By JIM LANDERS
Staff Writer
16 July 2015
Getting your knees replaced can be an education in much of what’s wrong with health care — as I learned last year from personal experience.
My insurer offered guidance on which hospitals were in network, and how much they’d be reimbursed. My doctor referred me to a surgery group that practiced at only one of those hospitals.
I didn’t know which companies make artificial knee joints, or which ones are best.
Luckily, I came out of it with mechanical knees that greatly improve my quality of life. I remember the times I couldn’t run across the street before the light turned red because running meant bone-on-bone pain. I remember the photos my wife took where I was as bow-legged as a cowboy cliche — my knee cartilage was so far gone.
But the choices I made with limited information about surgeons, hospitals and medical devices probably wound up hitting my employer, The Dallas Morning News, with $10,000 in extra insurance charges.
It was a surprise, though, when one of the nation’s top orthopedic surgeons told me he is almost equally in the dark as he tries to determine where to go to replace one of his own knees.
“There should be a process where I can seek information about quality, outcomes and cost,” said Dr. Kevin Bozic, chairman of surgery at the University of Texas at Austin’s Dell Medical Center. “If you’re in D.C. or Dallas and you’re trying to figure out where you can get that, it’s a joke.”
Market peculiarities
Bozic recently came to Austin from San Francisco, where he was part of an orthopedic surgical team and was on the faculty of the University of California at San Francisco. He has a master’s degree in business administration to go along with his medical credentials.
He’s studied and written about the peculiarities of the joint replacement market for several years.
“If you look this up online,” he said, “you’re going to get a bunch of advertisements saying this one uses robots, or this one has the latest technology, and then you’ll find information on Yelp about the surgeon’s bedside manner, and that’s important.
“But the things you really care about — will it improve my health, reduce my pain, will I have a quality outcome — you’re going to find nothing.
“That needs to change,” Bozic said. “The consumer wants the best outcome at the lowest cost.”
He hopes a more rational way of doing business is on the horizon.
The hope, which is beginning to emerge in Dallas and elsewhere, is that medical devices will have a searchable track record of success — or failure.
It’s a hope that consumers can learn which hospitals and surgeons do the best work — and which surgeons are paid huge sums by the device makers. It’s a hope that patients will be out of bed and able to start physical therapy within a day of surgery, rather than two or three or even four days later.
And it’s a hope that insurers will someday pay one bundled price for joint replacements — and hospitals, surgeons, anesthesiologists, physical therapists and medical device makers will have to work within that budget.
Some device manufacturers are taking cost out of their products. Prices have fallen between 8 percent and 13 percent over the last year for key knee and hip replacement components.
The 4-year-old American Joint Replacement Registry (Bozic is its vice chairman) has data on nearly 300,000 joint replacements. The group is watching to see how long the replacements last, which surgery techniques and technologies work best, and which ones don’t.
This month, Medicare announced a bundled payment initiative for joint replacements. And for two years, it has released data on medical device and pharmaceutical company payments to physicians and hospitals.
The big remaining question is: Value for whom? The consumer, or the hospital? In Dallas, at least, the hospitals are the ones coming out ahead.
Oblivious to cost
The way it’s worked until now is pretty strange.
Most orthopedic surgeons are oblivious to the cost of medical devices. They choose what they’ll use based on a buddy system with a sales representative. Many surgeons get consulting fees or design royalties from those device makers.
Hospitals that want the surgeon’s business buy the joint replacements the surgeon wants. They are contractually forbidden from telling the surgeons or anyone else what price they pay. The hospitals bill patients for the device (often including a big, hidden markup), for the operating room and for their care during a typical two-night stay.
“In most places, physicians are not employees of hospitals and don’t care what things cost, and that shifts a lot of power to the manufacturers,” said Pete Allen, executive vice president for sales and marketing with Novation, an Irving-based company that buys supplies for more than 1,500 hospitals across the country.
The sales reps stick with their surgeons. They go to all the surgeon’s operations with suitcases full of tools and parts for artificial joints. They use laser pointers to tell nurses and other members of the operating team what to use.
Sometimes they upsell, Allen said, recommending a new component to the surgeon while the patient is on the operating table.
When a patient has multiple fractures, the operating room can get crowded. “A trauma case may have four or five reps in the operating room,” Allen said. “That’s a lot of expense, and it’s not free.”
Artificial knees are made of cobalt, stainless steel or titanium that covers the ends of the thigh and shin bones. A hard plastic disc absorbs the friction between the metal pieces. A sliding button on the back of the knee cap keeps it moving.
Hips are made from similar materials and ceramics, with a long stem embedded in the femur and a ball-and-socket placed into the pelvis.
Hospitals pay anywhere from $3,300 to nearly $11,000 for the parts in one standard artificial hip or knee, according to the ECRI Institute, a Pennsylvania group that tracks medical supply pricing for hospitals.
U.S. surgeons are expected to replace more than 1.3 million hips and knees this year. By 2020, the number is expected to hit 2 million, with 3 million by 2030.
In 2012, Truven Health Analytics determined that medical devices were the single-biggest driver of hospital inflation between 2001 and 2006.
Medical device prices doubled between 1997 and 2008, and the number of joint replacements grew even faster. Hospitals complained that they were getting squeezed between what Medicare was prepared to reimburse and what device makers were demanding as payment.
