How much does a knee cost?

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My mother had her knee replaced two years ago.  By almost every clinical measure, her surgery was successful – her pain mostly disappeared and her mobility has fully returned.  But what about financially?  Is her new knee a financial success?

The answer is “Nobody knows.”

Let’s first look at the various healthcare providers with whom my mother interacted during the five years leading up to the surgery:

  • Her orthopedist, who gave her a series of cortisone injections and one arthroscopy
  • Multiple physical therapy visits in an attempt to prevent surgery
  • An acupuncturist
  • An ambulatory clinic for the eventual surgery
  • Six months of post-surgery physical therapy

That’s a lot of people, locations and procedures – all centered around fixing one knee. Was it a good deal?

For my parents, the financial outcome was an unqualified success.  My father has good health insurance, so after paying their small deductible on each service, all of the treatment was more or less “free.”  I’d estimate that my parents wound up paying less than 10% of the cost of the entire ordeal out of pocket.

For the individual providers, the answer is unclear.  While the physical therapist knows how much she charges for an hour of her time, what about the ambulatory clinic?  When you add up the costs of administrative labor, rent and overhead for the entire facility, it’s difficult to assign a portion of that down to one surgery.  The clinic can probably figure out the costs of the medical personnel assigned to the surgery, but has anyone actually done that math?  About the only item to which the clinic can gain true cost insight is the knee replacement itself – the metal parts that make up the new knee – and that’s mostly because they have to buy each knee from a third-party vendor.

For the insurance company, the answer is likely “No, we didn’t get a good deal, but we can’t prove it.”  The insurance company paid a variety of folks to take care of my mother’s knee.  Each provider charged individually for their service, and none of their payments were tied to achieving a quality outcome.  That’s not to say that each provider didn’t care about my mother and work hard to make her feel better – I’m sure they did.  But they were paid by the insurance company whether they were successful or not.  The insurance company likely had negotiated agreements with each provider about the price that the insurer would pay for a particular service, but the insurance company doesn’t know the true cost of each provider.

So the financial success of my mother’s knee is a definite “Maybe.”  In the new world of integrated care, however, we’re going to spend a lot more time looking at the cost of healthcare and tying it to clinical outcomes.  Bundled, or episodic, payments are the wave of the future.  As the number of stand-alone hospitals decreases, and the number of integrated delivery networks steadily increases, the way that we pay for healthcare will dramatically shift.

Integrated delivery networks (IDNs) will now have hospitals, ambulatory centers, specialists, primary care physicians, and physical therapists all under one virtual roof, and potentially even on one virtual payroll.  And insurance companies will now want to pay one price for a knee replacement.  In the case of my mother, the insurance company would have paid the IDN a flat fee for all the services listed above.

Taking this to the next level, you could even imagine a world where the insurance company pits IDNs against each other to see who is going to offer a lower price for the “Knee Replacement Bundle.”  From the insurer’s perspective, this is great, as they have fixed their cost for knee replacements, and moved the risk onto the provider to manage cost.

From a provider’s perspective, this shift is good because it will lead to more coordinated care.  However, it also means that the IDN now needs to truly understand its costs, because they will receive a flat fee negotiated with the insurer.  If the IDN doesn’t know its costs accurately, then how can it be sure that the price it negotiates with the insurer will be a profitable one?  But if the IDN does know its costs, then it can set up a pretty profitable business doing “packages” like knee replacement or bypass surgery.

There is a lot more to this topic, but it’s August, and I’m sure thinking about the cost of knee surgery isn’t exactly at the top of everyone’s mind, so I’ll stop here.  But in my next post, I will take this discussion to the next level, and explain why the future of revenue cycle management is actually what I call profit cycle management.   Til next time….

 

 

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