Feb 23, 2022 8:42:01 AM | 12 Min Read

Is It Time to Reconsider Capitated Constructs To Address Runaway Implant Costs?

Posted By
Tim Anderson
Is It Time to Reconsider Capitated Constructs To Address Runaway Implant Costs?

When procedural capitated cost models were first introduced as a strategy to reduce the expense for total hip and knee arthroplasty cases, the strategy proved to have its merits. Matrices, categories, and price points were developed based on levels of technology and cost with the end goal of setting a fixed price that suppliers would meet for the most common procedures. These constructs were viewed as a simple way to establish a fixed price while allowing surgeons the preference to use the best implant for the patient. 

However, in practice, the promise of this strategy often went unrealized as the complexities of physician preference and the work of crafty implant vendor representatives who would find ways to “break the cap” significantly eroded savings and made the management of capitated (or cap) constructs unwieldy.

Adding to this complexity were operational challenges of maintaining cap constructs within EMR and ERP systems that were designed to manage implant costs at the line-item level. This often required charge nurses to "disassemble” caps so that items can be charged for at the line item in the EMR while buyers needed to the same to process purchase orders. With all these complexities, the return to a line-item pricing strategy seemed like a better contracting approach at renewal time. 

Cost reduction, spend management and other cost containment strategies for hospital supply and beleaguered budgets emerging from the pandemic have brought a renewed focus to this area. It may be time to re-evaluate the efficacy of procedural cap pricing for certain types of implant surgery. That includes fully understanding any shortcomings in the effective management of the approach, lessons learned, their original intended value, and how the technological advancements since their original introduction can be brought to bear.

What Capitated Constructs Were Meant to Solve 

Surgical costs where implants were used were exponentially increasing. Clinical variability, sometimes at the expense of cost, was prevalent. Supplier reps forged strong bonds with surgeons and promoted their newest products, many times at a higher cost. The result of this, as many recognized, was higher costs with a lack of control over product introduction and the use of items which were not contracted. 

One approach to control costs and product introductions was to apply a maximum supply cost per procedure and acceptable product adoption guidelines for the most common implant-related surgeries. 

The approach is logical: the hospital will pay a fixed amount for a total knee procedure to control costs, but will allow the surgeon to use any combination of clinically appropriate implants and supplies to achieve the best patient outcome. Components like drill bits and temporary fixation pins would no longer be billed on a line-item basis as they were now covered under the cap and considered necessary and appropriate.

Why Capitated Constructs in PPI Failed (And Why You Were Right to Revert) 

There is a high probability that if you are reading this, you may have tried capitated constructs and eventually decided that they were not worth the trouble. Many hospitals reverted to the old way of doing things once they realized the trade-off in cost savings did not outweigh the operational headaches of managing the approach properly.

The implant vendor representatives easily found ways to make the administration of cap constructs untenable for the average hospital. Surgeries using revision and premium components became more prevalent and, not coincidentally, more expensive. New items were introduced into the operating room at greater frequency, and "Cap-plus” as a pricing scheme became the new normal. In other words, suppliers had a playbook filled with ways to “break the cap” and offset cost controls and their declining margins so that they could meet their sales targets. Many hospitals and health systems found the approach impossible to administer. 

Hospital buyers were placed in an unwinnable position. The implant category, products, and procedures are nuanced and complex, making the surgeon and the vendor representative the only two people with a true grasp on their intricacies. How could non-clinical buyers be expected to enforce cap compliance, compare each case to contracting details and push back on clinical validity of new items or the incessant use of Cap-plus supply billing? (Hint: they couldn’t!) 

Further, the enterprise technology applications widely implemented were not built to handle a bundle of implants at a fixed price. This had an immediate and negative impact on the process for supplier payment and patient billing.

But was reverting to a line-item pricing approach the best next step? What if capitated pricing was the best pricing control and we just needed purpose-built technology to administer the approach? Most would argue that there was nothing positive that came out of the recent pandemic, and they would be right. The post-Covid era of belt-tightening when it comes to healthcare supply costs has now received focus as an urgent matter spurred by shrinking budgets and reduced topline revenues. Now is the time to leverage all available approaches to cost reduction and to create lasting spend management. 

How Kermit Ensures Cap Constructs Produce Their Intended Results 

Like speed limits, cap constructs require a degree of enforcement to ensure compliance. However, the problem is that the highway patrol is being asked to write speeding tickets without a radar gun. 

Kermit’s software is that radar gun, a technology solution that is purpose-built to identify and correct pricing issues and billing non-compliance instantly. The success of your program is no longer dependent on your staff to enforce subtle and sometimes unwritten rules for capitated and line-item pricing or the myriad, nuanced permutations that come with these surgeries. Software is black or white and rule-based and the Kermit application is no exception. It effectively draws the line, flags violators, and enforces capitated structures to truly keep your implant spend from speeding away from you.

Through digitization, critical procedure and device data are no longer locked within the supplier’s paper bill sheet. This opens the door for technology to automate what was once a manual effort and create data visualizations and reports from previously unstructured, hand-written paper bills. Digitizing bill sheets and programming your cap constructs allows each case to be automatically compared via Kermit’s extensive library of clinical and pricing business rules. 

Kermit is designed to manage a variety of different cap constructs, as well as kit and line-item pricing, and unleashes the spend management potential of this contracting approach without the complexities. For example: 

  • Clinical Experts Are Not Required: The Kermit software knows when a cap should be applied and monitors for the ways a vendor rep tries to break the cap.
  • Off-Contract Items and Revision Components are Flagged: Kermit keeps the caps clean and precisely executes the terms and conditions of your supplier agreements for items outside of the cap, use of off-contract items and revision components in primary surgery. These issues are raised and corrected by the application and also reviewed by an implant and bill-only expert on the Kermit team. Our team reaches out directly to your vendors to resolve compliance issues.
  • Common Line-Item and Cap-Plus Procedures are Reassembled into Caps: Kermit monitors cost and utilization trends to identify exploits and new areas where caps can be applied.
  • Charge Entry Made Easy: Kermit can automatically allocate the total cap construct costs across individual line items to support line-time charge entry in your EMR useful for streamlined patient billing.
  • And We Know How to Fix the “Un-Bill” Issues with EHRs: If someone from Cerner or Epic is reading this, call us! 

The use of Kermit’s technology to manage cap constructs has birthed creative contracting methods. Not only can Kermit manage cap pricing for orthopedic reconstruction surgery, but enterprising supply chain teams are using the tool to negotiate leveraged supplier agreements using cap constructs in other high-cost categories such as spine, trauma, and sports medicine. Kermit has been programmed to understand and administer the management of implant supplier bills in nearly two dozen categories.

Learn How Kermit Can Implement and Enforce Caps at Your Hospital 

After successfully processing over 120,000 vendor bill sheets for implantable surgical encounters, Kermit has mastered the art of enforcing capitated constructs and other contracting approaches such as complex product rebate models and the use of price controls for off-contract and wasted items.

Complete the form below to learn how Kermit can help your hospital take control of your implant spending and realize the savings promised by capitated constructs.


Topics: PPI Spend Management, Bill-Only Process, Vendor Management