Orthopaedic Fundamentals: The economics of orthopaedic surgery

To practice successfully and sustainably, graduating orthopaedic surgery residents must quickly understand the nuances of billing systems. Unfortunately, many residents enter practice without a clear understanding of these essential concepts or of the broader financial systems that shape how care is delivered. To practice successfully and sustainably, orthopaedic surgeons must understand not only how their work is documented and reimbursed, but also how hospitals are paid and how clinical decisions influence overall costs.

Surgeon reimbursement
In large part, surgeons in the United States submit charges that essentially itemize the work they have done. In the clinic or office setting, orthopaedic surgeons submit professional charges through an Evaluation and Management (E&M) code for the work they performed relative to the care provided in the outpatient setting. Generally speaking, care that entails an increased amount of work and complexity is documented by an E&M code representing an increased amount of work relative value units (wRVU).

For surgical care, surgeons submit charges with associated codes found in the Current Procedural Terminology (CPT) resource provided by the American Medical Association. Similar to the clinic setting, surgeons submit itemized bills for the work they have performed. For instance, the work of open/closed reduction and intramedullary fixation of a tibial fracture would be represented by CPT code 27759. If the tibial fracture was open, the surgeon would submit CPT codes 11010 through 11012 to represent the work entailed in irrigation and debridement of the wound. If the surgeon also performed four compartment fasciotomies for an associated compartment syndrome with the fracture, CPT code 27894 would also be submitted.

Hospital reimbursement
Not surprisingly, surgeons often fail to understand that hospitals are reimbursed in a completely different way. Whereas the surgeon documents and submits charges specific to the work performed, hospitals are generally paid according to the diagnoses and procedures coded into one of approximately 1,000 Diagnosis-Related Group (DRG) codes and submitted to Medicare.

For primary total knee and total hip arthroplasty, there are only two DRG codes the hospital can use to submit charges for the care provided. Hospitals typically are not able to submit itemized bills that represent the specific cost of the care provided. DRG 470 is submitted for “Major Hip and Knee Replacement … without MCC (major complication or comorbidity)” and DRG 469 is submitted for “Major Hip and Knee Replacement … with MCC or Total Ankle Replacement.” The only flexibility the hospital has to alter the charge is the presence or absence of a “major complication or comorbidity.”

Medicare pays hospitals according to the related weight of the specific DRG code and the hospital-specific blended rate. The hospital-specific blended rate is affected by factors such as local labor costs, the teaching status of the hospital, the proportion of financially indigent patients, and the presence of hospital-acquired conditions. The hospital is paid one fee for this episode of care, and financially savvy hospitals must ensure the cost of care does not exceed the payment received.

These DRG payments represent the bulk of the revenue the hospital receives year over year. Not only must this payment cover the cost of the surgical implants, it must also pay for the supplies used in the operating room, as well as the salaries and benefits of the operating room staff. These payments also cover system expenses such as depreciation and even the salary and benefits of the maintenance personnel mowing the grass and shoveling snow. Hospitals are extremely dependent on DRG payments, and inefficient business models can quickly bankrupt otherwise high-quality hospitals.

Beyond reimbursement: high-value orthopaedic care
Healthcare value has been routinely described as quality divided by cost multiplied by access.

In healthcare systems with value‑based oversight, implants present an opportunity for orthopaedic surgeons to exercise their ethical obligation to provide high-value, cost-effective care, helping the hospitals in which they practice to thrive and remain sustainable. Surgeons are often swayed by new, fancy (and expensive) implants that may fail to improve value. Quantifying implant value attributes of expense, quality outcome, or access can be extremely difficult, especially when the advantages of new implants can be hypothetical until follow-up studies demonstrate whether the new technology was materially better. Regardless, this exercise requires surgeons to actively consider whether the new, expensive implant is materially better or just “cool new technology.”

Increased quality outcomes can be demonstrated by fewer complications, reduced reoperations, and quicker return to activity. Increased access can be represented by higher patient volumes as a result of using the new device. While some patients may be swayed by marketing ploys and believe that newer, more expensive technology provides better outcomes, there may not be demonstrated evidence to support these claims. These patients may demand the more expensive technology be used in their care, and healthcare systems providing this technology will see higher access to these patients than systems that do not provide the desired technology.

Surgeon-level expense data can be difficult to obtain, and the data must be accurate and specific to the defined care. Junky data filled with erroneous costs for unrelated procedures will not inspire loyalty or a call to action to reduce expenses by the surgeons. Networks must ensure that any cost assessments between surgeons are as close to an “apples to apples” comparison as possible. Failure to ensure the data are accurate will only hinder efforts to responsibly reduce costs.

At St. Luke’s University Health Network, surgeons were provided with extremely accurate and actionable surgeon-level expense data. This information — blinded by individual surgeon — was presented to the department to illustrate how clinical decision making affects both network performance and overall costs of care. Without any administrative mandate, surgeons independently reduced the cost of care for total knee and total hip arthroplasty by $1.17 million over one year.

A strong foundation in coding and reimbursement is only the starting point for understanding the economics of orthopaedic surgery. Surgeons who also appreciate how hospital payments are structured and how their clinical choices influence costs are better positioned to contribute to high-value care. Surgeons should neither use low-quality implants nor rush through procedures. However, surgeons should seek to be efficient and only advocate for more expensive implants if there is an associated increase in value. We must all work together to provide sustainable, cost-effective care. Failure to do so will eventually result in a loss of autonomy in our profession.

Douglas W. Lundy, MD, MBA, FACS, FAAOS, is senior vice president of medical services and chair of orthopaedic surgery at St. Luke’s University Health Network in Bethlehem, Pennsylvania. He is also the deputy editor of AAOS Now.

Scott R. Wolfe is senior vice president of finance and chief financial officer at St. Luke’s University Health Network. He has nearly 43 years of experience in the healthcare industry and has served in various senior leadership roles over the past 30 years as chief executive, chief operating officer, and chief financial officer for both large and smaller community-based acute care teaching hospitals.