hip Replacement in the United States Medicare Population," Journal of Bone and Joint Surgery, November 2001, pp. 1622-1629).

In addition, new approaches to surgical procedures can often be controversial, and TJR is no exception. Considerable controversy surrounds the use of custom pin guides, a "new-to-the-market" technology that many surgeons are using for this procedure. The difficult task falls on the CFO to be informed of these controversies and to make sure they are considered before the hospital commits substantial financial resources to purchase these controversial "technologies."

So what should the CFO do if one of those orthopedic surgeons who rarely perform TJR decides he wants to use a custom pin guide to increase his practice revenues? The cost for this pin guide system is $1,500 per case, and it's also very likely that the hospital is already losing money on each TJR case. (The low profit margin on this procedure led one witty CFO recently to refer to TJR as "not so much bloodless surgery as profitless surgery.") How should such considerations enter into the decision process? And given the controversies swirling around these pin guides, there may be good reason for the hospital to discourage adoption of the technology (see the sidebar).

The problem is that it is difficult for anyone, much less the CFO, to keep fully informed on such issues. A recent New York Times article succinctly sums up the underlying issue: "… little data is available to compare the benefits of competing makers' products or to determine how much buyers like hospitals should be paying for them" (Meier, B., "Costs Surge for Medical Devices but Benefits Are Opaque," The New York Times, Nov. 5, 2009).

Despite the apparent challenges, CFOs do have clear options on how they can respond. What might appear to be a no-win situation could actually become a win-win, if handled properly. It's a question of informed leadership. CFOs who are kept apprised of all the facts surrounding technological developments such as TJR custom pin guides, particularly where the competitive marketing realities are an important factor to consider, will be in a much stronger position to help their organizations avoid wasting precious resources, while maintaining positive relationships with their physicians.

The choice need not be between cost and quality, but one of cost with quality. The day when physicians may have perceived the finance role as "bean-counting" is done. Today, the ever-expanding CFO leadership role encompasses skills to articulate margins and outcomes, and saying "no" when necessary, even to the CEO, who may be vulnerable to pressures from key physicians. Valuing and managing intangibles early in the introduction and adaptation of medical devices is now part of the CFO's skill set.

Consider the Intangibles

What, then, are the intangibles that CFOs must value and manage to minimize waste and maximize resources? There are four intangibles, in particular, that CFOs should routinely consider:

  • Potential revenue impacts, both positive and negative
  • Good will-for both patients and surgeons
  • Internal and external service levels
  • Outcomes-for patients, surgeons, and service lines

Potential revenue impacts. Revenue impact is an intangible because so much is unknown until it is clarified by analysis. Rising expenses and increased charges within a variant mix of payers are affected by losses due to the increased expenses (e.g., the $1,500 pin guide). A promised increase in case volume may lead to a positive rise in margin, but the only way the margin will go up is if the organization spends less than it takes in. Unfortunately, CFOs too often see the volume of patients remain flat while expenses go up because they are not being involved in decision-making soon enough.

Good will. The covenant between the institution and its customers-both the community and the physicians-is intangible, but very real. A community comes to expect a level of care and range of services from its hospital, and may balk if services are cut or curtailed, even if this action must be performed for the sake of the hospital's financial health and ability to meet its mission. A delicate touch may be required to reassure the community when the hospital cannot be all things to all, as when a service is too costly to maintain. And it is possible to deliver this message effectively. It was heartening recently to hear a CEO declare that a certain surgeon was "not worth keeping for such a small margin contribution." Hospitals that continue to subsidize money-losing programs and services will eventually have to make the hard choices, anyway.

It also is important to achieve and maintain trust and good will of the surgeons, and the best way to do so is through constant transparency. One way to do this is through the preparation and dissemination of "score cards" that employ data for each surgeon, indicating the price/cost of implants used and outcome/quality results. This information should be readily available in every organization, whether obtained through data reports or, if necessary, even manually. Depending on the particular organization's culture, the physicians in the score card may or may not be identified by name. Increasingly, in the interest of transparency, organizations are choosing to include the names of physicians with their data.

Service levels. The internal intangible regarding level of service relates to the capability of a hospital's staff and leadership to provide the support needed to sustain a high-quality service line. The CFO should have a strong understanding of what is required for this internal support-particularly with respect to operating room (OR) staff-before the organization actually embarks on a new surgical line or significantly develops its existing lines.

The external intangible is one of image, where the hospital is perceived as offering the highest level of service. The hospital cultivates this image through commitment to quality care and fiscal responsibility.

Outcomes. How well the organization manages the most visible aspects of outcomes-e.g., turnover times, pain management care, emergency department times and conditions, length of stay, infection rates, and discharge issues-is an intangible that has implications for the financial outcomes as well.

