A 2018 Navigant report1 found that two-thirds of health systems saw operating income decline between fiscal year (FY) 2015 and FY 2017. Among those hospitals experiencing a decline in operating earnings, the average drop was a staggering 44%. The bottom line problem is hospital expenses grew faster than revenue. Hospital revenue actually decreased, primarily because the Affordable Care Act (ACA) was funded by permanent, significant cuts in the annual Medicare payment rate to hospitals. As long as the ACA remains in effect, hospital revenue will stay down, meaning hospitals must cut expenses.
Health care institutions can’t easily reduce the cost of their physical plant and they can’t decrease salaries without losing their best staff members. That means the hospital supply chain represents the primary opportunity for cost savings. It is, therefore, not surprising that wound care practitioners are under heavy pressure to reduce their annual spending on supplies like dressing products. Because supply cost has been a major issue at my clinic, my Program Director Sherrill White-Wolfe and I have been looking at the factors affecting supply cost and have been surprised at what we found.
About two years ago, in response to the hospital’s demand that we reduce the wound clinic’s annual spend on dressings, we held a “dressing formulary summit.” The truth is that we ordered pizza for lunch and the doctors and nurses sat down with a list of the per item price for all the dressings on our formulary. We started by allowing each doctor and nurse to pick one dressing product they could not live without, and we agreed to keep those products. The next step was to simplify and reassess the formulary. We compared the cost of dressing products within the same category (e.g., two different brands of collagen or two different brands of foam). With almost no exceptions, we agreed to use the cheapest product available in any given category, even if we preferred the costlier product.
The average patient only gets about 20% of their dressing changes in the clinic because many patients have home health services that supply their dressings, or they perform their dressing changes at home using products we order from a durable medical equipment (DME) company. Depending on the payer, we can usually order a specific brand of dressing from the DME. Also, since there are no data to prove that wound healing is impacted by product brand within a specific category, we had no clinical reason not to select the least expensive brand in any category. After we completed this process, I was confident we would see a reduction in annual supply cost. Unfortunately, a year later, it is clear this approach didn’t work.
In FY 2017 we spent approximately $41,000 on dressings and in 2018 approximately $43,000. That represents a 9.5% increase in our annual spending on dressings despite the formulary changes. However, we had 8% more patient visits in 2018, so a $2,000 increase may simply represent the cost associated with the additional patient volume. If so, these numbers suggest that changing the formulary didn’t reduce spending on a per patient basis. To get a clearer picture, we needed to determine the per patient-visit cost of dressings. For a rough estimation, we divided our annual spending on dressings by the total number of patients-visits over that time frame. Using this very simple method, in FY 2017, our dressing cost “per patient per visit” was approximately $10.30 but in 2018 it was down to $9.50. In other words, making substantial changes in the formulary had decreased our dressing cost on a per patient basis by 8%. That was a disappointment.
Since not all patient visits involve a dressing change, the above method might underestimate the actual per patient-visit cost of dressings. To get a slightly more accurate estimation of current dressing cost per visit, we picked a random month, tallied the cost of all the dressings used and divided that by the number of patient visits in which a dressing was required. Using this method, the average cost of dressings per patient visit in 2018 was approximately $13.96. We wondered if perhaps, even though we created a more parsimonious formulary, we were simply using the costlier dressings.
In our current formulary, the “cost per each” of dressings ranges from $0.67 for petroleum gauze to $13.30 for the largest size of a specific silver dressing. Annual product cost in each category ranges from $270 (petroleum gauze) to about $5,500 for the silver dressing. In contrast, we spend approximately $16,500 per year for the compression bandage system we use most often. We realized that over the course of a year, we spent almost exactly the same amount of money on the 3 products we use for compression bandaging as we spent on all wound dressings combined. When the cost of the compression bandage system is removed, the per patient visit cost of wound dressings is only $4.50.
What we learned is that the cost of compression bandages is so high, streamlining our dressing formulary did not impact our annual product spending. It wasn’t the wound dressings that drove supply costs, it was the cost of the compression bandage products. No doubt some of you are thinking, “Wait, the compression system is a separately billable charge!” That is true, but no payer actually pays these charges. It’s important to remember that spending even $13.96 per patient visit on supplies is not a problem if the amount paid by the insurer is enough to cover the cost of providing it. If we were being reimbursed at a higher rate for the visits that involved compression bandaging, these costs might not matter. If that were the case, even though spending on supplies did not go down, clinic revenue at least, might have gone up.
