Introduction
Rising health care costs are threatening the long-term sustainability of the U.S. health care system. Costs continue to rise at a rate that significantly outpaces inflation. As a result, the percentage of the U.S. gross domestic product spent on health care has increased from 5% in 1965 to 18.1% in December of 2011. Furthermore, there is little evidence that higher health care spending in the United States correlates with better health outcomes when compared with other developed countries.
Health care costs are also becoming more closely scrutinized by health care payers, purchasers, and health policy makers as a result of the negative impacts they are having on society. Health care is becoming more expensive and less available to the average American. U.S. businesses are at a competitive disadvantage worldwide as a result of the increased cost associated with providing health care benefits to their employees. With Medicare being the largest single payer and recent health care reform legislation placing government further into the business of paying for health care, the need to control health care costs is greater today than at any time in the past.
As one of the most common surgical procedures performed in the United States, total joint arthroplasty (TJA) of the hip or knee is a major contributor to the rising cost of health care. Medicare data indicate that more total Medicare dollars are spent on lower extremity TJA than on any other procedure. As a result, surgeons, payers, patients, and policymakers have all shown increasing interest in managing economic issues related to TJA surgery. Furthermore, osteoarthritis of the hip and knee is a major contributor to disability and economic loss in U.S. society, with some estimates putting the cost at more than $80 billion per year.
The number of TJA procedures has continued to rise over the past decade. This trend is likely to continue because of the aging of the population and advances in technology and surgical technique. Basic science and clinical research have driven an upsurge of new implants and other technologies in TJA. However, technological advances have outpaced the ability to pay for them, calling into question their true value to society. Given the impressive success rates and outstanding clinical outcomes of hip and knee replacement surgery, new implants must deliver a marked improvement to justify the added cost.
The cost of performing a total hip arthroplasty (THA) or total knee arthroplasty (TKA) has continued to rise sharply over the past 2 decades. In 1999, the average hospitalization charges for TKA and THA were $22,000 and $23,000, respectively. By 2003, the average charges had increased to $31,000 and $35,000 dollars, respectively. However, provider reimbursement has not kept pace with rising costs. Physician reimbursement steadily declined over the same time period, with an absolute reduction of almost 40%. After accounting for inflation, physician reimbursement per procedure experienced an inflation-adjusted drop of greater than 70%. Hospital reimbursement for TJA procedures has remained relatively flat despite a substantial increase in costs, making the economics of TJA more challenging for many hospitals. Although many hospitals are able to achieve a positive margin for primary THA and TKA, particularly for commercially insured patients, most hospitals lose money on revision hip and knee arthroplasties and barely break even on TJA procedures in the Medicare population.
Costs of Total Joint Arthroplasty
Although the increasing cost of TJA procedures has been well documented, the drivers of increasing cost have not been well characterized. Numerous studies have evaluated the factors that contribute to the cost of a joint replacement. Commonly cited major contributors are operating room costs (including implant costs), nursing costs, and pharmacy costs.
Myers and colleagues quantified the costs of primary TJA by cost center using hospital-based accounting data. They found that implant, anesthesia/operating room, and nursing/hospital room costs accounted for 76% of the inpatient cost of TJA. They also found that implants accounted for 34% of expenses. Given the main drivers of cost, it is not surprising that they also found that length of stay was the variable most strongly correlated with total cost.
Although it makes sense that length of stay would correlate with overall cost, Healy and associates determined that most of the cost of a TJA is incurred during the first 48 hours after admission. They found that 80% of the total cost of a joint replacement comes from the operating room, nursing units, recovery room, and pharmacy in the first 2 days, despite an average length of stay of 4 days. These findings can be reconciled with Myers’ conclusion that length of stay is most strongly correlated with total cost by recognizing that the costs during the first 48 hours are relatively uniform among all patients. Although later hospital days may not account for as much of the total cost, the number of inpatient hospital days is variable and therefore accounts for some of the difference in total cost across procedures.
Boardman and colleagues provided evidence of rising hospital costs associated with TJA in their study comparing hospital costs, hospital charges, and reimbursement for THA at University of California, Los Angeles (UCLA) Medical Center between 1988 and 1993. They reported a 36% reduction in hospital length of stay over that period but no significant reduction in total hospital charges. This finding indicates that hospitals are charging more while providing fewer services. In addition, these authors found that there was a 27% drop in inflation-adjusted hospital reimbursement over this time period. Even more telling was the finding that hospital gross profit margins for TJA procedures declined from 66% in 1983 to 8% in 1993. Hospital length of stay is decreasing, and hospitals are providing fewer interventions, medications, and services, yet profits are still dramatically declining.
Costs of Revision Total Joint Arthroplasty
The number of THA and TKA procedures performed in the United States is expected to continue to rise in the foreseeable future. Despite the excellent long-term survival of patients undergoing primary hip and knee replacements, the increase in primary procedures will certainly be accompanied by an increase in the number of revision procedures performed. The American Academy of Orthopaedic Surgeons (AAOS) projects that the number of revision procedures will continue to increase over the next several decades.
The economics of revision TJA are different from those of primary hip and knee arthroplasty. There is disproportionate resource use between primary and revision procedures. Many studies have concluded that revisions require more resources, increased surgeon time and effort, longer hospital stay, longer operative time, and higher complication rates, all of which contribute to increased cost.
