As a group, orthopaedic surgeons repeatedly demonstrate a strong, focused, and independent (entrepreneurial) spirit. As a clinical discipline, orthopaedics historically has been one of the most profitable services for hospitals and health systems. With the passage of the Patient Protection and Affordable Care Act (ACA) in 2010, however, the rules for maintaining a successful orthopaedic practice changed virtually overnight.

The former hallmarks of success—competency, availability, professional identity and recognition, communication with referring physicians, and the provision of market-differentiated care—simply may not be enough to ensure future success. Orthopaedic practices will also need to capture outcome data, explore new governance structures, and manage competitive tensions in a post-ACA world.

Revenues and risks
Prior to 1965, the federal government’s share of the nation’s total healthcare spending was negligible at 5 percent. Today, government programs account for more than 44 percent of total healthcare spending. Under the ACA, more Americans will be receiving government-sponsored health care, which will increase the federal share of total healthcare spending by several more percentage points.

Despite an aging American population and increased federal spending on health care, Medicare spending for orthopaedic services has remained flat and has even decreased in inflation-adjusted dollars. To achieve—or maintain—target income for a robust orthopaedic practice, orthopaedic surgeons have assumed additional business risk. They have expanded the portfolio of specialized clinical services they offer to better meet the in-office needs of their patients. In addition, to ensure a steady stream of patient referrals from defined patient-distribution channels, orthopaedists have taken the following steps:

• established relationships with referring physicians (most often primary care physicians)
• taken emergency department/trauma call on either an initial or continuing basis
• participated in risk-bearing organizations (such as independent practice associations or physician-hospital organizations) to leverage aggregated seller power to improve reimbursement, access sophisticated services to quantify clinical quality of rendered services, and have at least nascent exposure to population health and clinical integration initiatives
• participated in select media and community events to promote individual orthopaedic or group practices
• aligned themselves with an area of clinical expertise, training, or specialty interest, such as sports medicine and identified demographic cohorts and/or high-risk vocational populations

Despite these efforts, revenue directly related to orthopaedic office visits and surgical procedures continues, on average, to decline in many markets. In response, and concomitantly to improve patient access and comprehensiveness of care, orthopaedists began to assume additional business risks, such as adding diagnostic imaging, physical and occupational therapy, and limited home health capabilities to their practice. Practices have also expanded, adding fellowship-trained orthopaedists.

As a result, midsize and “super groups” developed to aggregate capital and realize economies of scale. Usually, orthopaedists retained close, collaborative relationships with hospitals and health systems despite emerging competitive overlaps. All these tactics were adaptive in an environment that supported fee-for-service and limited (physician and outpatient service only) risk.

Transitioning to a new environment
During the transition to the initial stages of population health as defined by the ACA and public health policy, flexibility will be key to providing high-quality clinical services and achieving net income targets. In addition to the existing channels of patient distribution, orthopaedists will need to continue developing niche markets and highly specialized services.

As practices build larger entities and open related ancillaries, including ambulatory surgery centers, this vertical integration may further strain traditional relationships with hospitals and healthcare systems. These systems are feeling the additional pressures of emergency department and trauma call payment and reductions in graduate medical education funding.

Both orthopaedic practices and hospital/healthcare systems recognize the need for relevant, detailed, clinical outcome data. To that end, orthopaedists may seek additional revenue that reflects the work involved in collecting these data, while healthcare systems and hospitals continue to push for assurances of call coverage and care to expanded populations.

In certain competitive markets, some high-profile orthopaedists and orthopaedic groups choose not to accept Medicare assignment or to participate in the state Medicaid program. This may work for the individual orthopaedist—opening schedules to treat better-paying patients—but it creates challenges for hospitals, healthcare systems, and other orthopaedists.

The future?
In terms of practice vitality, the future of orthopaedics should be robust. The aging baby boomer population means that 10,000 Americans join Medicare daily. Coupled with a steadily increasing portfolio of surgical and medical interventions, this should fuel orthopaedic demand into the next decade and beyond. Already, knee replacement is one of the most common elective surgeries in the United States; other orthopaedic procedures will very likely follow.

The current transition from volume to population management, however, posits a new era. How much longer will orthopaedic practices, even mega-groups, be able to exist in concert with local healthcare systems? The relationship is already strained as both entities strive to retain patient revenue. As health systems—through vehicles like accountable care organizations (ACOs) and their commercial product equivalents—assume additional financial risk, competitive dissonance and the perceived need for fundamental alignment will only intensify.

Whether orthopaedics and the resulting “downstream” revenues from ancillaries and surgery will shift from a hospital environment to primarily outpatient facilities owned by the practice or as part of a joint venture is unknown. As healthcare systems assume additional risk for patient care costs, independent orthopaedists (as either a revenue stream or expense line item) will assume radically different roles than their predecessors.

The need for alignment and control, along with the predictability of employment in an unstable environment, is compelling. If the evolution to population health continues, the trend to orthopaedist employment, either to ensure short-term revenues or to achieve the best alignment to meet expense management goals, would seem inevitable in many markets.

If the ACA goes away?
Independent orthopaedists will not return to their former autonomy and target income achievement even if the ACA is overturned or severely modified—unless they reposition themselves in the market, perhaps radically. Due to pressures from the federal government and commercial payers, ACO models that push financial risk to providers are likely to continue as the most significant strategy for reducing provider costs.

Already, nearly 60 percent of primary care physicians are employed, and that number shows no sign of abating. How will orthopaedists flourish without significant alignment with the physician employment entity?

Former revenue streams, including in-office ancillaries and investments in diagnostic imaging and outpatient surgery centers, are likely to significantly change as hospitals and healthcare systems reclaim control by charging less and providing more specialized management. The remaining fee-for-service population simply won’t be large enough to support widespread independent practices. If employment, for whatever reasons, is not a viable option, private practices must craft new strategies.

In the short- and midterm future, both orthopaedists and healthcare systems will need to manage the competitive tension of caring for patients with newly available insurance coverage. New opportunities to service larger populations will emerge. Even the most independent orthopaedic groups may need to relinquish at least partial independence simply to have access to newly identified private and public patient populations.

Medicaid managed care organizations and accountable care entities, traditionally nondesirable payer sources, will offer new opportunities, particularly if the Supreme Court upholds the ACA. Hospital systems and other organizations that assume financial risk will likely need to become more comfortable with partnerships and to compete for surgical and ancillary revenue streams by reducing their costs. In short, rapid change will continue to be the sole constant: recognizing a rapidly changing environment will be fundamental to the success of both orthopaedic practices and health systems and to ensure access to redefined channels of patient distribution.

Michael A. Swarzman, MA, MBA, is vice president, business development and clinical institutes, at Advocate Illinois Masonic Medical Center. He also serves on the faculty of the Graduate School of Public Health, University of Illinois-Chicago.

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