This article is more than 5 years old. Information may no longer be current.
Hospital profitability on the decline for joint replacement service lines
An aging population and changing reimbursements may threaten access and standards of care.
Click Here to Manage Email Alerts
|
![Kevin J. Bozic, MD, MBA [photo]](/~/media/images/news/print/orthopedics-today/2006/11_november/bozic_70_90_19148.jpg)
Total joint replacement is one of the most widely performed and clinically successful operations in orthopedics. Recent statistics indicate that over 400,000 hip replacements and 500,000 knee replacements were performed in the United States in 2005.
Furthermore, in light of expanding indications, the expected doubling of the Medicare population in the coming decades and an increase in direct-to-consumer marketing related to orthopedic devices and procedures, total joint replacement (TJR) volumes are expected to rise exponentially over the next several decades. In 2006, the size of the U. S. hip and knee reconstruction market is expected to exceed $5.1 billion.
Advances in implant technologies over the last 4 decades have contributed to improved patient outcomes, prolonged implant survivorship and made it possible for younger, more active patients to benefit from TJR procedures.
However, with increasing concerns over rising health care costs, the feasibility of providing these services in an environment of increasing implant and procedure costs is the subject of recent debate among health policy makers. Parties directly involved in the delivery and financing of health care, including the government, health plans, hospitals, and orthopedic surgeons are examining ways to address these problems in a rational, ethical, and fiscally responsible manner.
Implant costs
Implant costs account for as much as 50% of the total cost of joint replacement procedures, and as a result, the cost of orthopedic implants have been increasingly scrutinized by hospitals and payers in recent years. But when considering the costs associated with orthopedic implants, it is important to recognize the difference between list price and average selling price.
|
The list price is analogous to the charges that physicians bill for their professional services. Most payers reimburse physicians for professional services based on a negotiated fee schedule, independent of billed charges. Similarly, most hospitals pay for implants based on a negotiated discount off of list price. Average selling prices (ASPs) of orthopedic implants are primarily influenced by three factors: (1) list price; (2) case mix; and (3) hospital purchasing power. List price is a fairly straightforward concept, and tends to increase each year based on medical inflation.
Case mix refers to new technologies (eg. alternative bearing surfaces, hip resurfacing, trabecular metal), which are often priced substantially higher than the previous generation. In addition to the higher list price associated with most new implant technologies, many vendors do not offer the same (or any) discount on new technologies, resulting in a substantially higher ASP compared with the previous generation of implant.
Hospital purchasing power is related to many factors, including relationships between the hospital and the implant vendor, volumes, and surgeon relationships with both the hospital and the implant vendor, among other factors. List price, case mix, and hospital purchasing power all impact per implant case.
Variability in implant costs
The lack of transparency and wide variability in implant costs across institutions has become the subject of recent debate in the lay press. Some vendors are willing to provide considerable discounts for guarantees of higher volume or market share, as is the case with the delivery of other healthcare services.
Smaller hospitals with lower procedure volumes tend to be at a relative disadvantage when it comes to negotiating implant prices.
However, recent research suggests that only a small percentage (less than 20%) of the differences in hospital acquisition costs for orthopedic implants can be explained by differences in procedure volumes.
The number of vendors that supply implants to a particular hospital along with vendor relationships with hospitals and key surgeon thought leaders, appear to play a more substantial role than procedure volume in determining implant costs.
Most implant contracts also include a confidentiality clause, which prohibits hospitals from publicly or privately disclosing the terms. Recently, these confidentiality agreements have been challenged in the court system.
Hospital profitability
Hospital reimbursement for inpatient surgical procedures is most commonly based on one of three payment methods: (1) a case rate; (2) a per diem (or daily) rate (with or without a “pass-through” payment for implants); or (3) a percentage of billed charges. The most common method of hospital reimbursement for TJR is a case rate, based on a diagnosis related group (DRG). DRG payments were originally developed by health economists in the 1970’s under the auspices of Medicare as a method to match hospital reimbursement to resource utilization for patient groups with similar clinical characteristics and resource intensity. By establishing reimbursement prospectively based on a case rate rather than billed charges during a particular hospital stay, the objective of the DRG system is to give incentives for hospitals and physicians to maximize the efficient use of health care resources and reduce costs, while maintaining high quality standards and adequate access. However, because DRG payments are determined by retrospective charge data provided by hospitals, the increasing costs for inpatient services over the past several decades has resulted in a disproportionate share of the total health care budget being directed towards hospital services, which has raised concerns among health policy makers.
