Demand for Hip Replacements, Knee Replacements and Spine Fusion

After the pain comes the test of will. From onset to wheelchair, the task is the same: contain the pain…maintain mobility… stay working. Problem is, arthritis doesn’t read the newspapers, isn’t clued into budget deficits and never adjusts to economic news. Arthritis exacts its toll regardless of job status. More than anything, that fact may well define whether the price of arthritis will be paid with surgical intervention, with pharmacopeia or in misery. It may also define whether suppliers of orthopedic implants can return to the robust growth of five years ago.

Pathology of Degenerative Musculoskeletal Diseases

The human body reaches its physical apex sometime between the 22nd and 29th year of life. After that, because of DNA, wear and tear or other factors, the body’s systems begin to degenerate. When those degenerative processes affect the musculoskeletal system, they are called “osteoarthritis, ” “osteoarthrosis, ” “degenerative disc disease” or one of several other descriptive terms for the same basic physiologic process.

The correlation between age and the onset of the degenerative processes is positive and absolute. As the musculoskeletal system matures, osteophytes and subchondral cysts can form, spines can become more compact and unstable and millions of patients show up at their doctor’s office asking for relief from chronic and severe pain.

These are natural processes. They are universal. They are not going away.

Cost of Hip/Knee/Spine Procedures in the United States

When the pain of a degenerated joint or disc becomes debilitating, surgery is often the best long-term treatment.  The cost of surgery, however, is high.

The following three tables provide the most recent data available on the cost and reimbursement of hip arthroplasty, knee arthroplasty and spine fusion procedures in the United States. This data, provided by PearlDiver Technologies Inc., is aggregated from Ingenix and the Centers for Medicare and Medicaid Services (CMS).

Table 1 – U.S. Hospital Charges to Private Payers

The data below is drawn from the PearlDiver Private Payer Database, which contains inpatient and outpatient procedures covered by private insurers. Presented below are the charge results by year based upon the ICD-9 procedure coding billed by facilities.

Table 2 – U.S. Hospital Charges to CMS

The data below is drawn from Center for Medicare and Medicaid Services Inpatient Standard Analytical File, which contains inpatient procedures covered Medicare. Presented below are the charge results by year based upon the ICD-9 procedure coding billed by facilities.

Table 3 -U.S. Medicare Reimbursement For Specific Hip, Knee and Spine Surgeries

The data below is drawn from Center for Medicare and Medicaid Services Inpatient Standard Analytical File, which contains inpatient procedures covered Medicare. Presented below are the reimbursement results by year based upon the ICD-9 procedure coding billed by facilities.

Between 2006 and 2009, hospital charges to private payers for hip arthroplasty increased from $39, 338 in the Midwest region of the U.S. to $45, 056, a 14.5% increase. Charges for knee arthroplasties similarly rose as did charges for spinal fusions. All told, charges for these three procedures ranged from a high of $127, 000 to a low of about $39, 000.

Medicare reimbursement for these procedures also increased between 2006 and 2009, but the amount being reimbursed, which ranged from about $28, 000 to about $11, 000 was substantially less than the amounts being charged by hospitals.

Even with insurance, reimbursements for these basic procedures do not appear to fully cover the charges.

The Recent Drop in Health Insurance Coverage

Earlier this year, the U.S. Census Bureau reported that the number of people covered by some form of health insurance had declined and that this was the first overall decline since records began to be compiled.  

Health Insurance Status (Under 65 Years of Age)

Source:  U.S. Census Bureau. Income, Poverty and Health Insurance Coverage in the United States: 2007.

As the table below shows, the number of people in the United States who are covered by insurance declined by about 6 million to 253, 606, 000 in 2009 (the most recent data available). Most of those people (194 million) are covered by private health insurance. Most of those people (169.7 million) are covered by employment-based insurance plans. It was, in fact, the drop in employment-based insurance that accounted for virtually the entire overall drop. Every other category of insurance coverage increased in 2009. Only employment-based health insurance coverage fell.

Table 4 – Number of People Covered by Private or Government Health Insurance (000’s)

The Recent Drop in Employment

Not coincidentally, the number of people employed in the civilian labor force in the United States also dropped in 2009. The number of people employed in the U.S. in 2009 fell to 139.9 million from 145.4 million. The unemployment rate increased from 5.8% to 9.3%. Those trends have continued into 2010 and 2011. In 2010, the number of people employed in the civilian labor force in the United States declined slightly to 139.0 million. The unemployment rate edged even higher to 9.6%. So far this year, the unemployment rate is hovering around 9.1%

Table 5 – Civilian Labor Force

When the health insurance coverage data for 2010 and 2011 is finally released by the U.S. Census Bureau, there is no doubt, we think, that the number of people with employment-based health insurance will likely to have declined again.

Also between 2008 and 2010, unit growth rates for hip, knee and spinal implants declined significantly. Could the drop in employment and therefore private insurance coverage be the main culprit?

We think so.

Employment Forecasts for 2012 and Beyond

Two recent economic forecasts point to a slight improvement in the overall employment rate this year but, for the next two to three years, stubbornly and historically high overall rates of unemployment.

The report from the University of Michigan’s Research Seminar in Quantitative Economics (RSQE), George A. Fulton, Director, wrote in their most recent report: “This year, with a new Congress in place, the focus is on deficit reduction through spending cuts. Some deficit reductions will occur automatically as the 2009 stimulus provisions expire, and lower troop commitments abroad should lead to slower growth in defense spending. An urgency has also developed regarding budget imbalances at the state and local levels. Federal dollars have been a stopgap over the past few years, but that funding is unlikely to continue. The fiscal restraint at all levels of government will likely be an impediment to economic growth over our forecast horizon.”

The RSQE report goes on: “The unemployment rate inches down over the next two years, reaching 8.4% by the closing quarter of 2012. The improvement in jobless rate is slowed by workers re-entering the labor force as job prospects improve. The unemployment rate averages 8.8% this year and 8.5% in 2012, down from a 9.6% reading for calendar 2010.”

In a speech delivered to the International Monetary Conference last week in Atlanta, Fed Chairman Ben Bernanke said, “Although hours of work have increased during the expansion, this measure still remains about 6.5% below its pre-recessionary level. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment—nearly half of the unemployed have been jobless for more than six months.”

Bernanke went on to say; “Although the jobs market remains quite weak and progress has been uneven, overall, we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180, 000 per month over the first five months of this year, compared to less than 140, 000 during the last four months of 2010 and less than 80, 000 per month in the four months prior to that. As I noted, recent indicators suggest some loss of momentum, with last Friday’s jobs market showing an increase in private payrolls of just 83, 000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year.”

Bottom Line

The link between employment and health insurance coverage and then the further connection to demand for hip arthroplasties, knee arthroplasties and spine surgeries is, we think, clear.

While underlying demand in the form of incidence rates of osteoarthritis or degenerative discs will increase in the U.S. over the next few years. (We know exactly what an aging populations means in terms of degenerative processes in the joints and the spine). Getting from diagnosis to procedure is proving to be ever more difficult.

Surgical intervention may represent the best solution for millions of these new patients but historically low rates of employment and insurance coverage are putting millions of prospective patients in a painful and debilitating holding pattern. For the patient in pain, there are no easy answers. Drug prescriptions go only so far. The single most common prescription for legal marijuana is to treat musculoskeletal pain.

So, despite the best of intentions and the most hopeful predictions, without higher rates of employment and, therefore, health insurance coverage, the outlook for orthopedic implant unit shipments in the United States will likely continue to be flat.