Instructional Course Lecture panelists emphasize a ‘bottom-up’ approach to calculating orthopaedic costs

The traditional equation used to define value-based care takes quality of care and divides it by the total costs. Patient-reported outcomes (PROs) have the potential to help improve both quality and cost of care. Although there has been increased education around defining and collecting PROs, there has been less guidance on quantifying and understanding the cost side of the value equation.

At the AAOS 2025 Annual Meeting, Brian P. Cunningham, MD, FAAOS, vice chair and director of inpatient orthopaedics at Methodist Hospital, and colleagues dove into the details of defining cost during the Instructional Course Lecture titled “Costing for the Clinician: How to Understand Cost in Orthopaedic Care.”

“The interesting thing about cost is it is always a bit dynamic,” Dr. Cunningham explained, as the final number incorporates factors such as payer cost, societal cost, cost to the patient, a clinician’s expense, or cost to the hospital. “That is one of the challenges of the nomenclature when interacting with finance colleagues or administration. It is not always clear what the cost is that you are trying to access, and reporting of cost is not always done in a way that is usable for decision-making.”

Costing is a foundational piece of the value proposition. Traditionally, cost in healthcare was thought of from the top down — in other words, senior leaders in an organization set the costs. However, during this course, Dr. Cunningham and colleagues discussed thinking about cost from the bottom up. This type of analysis must consider both direct and indirect costs even though clinicians typically only have influence over direct costs, which include charges, reimbursement, and care delivery.

Time-driven activity-based costing
Prakash Jayakumar, MD, PhD, assistant professor of surgery and perioperative care at Dell Medical School at the University of Texas at Austin, presented some “hard truths” about costing in the United States. The United States, he remarked, is an outlier among high- and middle-income countries for a range of indicators, from care processes, access to care, and health outcomes, despite spending more than $4.9 trillion in healthcare as of 2023.

“The contribution of our field is substantial,” Dr. Jayakumar said, adding that the estimated annual cost of healthcare for orthopaedic conditions totals between $350 billion and $400 billion.

Dr. Jayakumar introduced the concept of time-driven activity-based costing (TDABC) as a key to unlocking value-based care in orthopaedics. Unlike more common top-down approaches, TDABC is a bottom-up approach based on cost-of-care pathways. Dr. Jayakumar outlined TDABC’s seven steps:

1. Selecting the medical condition
2. Defining the care-delivery value chain
3. Developing process maps
4. Obtaining time estimates
5. Estimating cost of resources
6. Estimating capacities and capacity cost rates
7. Calculating total cost of patient care

This type of approach provides advanced financial data for bundle pricing and can potentially identify where bundle pricing is set too low. In the future, payment models will likely be a hybrid cost-accounting approach that incorporates TDABC plus claims data and administrative data to more accurately build financial models across the care continuum.

Cost as part of decision-making
Speaking with a self-reported bias to cost consciousness, Karl M. Koenig, MD, MS, FAAOS, division chief of orthopaedic surgery at Dell Medical School, discussed some of the realities of integrating cost data into clinical decision-making.

“There is nothing wrong with spending resources to create better outcomes [for patients], but we have to be aware of cost,” Dr. Koenig said. He explored some cost-saving tips that can be applied to orthopaedic practice. The first was to be aware of available resources.

For example, a cemented total hip nearly halves the cost compared with a cementless one. “That doesn’t mean you always do it,” Dr. Koenig advised, but it is a cost-saving option for appropriate patients. He also encouraged looking at the variability in price of different suture anchors, cables, or configurations of bone grafts to identify further opportunities to lower costs.

Dr. Koenig’s second tip was to normalize cost discussions with the clinic team, OR managers, and vendors. Third, he emphasized the importance of familiarizing oneself with data on surgical costs and clinical expenses.

He encouraged attendees to view the resources being utilized in orthopaedic care as “investments.” If something makes a patient better, it is a wise investment — but he emphasized that if orthopaedic surgeons do not start regulating their own costs, someone else will do it for them.

“We have to be leaders. You should demand evidence for technological innovations before changing your practice,” Dr. Koenig said. “If someone wants to do something new and doesn’t have good evidence, you have to measure it. Be a part of that work.”

Patient-level value
Rebekah Kleinsmith, MD, a postdoctoral research fellow with TRIA Orthopedics, closed out the session with an overview of patient-level value analysis (PLVA) and the methodology that went into its development at her institution.

“Value is the ratio or relationship between costs and outcomes, but value is not quality, per se,” Dr. Kleinsmith said. “Value really incorporates patient outcomes and the cost of care required to treat patients throughout an episode of care.”

According to Dr. Kleinsmith, value is the future of healthcare. Her institution has been working for about 15 years to try to measure value. In that time, it has identified several value drivers. Using a wide range of analyses to assess orthopaedic procedures, they identified several value drivers, including provider-level drivers such as fellowship training; process-level drivers such as procedure setting and discharge disposition; clinical-level drivers such as injury characteristics; and patient-level drivers such as age, sex, and BMI.

These drivers may vary by procedure, but “operating surgeon” was a value driver in nearly every analysis, she noted. Ultimately, these value analyses are trying to identify providers that deliver high-value care, which she defined as greater improvement in PROs with lower-than-average costs.

PLVA allows for intraprocedural comparison in value and offers clinicians insights into procedural techniques that drive value. “A graphical representation of value is powerful and can be presented to surgeons to stimulate discussion about how they can drive value within their institution,” Dr. Kleinsmith said. “It can be used on any procedure or intervention and spans across the entirety of medicine.”

However, Dr. Kleinsmith acknowledged that PLVA collection is not without barriers. Initiating PRO collection can be difficult to start and requires a lot of resources and personnel. It can also be difficult to create a culture that includes open dialogue about value and PROs. It requires physician and administrative engagement and a certain amount of vulnerability.

“I am hopeful for the future of PLVA and am excited to continue to refine our process,” Dr. Kleinsmith said.

Leah Lawrence is a freelance writer for AAOS Now.