Barrack evaluated the hospital charges and reimbursement associated with primary and revision THAs. He found that revision surgery was associated with a 20% longer hospital stay, 51% longer operative time, 64% more blood loss, and a 400% increase in the complication rate. He also reported that the cost of a revision procedure was significantly greater than that of a primary THA. More importantly, he found that hospital charges for a revision THA dramatically exceeded reimbursement. This finding indicates that hospitals in his study were losing considerable amounts of money on revision procedures.
Further studies have supported these findings. Iorio and co-workers compared costs and reimbursement for primary and revision THA using hospital cost-accounting data. They found that revision THA was associated with longer operative time, longer hospital stay, and increased costs. They found an average hospital profit of 22% for primary procedures but an average 3% loss for revision procedures. They further concluded that primary THA was profitable for all payers except Medicaid, whereas revision procedures were not profitable for any payer unless the patient had a private indemnity plan. For hospitals, there is a clear disincentive to participate in the care of patients requiring revision TJA.
Surgeons also face financial disincentives to perform revision THA and TKA surgeries. Lavernia and colleagues used hospital length of stay and operative time to compare surgeon work effort between primary and revision procedures. They found 50% longer hospital length of stay, 40% longer operative time, and 58% higher total charges with revision surgery. However, differences in reimbursement between primary and revision procedures were not commensurate with the additional workload. Ritter and associates further looked at this issue and reported a 77% increase in operative time for a revision TJA compared with a primary procedure. However, the difference in professional reimbursement for revision procedures was only 30.8%.
A major limitation of the hospital payment system for TJA before 2005 was that all such procedures (primary or revision) were paid under a single Diagnosis Related Group (DRG) category, regardless of case complexity, patient comorbidities, or resource use. Many investigators have pointed out that revision TJA procedures are associated with higher resource use than primary TJA procedures. In 2005, based in part on work by Bozic and associates demonstrating substantially higher resource use associated with revision TJA procedures, a new DRG was created for revision TJA procedures. Since that time, additional DRG categories, known as Medicare Severity-Diagnosis Related Groups (MS-DRGs), have been developed that recognize and account for differences in resource use based on patient comorbidities and complications.
Low reimbursement for revision TJA is particularly problematic for academic medical centers, which perform a disproportionate number of these procedures. Many community hospitals lack the resources and expertise to manage patients with multiple medical comorbidities who require complex revision surgery. Furthermore, even if they have the expertise, strong financial disincentives exist for hospitals and surgeons to take on these challenging and resource-intensive surgeries. For all of these reasons, the burden of providing care for revision TJA patients often falls to academic medical centers.
At the same time as academic centers are performing more revision surgeries, they are also coming under increasing financial pressure. Teaching hospitals in the United States enjoyed a 6% operating margin in the mid-1990s, but by the third quarter of 2010, the margin had dropped to approximately 3.5%. This drop in profitability has led several academic medical centers to sell their teaching hospitals to for-profit companies and has forced others to dramatically reduce their workforce. These changes could ultimately lead to a reduction in the quality of care provided to patients undergoing revision TJA.
Implant Cost
Another important consideration in the economics of TJA and health care reform is the cost of implants. Implant costs have continued to rise at a rate that outpaces cost increases in other aspects of TJA. Barber and Healy found that from 1981 to 1990, implant costs rose from 11% of the total cost of TJA procedures to 24%. Other authors have reported that the cost of implants increased 156% between 1991 and 2005 and that joint implants could account for 50% or more of a Medicare hospital payment for TJA. This is particularly problematic given that Medicare reimbursement during this time period increased by only 19%.
Over the past few decades, there have been numerous joint implant innovations, including new designs, new materials, improvements in fixation, and new bearing surfaces such as highly cross-linked polyethylene, ceramic, metal-on-metal, and diamond surfaces. Most, if not all, of these innovations are associated with increased cost. And although many of these innovations have improved the value of TJA, others have been associated with adverse patient outcomes. One difficulty in implant cost is that the incentives related to implant selection and cost are not aligned for hospitals and surgeons. From a hospital perspective, it is important to control implant costs: As surgeons spend more money on implants, hospital profits decrease. In contrast, the surgeon’s primary concern is to provide the best possible outcome, so their objective is to select the best implant to achieve that outcome, regardless of cost.
The problem is that it is not clear which implants provide the best outcome for patients, and it is even more unclear which implants provide the best value for patients. The result of this lack of evidence is that hospitals are spending drastically different amounts of money on implants. In 2008, Bozic and colleagues studied patients undergoing unilateral THA or TKA at 61 different hospitals. They found that the average implant cost per case ranged from $3,380 to $10,744 for TKA and from $3,828 to $10,640 for THA.
Many methods are being used to control implant costs, such as surgeon and hospital education through cost-awareness programs, negotiated vendor discounts, price caps and ceilings (as determined by hospital administration), and implant standardization programs. One method studied at the Lahey Clinic, termed the Single-Price/Case-Price Implant Purchasing Program, was able to reduce the cost of hip implants by 31.8% and that of knee implants by 23%. Implant cost is a critical issue for the health care marketplace and will undoubtedly be an important aspect of TJA targeted in health care reform.
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