In the setting of fixed payments for certain conditions and procedures with alternative payment models, hospital organizations have shifted from analyzing revenue metrics to scrutinizing cost of care for organizational decision-making. However, substantial variability exists in the cost of care for even the most basic orthopaedic diagnoses such as osteoarthritis. A deeper dive into the methods by which costs of care, or cost accounting, are determined is therefore critical in understanding the drivers of cost with the goal of lowering the denominator in the value equation. It is important to explore both legacy and novel cost accounting methods and discuss their merits in the shift toward clarifying cost in value-based orthopaedic surgery.

The cost of health care in the United States is expected to reach 20% of the gross domestic product by 2025.¹ Therefore, it is important to understand the best methods for cost accounting. There are two commonly used traditional methods of cost accounting in health care: the ratio of costs to charges (RCC) and the relative value unit (RVU).² Both of these approaches are considered top-down accounting methods because they attempt to derive the cost of care from revenue, which maintains
a somewhat predictable but inexact relationship with cost.³ These methods have been widely adopted because of their relative simplicity and ease of use.

The RCC is the ratio of the cost for a single service to the charge of that service, as determined by the payer. Conversely, if the RCC is known using historical data, the cost of a given procedure can be estimated using the product of the RCC and the charge of a given procedure. Using an RCC multiplier derived from the cost of all procedures in a given period divided by the charges in the same period and applying it to a future procedure can be interpreted as a rough estimate at best.⁴ Certainly, this approach is limited by numerous case-specific variables. Moreover, the cost of different support staff throughout the continuum of care is absent from the equation. This results in a highly inaccurate true cost of care.

The RVU method estimates the physician’s cost of service based on the value of the RVU and number of RVUs for that service.⁵ The RVU has become a national standard of measurement for clinical productivity commonly used for physician evaluation and reimbursement for these services.²,⁶,⁷ The Centers for Medicare & Medicaid Services (CMS) is responsible for updating and revising the RVUs assigned within the medical field at least every 5 years.⁷ The current method for cost accounting utilizes determination of payment under the CMS resourcebased relative value scale, and the Current Procedural Terminology (CPT®) and International Classification of Diseases (ICD) codes.⁶ A simple equation is calculated to generate the compensation using the total RVU multiplied by the conversion factor listed by the CMS. With corresponding assignments to respective ICD and CPT® codes, RVUs allow for a quantitative comparison of productivity between different physicians among the services they provide. Universal understanding and straightforward compensation analytics are one of the largest benefits of RVU accounting.

However, arriving at cost from revenue remains nebulous, making it difficult for surgeons and hospital administrator to optimize spending and reduce overhead costs.⁵ Within orthopaedic surgery, high variability in reimbursement has been noted based on insurance providers. Lalezari et al⁸ reported in 2018 that variability of Medicaid reimbursement among the states was substantial for the 10 most commonly performed inpatient orthopaedic procedures. Casper et al⁹ found the most interstate variation was noted for anterior cruciate ligament (ACL) reconstruction, ranging from 20.6% to 229% of local Medicare reimbursement. On average, Medicaid insurance reimburses at a rate of 81.9% of Medicare reimbursement.⁹ Lack of consistency not only affects physician reimbursement, but also decreases access to optimal care when comparing Medicaid to Medicare alone.⁹ In the case of total hip arthroplasty and total knee arthroplasty (TKA), primary cases are valued over complex revision cases. Using the RVU system, surgeons are reimbursed at a substantially higher rate per minute for primary TKA compared to revision TKA, resulting in a reimbursement difference approaching $140,000 per year.¹⁰ Using this methodology of RVU accounting, surgeons are incentivized to select the easier primary cases and avoid the complex revision cases.¹¹ Moreover, the RVU cost accounting methodology may imply primary cases therefore carry
more procedural cost, highlighting the misalignment between this form of legacy cost accounting and arriving at the true cost of care. Moreover, this form of cost accounting wholly fails to take into account the cost of support staff and surgical materials, from instrumentation to implants.