Guest Column | August 14, 2017

Do OR Disposables Have A Future In Value-Based Healthcare?

Peter Nichol, MedAware Systems, Inc

By Peter Nichol, MedAware Systems, Inc. 

Approximately 18 months ago, I was asked to serve as the surgical director for Operating Room (OR) services at the University of Wisconsin’s American Family 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. If they fail to function optimally, the boat stops moving, and it is batted about by waves of 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 OR dependency is, when a budget crunch hits, expenses in the OR are scrutinized and hard questions are asked about costs.

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, those bills represent 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 consumers or their insurance companies pay, though. For example, a hospital pays $444 for an instrument known as a harmonic scalpel, but the patient or 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 420,000 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 $600 Million per year for the hospital and close to $1.47 Billion per year for patients/insurers.

And this is the tip of the iceberg - many other operations are 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 counter argument 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 control and utilize them. Most hospital ORs are inefficient and fail to reach a standard operating capacity of 70 percent for this argument to apply. Even if the OR does reach 70-percent capacity, turnover times between cases, on-time starts, and further tuning of efficiency processes (which require no expenditures) should be undertaken before spending money on disposables to improve efficiencies.

The second argument against nixing surgical disposables is that no data exists 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 (EU) already is out in front on this issue. Medical device products undergo a rigorous certification process, followed by re-certification every three 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 certification as rigorous as that in the E.U. This likely is a result of the fear of big government interference with business – a sense exacerbated by the current deregulatory climate in U.S. politics.

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. 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. Otherwise, hospitals may not buy it.

So… is there a solution for all of this?

In fact, there is, but it requires some shifts in how medtech — and, for that matter, biotech and pharma — companies think about this problem.

That shift in thinking has to be one toward product data, and away from pure marketing. To be fair, pure marketing has worked for these companies for a long time, in large part because of the relationships that were developed with the primary users/prescribers: physicians.

As healthcare re-organizes, health systems are determining what gets purchased based on value to their systems. In other words, does it improve outcomes, thereby reducing costs? Thus, pure marketing and personal relationships give way to value-based decision-making.

This, of course, puts life sciences companies in a difficult situation because, with the exception of paying a CRO to run a randomized controlled trial, many companies are not outfitted to gather reams of information on the efficacy of devices or products already on the market.

As one global chief medical officer recently told me, “if I have a product that has no data to support that it has a benefit, I do not want to spend $20 million on a randomized controlled trial for a product that has only a $2 million global market.”

Another option for these companies is to pay a data analytics firm to assemble all published literature on their products, and then develop active databases that the companies can access at any time. This solution also provides external validation of the efficacy of said products, demonstrating the extent to which the results of a randomized controlled trial could be generalized to other situations and to other populations.

To be sure, I am not saying you eliminate marketing. What I am saying is that, if marketing is infused with high quality, reproducible data that demonstrates a benefit, it can then be linked to a cost or value. And this is precisely what hospitals and healthcare systems will demand before making a purchase.

About The Author

Peter F. Nichol M.D., Ph.D. is a Pediatric Surgeon with a focus on minimally invasive intestinal surgery. He serves as Surgical Director of both Operating Room Services and of Statewide Outreach at the American Family Children’s Hospital at the University of Wisconsin in Madison.  He is the Founder and Director of the Cars Curing Kids Foundation and has held multiple federal research Grants. He blogs on numerous healthcare issues including Big Data, A.I. in healthcare, and healthcare access. He can be reached at