At present hospital care comprises the largest share (31%) of U.S. health care expenditures.
Historically, inpatient orthopedic surgical procedures such as TJR have produced attractive profit margins for hospitals. However, over the past decade, hospital margins associated with orthopedic procedures have eroded substantially, primarily due to unfavorable changes in case mix, payer mix, and implant prices. Hospital profitability associated with TJR procedures is primarily influenced by three factors: (1) case mix (e.g., the ratio of primary to revision procedures); (2) payer mix; and (3) implant costs.
In general, hospitals that do less than 9% revision cases, that have a payer mix of more than 50% non-government (eg, Medicare and Medicaid) payers, and that pay lower average prices for implants are more likely to have profitable TJR service lines. The average profitability for Medicare TJR cases is zero for most hospitals, while the profitability associated with commercial payers has remained high.
Medicare reimbursement
The Federal Government, through the Medicare program, is the largest single payer for TJR procedures, covering over 60% of all patients who undergo TJR procedures each year in the United States.
Hospital reimbursement for TJR is based on a single case rate, which is determined by geographic location, hospital teaching status, length of stay (LOS) and discharge disposition. If a patient is discharged on or after the geometric mean LOS, which for TJR was 4.3 days in fiscal year 2005, the hospital receives the full DRG reimbursement, regardless of the discharge disposition of the patient.
However, if the patient is discharged prior to the geometric mean LOS, reimbursement is adjusted based on discharge disposition. If the patient is discharged home with no post-discharge services (eg, visiting nurse, physical therapy, or home health aide), the hospital receives the full DRG reimbursement. However, if the patient is discharged home prior to the geometric mean LOS with any post-discharge services, the hospital reimbursement is reduced and converted to a per diem payment.
Medicare recently split DRG 209, major lower extremity joint replacement procedures, into two separate DRG’s: DRG 544 (primary TJR) and DRG 545 (revision TJR). This split recognizes differences in clinical characteristics and resource intensity between primary and revision TJR procedures and minimizes financial disincentives for hospitals and surgeons to provide revision TJR services.
Taken together, DRGs 544 and 545 make up the largest dollar volume DRG’s within the Medicare program.
The combination of steadily rising implant costs and projections of increasing primary and revision TJR procedure volumes over the next several decades has created a heightened level of concern regarding the costs associated with TJR procedures among government and private payers.
Based on recommendations from the Medicare Payment Advisory Commission, Medicare is currently exploring modifications to the DRG payment system in order to better align costs and payments, thus addressing problems with systemic inequality and inefficiencies.
Under the new system called consolidated severity adjusted DRG’s (CSA-DRGs), additional importance/weight will be placed on the “three major resource drivers” of inpatient care: patient severity, treatment complexity and complications.
Specifically, the CSA-DRG system will narrow the profit margins for uncomplicated joint replacements to disincentivize hospitals to “cherry-pick” healthy patients with less complicated orthopedic disorders, will split hip and knee patients into separate DRGs, and will decrease the financial burden on institutions that are referred more complex patients.
|
Furthermore, the implementation of cost based weights (CBW) and hospital specific relative values (HSRVs) are intended to adjust for the issue of bias towards undervaluing non-surgical care as well as teaching hospitals that care for the underserved.
If the CSA-DRG’s are implemented as proposed by CMS in FY 2008, it could have a detrimental impact on reimbursement for orthopedic procedures. Policy experts estimate that the use of CBW’s and HSRV’s would lead to a decrease of 6% - 8% in hospital reimbursement for resource intensive surgical procedures.
