The growth of such arrangements is one reason hospitals and physicians increasingly are working together to lower the costs of implants and other supplies. That represents a big change from the past, since many physicians and surgeons traditionally have insisted on their own preferences for devices and other supplies without regard to cost. Now they are being pulled into the value equation by their own financial interests.
Hip and knee replacement operations are the most common types of inpatient procedures involved in bundled payment programs, according to a 2012 report from the Health Care Incentives Improvement Institute. They also are two of the most common operations in the U.S., with more than 285,000 total hip replacements and 600,000 total knee replacements performed each year. These two joint replacement procedures are some of the “most tried-and-true areas for bundled payments,” said Rob Lazerow, practice manager for research and insights at the Advisory Board Co.
Medicare's diagnosis-related group method, a fixed payment for certain procedures, including hip and knee replacements, is often described as the first U.S. bundled payment method, although it does not take into account post-acute care or physician services. A year ago, the CMS announced the Bundled Payments for Care Improvement initiative, involving 450 providers and 48 DRGs, including total hip and knee replacements.
Under bundled payment, hospitals and physicians split any surplus, giving them a powerful joint incentive to not only coordinate care and improve quality, but also to manage supply costs to keep overall expenses low.
“If the surgeon and the hospital are using a very expensive device, or if they don't have a competitive cost for that device, they now have a common cause to work together to negotiate a better price,” said Tom Williams, president and CEO of the Integrated Healthcare Association, a not-for-profit that promotes quality improvement and affordability in California. “The only way you achieve that is if you have the willingness to switch devices. The incentive for the surgeons is to get on board with the hospital and do joint purchasing.”
Hip and knee implant devices constitute up to 40% of the total cost of these joint replacement procedures. So it's no surprise that hospitals are aggressively seeking to reduce the amount they pay for the devices.
Hospitals pay an average of $4,320 for a knee implant device, but the cost can vary from $2,100 to $6,600. The average price for a hip implant is about $4,820, though that cost can vary from $1,000 to $8,000, according to the ECRI Institute's PriceGuide advisory service.
“Why does Southwest Airlines focus on fuel costs? Because that's where the money is,” said Dr. Kevin Bozic, vice chair of the orthopedic surgery department at the University of California, San Francisco. “Sure, (hospitals) are looking at all aspects of care. But the single largest expense for the episode is the device, and that's one easy place to start.”
UCSF is participating in the Medicare bundling initiative for primary hip and knee replacements. Bozic said involving surgeons in bundled payment deals typically drives greater awareness of the costs of implants and gets them more involved in the contracting process.