Adapt a Working Model: DUE to MUE

Most of what the CFO needs to support informed decision making is already in place and accepted by physicians and other clinicians. It merely needs to be adapted to the new situation. This solution is obvious, if you think about it: The drug use evaluation (DUE) committees that hospitals rely on for analysis of pharmaceuticals are typically effective and relatively controversy-free. Everyone understands a DUE committee's mission and purpose, and it typically has organizational support from all constituencies. With just a few adjustments, a similar system can be used to formulate a materials use evaluation (MUE) committee that opens up the dialogue between physicians and administrators, especially financial executives, about the "hot" new "technologies" and how they may or may not fit into the hospital's programs.

An MUE offers the way to get to "no," when you must. Here is a list of actions and skills that the healthcare CFO can readily adopt to make it happen.

Identify a clinical confidant. This individual is not someone from the finance office, but rather someone with clinical credibility and experience-perhaps an orthopedic team leader in the OR, or possibly the OR director, the nurse educator, the chief nursing officer, or one of a number of service line administrators. The role calls for a leader, and any of these leaders should be up to the challenge, depending on their abilities and energies. It also should be clear to everyone who this person is. Most important, the selected individual must not only value quality and appreciate the importance of saving on costs when possible, but also keep an open ear to the surgeons and their issues. Some describe this person as the surgeons' trusted confidant or "go-to" person.

Develop and implement the MUE committee. This committee's structure should be modeled on the existing DUE or pharmacy & therapeutics (P&T) committee's structure. A key consideration is to develop a balanced scorecard process that can facilitate asking the tough questions. Some hospitals are appointing pharmacists as support staff to their new MUE committees. Harnessing the credibility of DUE committees is an effective means of crossing barriers that are common to hospital operations and technology. Therapeutic interchange is a key concept that allows such discussions of medical devices.

Make a long-term commitment to the culture. Such a commitment will ensure that the finance office is recognized for its strong role in the organization's culture-supporting, negotiating, and valuing. That role should be communicated throughout the organization.

Develop tools and documentation to value and support the intangibles and outcomes. The finance office stands for what represents the best patient care. Those values and support should be put in writing, and the results shared with the hospital community.

Leading CFOs Weigh In

This approach is not mere theory, but proven fact. The direct experiences and stories of CFOs in U.S. hospitals and systems may offer some inspiration and food for thought.

Lee Memorial Health System in Florida, a public institution, is a high-volume TJR implant facility that has taken aggressive steps to control implant pricing. And these steps were not easy, according to John K. Wiest, Lee Memorial's CFO and chief institutional services officer.

"We recognized the physician preference reality-the primary user of the TJR implant product (the surgeon) does not, in fact, pay for it," says Wiest. "Our goal was to achieve reasonable pricing for TJR implants, and to do that we had to involve the physicians, the vendors, and the administration in what was a painful process. We met with the physicians-not just every month or every week-but every day, when we had to. We acknowledged the strength of the relationships between the surgeons and vendor reps, who have worked together sometimes for years, and factored that in."

Wiest says: "We started by determining where we were in TJR pricing and volume, and then developed a fair pricing matrix that gave us a basis for discussions. Through considerable discussion and consternation, we were able to retain all of our vendors. We intend to be even better communicators in the future, and we've learned a lot that will help next time. But there's no denying, this is a painful process for all."

Another CFO perspective on this comes from Kevin H. Walters, CFO for the Southern Nevada Market Area of St. Rose Dominican Hospitals, a member of Catholic Healthcare West. The St. Rose System was adding its third hospital and was expanding its surgical programs when Walters joined the organization in 2006, he recalls. "We were concerned that our TJR implant costs were above average and rising, and we wanted to draw the line. We knew it would be difficult to make changes, and we anticipated there could be significant push-back from our surgeons, as this was the first time St. Rose had taken such a stance. But really, we had no choice-we had to control our implant costs.

"Our local and corporate materials management coordinated with the senior management teams to develop a pricing program that we presented to the surgeons," says Walters. "It was critical to our success that the three hospital presidents lead the process, that we align with the surgeons, that the surgeons understand the hospital's costs, and that the surgeons support our efforts in working with vendors to reduce costs. As a result, we've achieved a 35 to 40 percent overall savings on our TJR implant costs annually with our TJR pricing program."

Walters concludes: "If I were to offer advice to other CFOs, I would just say to plan your approach very carefully, as you'll only have one chance to get this right. In addition, you'll need to hardwire your systems to ensure that the prices you negotiate are the ones you're actually paying at the end of the day. Constant vigilance is required to keep things on track."


