At one point in time, hip and knee surgery was generally assumed to be the bread and butter procedure for most hospitals in America.
A lot has changed since that was common wisdom.
A research team from New England Baptist Hospital in Boston has updated our understanding of the comparative economics of all forms of arthroplasty. Their study: “Variation in the Profit Margin for Different Types of Total Joint Arthroplasty,” appears in the March 2, 2022, edition of The Journal of Bone and Joint Surgery.
The study team collected detailed cost and revenue data from 13,545 arthroplasty procedures (6,636 total knee arthroplasties, 5,902 total hip arthroplasties, 346 total shoulder arthroplasties, 577 reverse shoulder arthroplasties, and 84 total ankle arthroplasties).
The team found that costs and reimbursement were highest for total ankle arthroplasties. Total hip and total knee arthroplasties generated the highest profit margins, whereas reverse shoulder arthroplasties delivered the lowest profit margins.
Costs. Reimbursement. Profit Margin
Co-author Eric L. Smith, M.D. Chief of Arthroplasty at New England Baptist Hospital explained the genesis for this very timely update study to OTW. “This study was born of a desire to understand the economic implications for hospitals when they perform different types of total joint replacement. Traditionally, hip and knee replacements have occupied much of this ‘space,’ however in the last five years we have seen an increase in shoulder, ankle, and elbow replacements.”
“With every new technology the biggest driving factor is value-based healthcare. At New England Baptist Hospital we do roughly 7,000 total knee and hip replacements per year, so we wanted to explore the economic impact of these and other arthroplasties.”
For many years whenever different authors or institutions have tried to define costs, says Dr. Smith, surgeons have used different terms as far as profit, cost, billing, charges, and reimbursement, making standardization difficult.
“For our study,” he told OTW, “we used time-driven activity-based costing, to determine all costs at our hospital using process maps with time-specific costs. That way, costs are broken down into the actual time required for each step.”
So, for a knee replacement, cost is measured from the second the patient steps into the hospital and is greeted (one cost), goes for a blood draw (another cost) and then through to the OR. Once you determine the time associated with OR things such as a Foley catheter and anesthesia, from that you can assign a standard cost for that procedure. But it doesn’t account for snow removal or other things that are unique to specific institutions.”
The researchers assessed the total hospital costs of total knee arthroplasty (TKA), total hip arthroplasty (THA), anatomic total shoulder arthroplasty (TSA), reverse shoulder arthroplasty (RSA), and total ankle arthroplasty (TAA) at their facility using time-driven activity-based costing (2018 to 2020).
They then calculated the average reimbursement for each type of procedure. “Profit margin, defined as the reimbursement profit after direct costs, was calculated by deducting the average time-drive activity-based total hospital costs from the reimbursement value,” wrote the authors.
Dr. Smith told OTW, “We were surprised to find that the most voluminous procedures, hip and knee replacement, resulted in the highest profit. This probably means that hip and knee replacements performed in the U.S. have been financially viable for the institutions that are performing those procedures. It was interesting that there is a greatly reduced profitability for other types of joint replacement such as ankle and shoulder. Those implant costs are not in line with hip and knee replacement costs.”
The researchers found that THA and TKA had larger profit margins than TAA and upper-extremity arthroplasty in general. Additionally, they determined that profit margins for RSA, TSA, and TAA were all at least 28% lower than those for TKA or THA.
“Ultimately, we want to deliver value-based healthcare for patients,” stated Dr. Smith to OTW. “We are working with vendors and surgeons to bring pricing down for anatomic shoulder, reverse shoulder, and ankle replacement implants. Maximizing profit for the hospital is important for hospital viability so that the hospital has the resources to take care of patients.”
“There remain many barriers to the adoption of value-based healthcare or reference pricing. One is that you must have some type of coalition of surgeons whereby they say, ‘We will accept a given cost for knee replacement…and then be prepared to only accept only those companies who can deliver the product at that cost. Complicating things is that many factors go into a surgeon choosing a certain knee/hip replacement.”
“As orthopedic surgeons we should recognize that within a hospital setting that we offer a lot of value not only to patients but also to hospitals. Having these conversations about profit margins will impact the profitability of numerous specialties, thus as resources shrink it is ever more important to address this.”
