What’s behind the crazy variation in Total Knee surgery pricing?
BUSINESS What Does Knee Surgery Cost? Few Know, and That’s a Problem (Wall Street Journal)
For nearly a decade, Gundersen Health System’s hospital in La Crosse, Wis., boosted the price of knee-replacement surgery an average of 3% a year. By 2016, the average list price was more than $50,000, including the surgeon and anesthesiologist.
Yet even as administrators raised the price, they had no real idea what it cost to perform the surgery—the most common for hospitals in the U.S. outside of those related to childbirth. They set a price using a combination of educated guesswork and a canny assessment of market opportunity.
Prompted by rumblings from Medicare and private insurers over potential changes to payments, Gundersen decided to nail down the numbers. During an 18-month review, an efficiency expert trailed doctors and nurses to record every minute of activity and note instruments, resources and medicines used. The hospital tallied the time nurses spent wheeling around VCR carts, a mismatch of available postsurgery beds, unnecessarily costly bone cement and delays dispatching physical therapists to get patients moving.
The actual cost? $10,550 at most, including the physicians. The list price was five times that amount.
Competitive forces are out of whack in health care. Hospitals are often ignorant about their actual costs. Instead, they often increase prices to meet profit targets. Patients, especially those with insurance, often don’t know the price of a procedure and rarely shop around.
This dynamic is a driving force in the explosion in health-care spending in the U.S., which will soon reach close to 20% of GDP. Americans spend more per capita on health care than any other developed nation, even though they aren’t buying more health care overall. The rise in hospital prices has outpaced economywide inflation for decades. “When price isn’t tightly linked to cost, that is a sign that the market isn’t competitive,” said Harvard economist Leemore Dafny.
Hospitals can be shielded from the competition that forces other industries to wring out expenses and slash prices. Hospital list prices are a starting point for negotiations with insurance companies over what they will actually pay, and those deals are confidential. Consolidation has given hospitals greater pricing power in many markets, according to health-economics researchers.
“Being cost effective was not an imperative in that type of market dynamic,” said Derek Haas, chief executive officer of Avant-garde Health, a health-care-cost accounting company that worked with Gundersen.
More New Knees
Knee replacement has become more common in the U.S. while at the same time climbing in price.
On knee-replacement surgery, higher-cost hospitals spent almost twice the amount lower-cost hospitals spent, despite largely similar quality and roughly comparable patients, research by Mr. Haas and Harvard Business School Professor Robert Kaplan showed.
“It’s a standard procedure” that doesn’t vary much from one hospital to another, and nor should its costs, Mr. Kaplan said. “Carve out the old knee and put in a new joint.”
For consumers, the prices paid for the surgery at some hospitals in the U.S. were more than double the prices at others, according to an analysis of 88 million privately insured people to be published in the Quarterly Journal of Economics.
Before 2016, Gundersen Lutheran Medical Center, one of the Gundersen system’s six hospitals, lacked even an estimated cost for knee-replacement surgery, which it performs an average of more than 400 times a year. The hospital long set its price, with help from consultants, to be on par with other hospitals, and to sustain the orthopedic department’s margin. Cost approximations, such as those used by Medicare to value a physician’s time, are a starting point for many hospitals.