The Economics of Total Hip and Knee Arthroplasty

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.