Additionally, the CSA-DRG’s as proposed would no longer recognize revision TJR procedures as a separate DRG, which could effect the number of hospitals willing to provide revision TJR services.
Medicare is currently accepting comments and opinions from the public regarding how implementation of the proposed CSA-DRG’s would impact quality and access.
Commercial Payers
Most commercial payers reimburse hospitals on either a case rate (similar to Medicare) or a per diem rate, with or without a “pass-through” payment for implants.
For straight per diem payers, hospitals receive a sliding scale per diem payment for each day of hospitalization. Given that almost 80% of the costs associated with TJR are incurred on the first day of hospitalization, most per diem payments are “front-loaded,” with 50% or more of the total case rate reimbursement assigned on hospital day one. Each subsequent day of hospitalization is assigned a sequentially lower per diem payment.
The total per diem reimbursement is usually equal to the case rate reimbursement if the patient is discharged at the geometric mean LOS.
Each day of hospitalization beyond the geometric mean LOS is assigned a baseline maintenance payment to cover routine hospital costs. Finally, some commercial payers continue to reimburse hospitals based on a percentage of billed charges.
Also, to protect hospitals against catastrophic losses, case rate and per diem payers often have stop loss thresholds, defined based on costs incurred, after which reimbursement shifts from case rate or per diem to discounted billed charges.
Additional challenges
Of note, all of the reimbursement systems currently used to reimburse hospitals for TJR procedures, including case rate, per diem, and percentage of billed charges, result in perverse financial disincentives for hospitals to discharge patients home prior to the geometric mean LOS.
This creates additional financial challenges for hospitals and surgeons who have reduced their LOS associated with minimally invasive TJR procedures and protocols.
In addition to the changes described above, both government and private payers are moving towards a “value-based purchasing” model. In this model, rather than reimbursing hospitals and physicians based on the volume of services rendered, an attempt is made to recognize and reward quality rather than simply quantity in the provision of health care services.
“Pay-for-performance” (P4P) programs are one example of value based purchasing, where providers (both hospitals and physicians) are eligible to receive financial rewards for meeting certain performance targets.
Although tying reimbursement to quality rather than quantity seems intuitive and appropriate in health care, the practical aspects of starting P4P programs, including the expense and complexity of collecting relevant data, risk-adjustment, and patient deselection incentives, have led many health policy experts to question the value P4P programs will have in terms of improving health care quality.
Although TJR service lines have historically been highly profitable for many hospitals, all of the factors we have described above, including unfavorable trends in case mix, payer mix, hospital reimbursement, and implant costs have made it challenging for hospitals and surgeons to sustain profitable TJR service lines while maintaining high standards of clinical care.
Going forward, hospitals, surgeons, and the medical device industry will need to work together with health policy makers to ensure that our patients will continue to have access to these highly successful and life altering procedures.
For more information:
- Bozic KJ, Katz P, Cisternas M, Ono L, Ries MD, Showstack J. Hospital resource utilization for primary and revision total hip arthroplasty. J Bone Joint Surg Am. Mar 2005;87-A(3):570-576.
- Healy W. The economics of total hip arthroplasty. In: Callaghan J, Rosenberg A, Rubash H, eds. The Adult Hip. Vol 2. Philadelphia: Lippincott-Raven Publishers; 1998:845-852.
- Kurtz S, Lau E, Zhao K, et al. The future burden of hip and knee revisions: U.S. projections from 2005 to 2030. Paper presented at: AAOS Annual Meeting, 2006; Chicago, IL.
- Mendenhall S. 2006 Hip and Knee Implant Review. Orthopedic Network News. Vol 17. Birmingham, AL; 2006:1-16.
- Nudell BM. Price transparency is a major threat to orthopaedic device manufacturers. AB Bernstein Research Report, June 27, 2006.
- Porter M, Tesiberg E. Redefining health care: Creating positive-sum competition to deliver value. Boston, MA: Harvard Business School Press; 2006.
- Kevin J. Bozic, MD, MBA is assistant professor in residence at the University of California San Francisco Department of Orthopaedic Surgery and Institute for Health Policy Studies.