We needed to understand whether we had an imbalance between the cost of supplies used and actual payment received for services. To do that we needed to look at money actually paid and not at charges. This is a complex issue, so we decided to start by looking at the payments made by different payers on 4 patient visits in which similar treatments were provided. I have posted photos of these 4 real-life illustrative cases on my blog (www.carolinefifemd.com), but here’s the overview:
- A man in his 90s with a “venous ulcer” who still drives himself to clinic. He certainly has venous insufficiency, but his nonhealing wound is in an irradiated field and his nutrition is borderline. For a follow-up visit that involved a collagen dressing covered by a compression bandage on one leg only, Medicare paid approximately $100.00. His secondary insurance paid an additional $27.00 (total $127.00). The combined cost of his dressings including the compression wrap system was about $20.00, which is about 15% of the total payment.
- A man in his 50s who is still employed. He has profound venous insufficiency and is status-post several venous ablation procedures. He has a hypercoagulable state and a history of blood clots. A wound dressing and a compression bandage system were applied to one leg. His Cigna “open access,” employer-provided private insurance plan paid $70.00 and his co-pay was $30.00 (total $100). In other words, under the current contract with my hospital system, this private payer reimburses at a rate that is only 70% of Medicare payment. That means that dressing costs represent 20% of his payment.
- A woman in her 70s with venous insufficiency and chronic lymphedema. She is now chair-confined and non-ambulatory following a stroke, and she has a lot of comorbid conditions. She was billed the same level of service as Patients A and B. A wound dressing-compression bandage system were applied to one leg. Her Medicare “Care Improvement Plus” plan paid approximately $220 for the visit and her copay was about $25.00 (total $245.00). Dressing supplies represent only 5% of the amount paid since her private insurance “Medicare” payment is excellent.
- A woman in her 80s with profound lymphedema of both legs. She is obese but malnourished and losing weight rapidly due to the deterioration of her overall health. She has heart failure, progressive dementia, and is now unable to walk. She underwent bilateral compression bandaging of her legs, which took nearly an hour given her size, mental status, and immobility, and which required a second nurse for some parts of her visit. She was billed the highest level of service due to the complexity of care required and she was wrapped bilaterally with a compression bandage system that is more time consuming to apply. Her Aetna Medicare replacement plan paid more than $300 for this visit (she had no copay). Dressing supplies represented about 12% of the total amount paid.
The above analysis established that in our clinic, per patient visit supply cost is driven by the cost of the compression bandaging system and not by the cost of the wound dressings. We also established that supplies can consume as little as 5% or as much as 20% of the actual payment, depending on the payer. In some cases, the contracts entered into by our hospital (and over which we had no control) reimbursed at a lower rate than Medicare. On the other hand, some commercial Medicare replacement plans provide better reimbursement than traditional Medicare.
The obvious way to impact our supply cost immediately would be to use the cheapest compression bandage system. Our favorite compression bandaging system costs 16% more than a less frequently used product on our formulary. However, our favorite compression system can be applied faster than the other choices. Having to perform bilateral compression wraps obviously doubles the supply cost and to the staff it is twice the work. However, payers generally reimburse the additional service at about half the original rate. Unfortunately, at the corporate level, our hospital system arbitrarily decided that when a patient requires bilateral compression bandaging, the second leg increases the staff work by only 0.3. Worse, our hospital corporate office has decided to allocate staffing by simply counting the number of “CPTs” provided in a day, regardless of the work involved in providing the specific service. The corporate underestimation of staff work for compression bandaging is one reason the hospital views our clinic as being “overstaffed,” since about 25% of our patients treated with compression bandaging require the application of bilateral wraps. Given the arbitrary way that our hospital determines staffing rate, we must continue using the more expensive compression system, simply because it can be applied faster. This one product represents 38% of our annual spend on supplies. We could significantly reduce the supply cost by changing products, but it could cost us a staff member.
What did we learn? Due to the high cost of compression bandaging systems, they dominate our supply budget. That is why our effort at reducing the annual spending on wound dressings didn’t make a difference. We could significantly impact supply cost by using a less expensive compression bandaging system and that is tempting to do, but the less expensive compression system takes more time to apply. We are already in jeopardy of losing a nurse staff position due to the percentage of patients who need bilateral bandaging and our hospital systems’ arbitrary staffing model. Since our hospital staffing model does not fairly represent the time it takes to perform bilateral wraps, we can’t afford to save money on supplies if it reduces through-put of patients by even a fraction. Perhaps the most important lesson we learned is that it is not possible to reduce supply costs enough to compensate for badly negotiated private payer contracts. In other words, we don’t have a supply cost problem, we have an infrastructure problem.
1. Goldsmith J, Stacey R, Hunter A. Stiffening headwinds challenge health systems to grow smarter. Navigant. Available at http://images.e-navigant.com/Web/NavigantConsultingInc/%7B7900bba7-87bd-4a9b-9cec-54cf0b6ea9d4%7D_HC_HealthSystemFinancialAnalysis_TL_0818_REV08.pdf . Published September 2018.
*Current Procedural Terminology (CPT) is a medical code set that is used to report medical, surgical, and diagnostic procedures and services to entities such as physicians, health insurance companies and accreditation organizations. CPT is a registered trademark of the American Medical Association.