Closing Thoughts

New technology can be dazzling, but new marketing of renamed and/or unneeded items is all too often a cynical ploy used by some manufacturers. For this reason, CFOs should play a key role in helping their organizations to distinguish between genuinely necessary new and mere smoke-and-mirrors. Choosing wisely among such products is essential to ensure that costs are contained and waste or unnecessary expense is avoided.

The CFO can gain the necessary level of control in such decisions by taking action, identifying and supporting a trusted clinical liaison, developing and nurturing an effective MUE committee, and ensuring that the entire organization knows how the finance office values and supports the highest quality care possible, while maintaining management of margins and outcomes. This is a proven formula for success that is working in excellent healthcare facilities nationwide. It can work for yours, as well.

Girard F. Senn, RN, MS, CNAA, is managing principal and executive
director, Clinical Benchmarking, LLC, Glen Ellyn, Ill. (


TJR Custom Pin Guides: A Closer Look at the Controversy

Custom pin guides for total joint replacement (TJR) are controversial technologies because they are widely regarded as being simply a TJR marketing strategy that is being touted as a technical innovation. Hospital CFOs should be aware of the elements of such controversies because, at the very least, this awareness contributes to informed decisions, and at best, it can give the CFO a sound basis for preventing questionable technologies from being adopted.

Consider, for example, the cases both for and against custom pin guides. This technology has been targeted to low-volume TJR surgeons nationwide. Costing about $1,500, it is a piece of plastic molded from images or scans of the patient. A computer designates on the plastic where pins should be placed that will hold the cutting blocks for those surgeons who are less proficient in performing the surgery. It can thus be, perhaps appropriately, characterized as a "crutch" for surgeons who perform TJR infrequently. Some vendors have promoted custom pin guides as an alternative to computerized intraoperative

One of the greatest objections to the custom pin product is that
it is entirely unnecessary. This argument points to the fact that instruments, including guides for pin placement (jigs), are already provided as part of every TJR implant set, and at no extra charge. Moreover, some critics suggest that what is billed as "new technology" is neither new nor technological at all, but rather a clever, even cynical (according to some), marketing strategy used by medical device manufacturers to move product. In the words of one critic: "They market as 'new' a metal alloy widget that is actually no more effective than the previous widget of titanium. And-insult to injury-they'll charge more for the 'new' thing, though it does not actually cost more to manufacture. That is the definition of cynical in my book."

Other critics note that hospitals gain no added revenue through such pin guides, but are certain to lose one way or another through hidden but substantial costs associated with its use. Along with the $1,500 cost per case, for example, the hospital also bears the loss of patient revenue from magnetic resonance imaging (MRI) procedures that the surgeon, instead, orders from his or her own imaging center. And even if the hospital does handle the MRIs, many hospitals are reporting that the cost is not being reimbursed, noting that, despite vendor assurances, these MRI claims have been denied as being an inappropriate diagnostic imaging modality for TJR.

Other recent developments in TJR surgery that are used routinely in many hospitals have also been widely criticized as being more trendy than technological. Here are a few of the recently marketed trends for TJR surgeries that CFOs should be aware of, and their typical cost per case:

  • Antibiotic cement-costing about $800-$850 per case-is being used in all TJR cases. In contrast, two doses of standard cement cost about $120.
  • Blood transfusions/donations typically cost between $250 and $500 per case. The gold standard for TJR is bloodless surgery, requiring no transfusions at all.
  • Continuous passive motion (CPM) device rental costs $50 per case per day. The gold standard for TJR does not require CPM in every case. Some hospital sites have opted to have their TJR patients use rocking chairs to achieve the same outcome.
  • Cell savers and reinfusion drains, requiring blood donation and storage, cost between $250 and $750 per case. But because bloodless TJR surgery is the gold standard, this is an unnecessary expense in most cases.
  • Navigation systems, involving capital expenditures of $500,000 or more by a hospital, also add a cost of $500 per case. Yet these systems could be deemed unnecessary, because the same information is provided by the TJR implant device set.
  • Robotics, requiring capital expenditures by the hospital of $750,000, also cost an additional $750 per case. The argument against these systems is that they provide no additional information beyond what the TJR implant device already offers.
  • Orthobiologics is an emerging TJR trend product (costing $400-$1,000 per case) that uses ground bone matrix in cement to fill voids. The standard cement, as previously noted, costs $120 for two doses.

Numerous other examples could be cited. Moreover, a hospital's orthopedic surgeons are constantly inundated with sales pitches for these types of items, with compelling arguments that they are vital to achieving high-quality patient outcomes.

CFOs should be aware of all such arguments, both pro and con, as they objectively consider whether to support or reject a request for a technology.

Publication Date: Monday, March 01, 2010

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