A bill was unsuccessfully introduced in Congress to compel device manufacturers to reveal their selling prices.
The gross margins on joint replacement sales are as much as three times greater than the costs of manufacturing. Relatively little of those margins are invested in research and development. Most of it goes back to the sales reps, who account for 40 percent to 45 percent of the price of a joint replacement.
Steve Lichtenthal, vice president of business development with the Orthopaedic Implant Company of Reno, Nev., argues those margins are too big.
“Thirty-five years ago, orthopedic implant sales operated like any other industry. The sales rep would come around every so often with lunch for the staff and to shake the doctor’s hand,” he said. “Then every few years there’d be new technology; anatomically shaped plates, different screws, or a different material used in spacers for a vertebral fusion case, for a few examples. Hospitals couldn’t keep up with the changes, and the industry did a wonderful job embedding their sales reps to manage the entire implant supply chain for the hospital while upselling physicians in the operating room while attending surgical cases.”
“It’s going to be very, very tough to undo that,” he said. “But if you eliminate that sales rep and modify the supply chain, you halve your implant costs. The magnitude of savings is into the billions.”
Lichtenthal’s company is just getting started, and specializes in trauma plates rather than joint replacements. But another device maker is experimenting with a lower-cost, “rep-less” approach.
Smith & Nephew, Britain’s largest joint replacement maker and one of the top four sellers in the U.S. market, recently launched a line of hips and knees called Syncera using last year’s components, training software — and no sales reps. The company hasn’t said how well it’s doing, but promises more information later this month.
Other device makers are watching but haven’t followed.
David Floyd, group president for orthopedics with Michigan-based Stryker Corp., was asked by analysts in May what impact Syncera was having on his firm. “None,” he replied.
Bob Marshall, a vice president with Indiana-based Zimmer Holdings, told another group that the competition was healthy.
“If we can’t prove out the value for the premium technology, those prices won’t be held,” he said. But he warned that value-based joint implants could be costly for hospitals if they lead to liability problems.
And yet, the pricing of joint replacements has dropped.
Tim Browne, ECRI Institute’s price guide director, said prices for a key knee component are down 8.3 percent from a year ago. With hips, the key component price has fallen 13.4 percent.
“Of late, hospitals have really gotten engaged with physicians, working collectively, to drive that down,” Browne said.
Some insurers are also pushing back. CalPERS, the California state employee retirement system, notified members in 2011 that their health insurance would cover a hospital’s knee replacement charges up to $30,000.
If the procedure cost more, the consumer would pay the difference.
In response, California hospitals left out by CalPERS’ reference price lowered their prices by 38 percent — from an average of $43,308 to $28,465.
The Blue Cross Blue Shield Association reported in January that joint replacement charges can double or even triple among hospitals within the same metro area. Between 2011 and 2013, hospitals in Dallas got as little as $16,772 and as much as $69,654 for a knee replacement.
The current average knee replacement reimbursement in Dallas, according to insurance claims sifted by the Health Care Cost Institute, is $45,436. The national average is $33,560.
Dallas hospital administrators say they’re squeezed by low Medicare reimbursements and have to recover by charging more to insured patients.
Big markups
Whether needed or not, the markups are big.
Baylor Scott & White Health System hospitals in the Dallas area performed almost 2,400 hip and knee replacements last year. The hospital chain’s supply managers and surgeons meet to discuss which devices to use. They try to limit the number of suppliers as much as they can to drive a better bargain.
A similar approach with cardiologists led to savings of between 18 percent and 20 percent on $40 million worth of stents, pacemakers and other heart surgery devices, said Pam Bryant, Baylor’s supply manager.
Bryant said the hospital chain spends about $30 million a year on knee and hip replacements. She said she pays between $3,800 and $6,900 each for artificial knees.
Insurers and patients never see those bills. Instead, their line-item hospital bills include component pricing that covers both the negotiated device price and the hospital’s markup.
David Toomey, a health care consultant with Dallas-based Compass Professional Health Services, said area insurers are paying between $7,860 and $12,800 for knee replacement components — almost twice as much as the average cost of the device.
Asked about these markups, Baylor responded with this statement: “Our charges for devices utilize a markup on the raw cost of the device, which is in line with industry standards. Baylor Scott & White Health engages a third party to conduct an annual review of our device markup formula, which is proprietary, to ensure its reasonableness and alignment with device pricing by other leading health care providers.
“Baylor is reimbursed less than 100 percent of the actual cost of treating more than half of its patients, as roughly 60 percent of the patient base we serve is uninsured or underinsured.”
My knees
For my knees, my surgeon chose standard components made by DePuy Synthes, an Indiana firm owned by health care conglomerate Johnson & Johnson.j
So far, they’re working fine. The pain is gone. I can stand a little taller these days.
The hospital where I had them replaced charged $16,097.05 for each artificial knee. My insurance paid $10,982.72 each.
When I studied the bill, I thought it meant my surgeon had used some fancier components that provide the knees with rotation.
Not so. They’re fixed, standard knees.
ECRI Institute’s Tim Browne says the current average price paid by U.S. hospitals for the components of a standard knee replacement last year (when I had my surgery) was $5,081 — half the price paid by my health insurance.
“It’s a very inefficient marketplace,” UT’s Bozic said. “Even [for] me, an orthopedic surgeon who needs a knee replaced — I have no information on value.”
