June 2004 Bulletin

The future of orthopaedics

Hospital-based services are squeezed, but opportunities are available

By James H. Herndon, MD

Note: At the AAOS Board Meeting in March 2004, a report on the future of orthopaedics was distributed and discussed. A number of AAOS fellows served as advisors in developing this report, which included both good news and concerns about the specialty. I felt the contents were so significant that I wished to share them with the fellowship through this article, which summarizes that report.

Last fall the Innovation Center of the Health Care Advisory Board in Washington, D.C., released a report forecasting the future demand and profitability of orthopaedics. Though the report was subtitled “Strategic Forecast for a Service Line under Siege,” the news is not all bad.

As recently as 1997, hospitals could count on the high volume of inpatient orthopaedic services to generate about a quarter of their profits. The volume is still there—orthopaedics ranks third in both volume and revenue in hospitals nationwide—but today, these services account for just 2 percent of hospital profits.

The four major components of orthopaedics—joint replacement, spine surgery, sports medicine, and fracture care—account for three-quarters of orthopaedic revenues. Smaller, but still important areas of orthopaedic care include general orthopaedics, foot and ankle care, medical back care, and hand surgery.

Joint replacement

Soaring implant costs are driving the decline in profitability for joint replacement procedures. Many hospitals are experiencing double-digit increases in implant costs. New implant designs are another factor. Many of these new designs require specialized instruments and equipment, further increasing the cost of the procedures.

Another factor affecting profitability in this area is declining reimbursements. Although the cost of joint implants has risen dramatically, Medicare payments actually fell in four of the five years between 1997 and 2002. Additionally, third-party payers have historically been slow to cover innovative procedures.

However, there has been a relative boom in hip and knee replacement surgeries in the younger, privately insured population. Over the past five years, volumes grew faster in patients aged 45-55 years than in any other age group. This may be due in part to current trends that favor an active lifestyle well into middle age and beyond. Though staying active has many health benefits, it also leads to more chronic joint wear and tear. Attracted by less invasive procedures and more durable implants, younger people—including a healthy proportion of Baby Boomers—are opting for early joint replacement in increasing numbers, and this trend is expected to continue over the next decade.

Two new joint replacement procedures should be major volume drivers for at least 10 years. They are unicompartmental knee replacement and hip joint resurfacing. Both are less destructive to bone than standard joint replacements, which make them particularly desirable to younger patients.

A less significant driver of joint replacement volume in the near term is likely to be minimally invasive hip replacement. Though its potential is very attractive—substantial reductions in length of stay, accelerated recovery, and considerably reduced postoperative pain—this new technique seems slated for a long break-in period. The procedure is technically extremely demanding, and though manufacturers have invested heavily in product development and physician education, general orthopaedists who see few opportunities to perform the surgery will probably not opt to expend the considerable effort to master the new techniques.

Notwithstanding the rapid growth of joint replacement in younger patients, elderly Medicare patients still comprise 69 percent of the joint replacement market, and there is every indication that this age group will continue to predominate in the ensuing decade. As in the past, the future profitability of joint replacement procedures in this population will rise or fall with the trends in implant costs.

Outpatient services

Outpatient procedures represent less than a third of total revenues for orthopaedics, but they account for half the profits. The disparity is fueling the competition between ambulatory surgical centers (ASCs), specialty facilities and hospitals. Between 1999 and 2001, ASC surgery volume rose 45 percent nationally, while hospital outpatient volume rose only 7 percent. In selected areas, the disparity is even greater

Although the majority of inpatient procedures probably will continue to be performed in a hospital setting, emerging technologies may cause some shift from inpatient to outpatient services. Competition from specialty service centers will be a factor in the decreased profit per case. ASCs typically target younger, privately insured patients, and many ASCs specialize in lucrative sports medicine procedures. This trend is expected to continue, with for-profit specialty hospitals increasingly attracting the most desirable patients. Government reimbursement for the older, Medicare-insured patients treated at traditional hospitals will almost certainly not keep pace with cost increases.

Reimbursement is the unknown quantity in the financial future of hospital orthopaedics. Assuming the present course of cost and reimbursement trends, orthopaedics may be at the break-even point by 2010 nationwide. Conversely, if insurers would increase payments in line with projected cost increases, total profits could nearly double by the end of this decade. The Innovation Center report straddles the middle, suggesting that the gap between reimbursement and rising costs will narrow but not close in the coming years.

Spinal surgery and sports medicine

Future projections for the course of back treatment suggest that, as new surgical techniques become more widely adopted, volume may shift from conservative medical treatment to the currently more profitable spine surgery subservice. When all orthopaedic services are considered, spine surgery stands out as generating a disproportionate share of inpatient profits. In 2001, spine surgery generated 53 percent of total orthopaedic profits, though the procedure accounted for only 21 percent of the volume and 25 percent of the revenues. Furthermore, spine surgery is offered in comparatively few institutions, so any increases in volume will have even greater impact on participating institutions.

Sports medicine occupies a similar position on the outpatient side. Sports medicine yielded 53 percent of outpatient orthopaedic profits in 2003, largely due to high per-case margins.

The recent growth in spine surgery and sports medicine is principally attributable to demographics. Baby Boomers are now middle-aged, a period in which both spine and sports injuries tend to occur. As the Boomers grow older—the first wave will reach 65 in 2011—volume will likely shift to joint replacement and fracture care, but until then, spine surgery and sports medicine will continue to generate heavy volume from this large segment of the population.

Though the outlook for spine surgery is generally good, the continued profitability of spinal fusion is problematic. The introduction of biological bone growth factors adds a significant additional expense to the procedure. For now, some private insurers are providing ample reimbursement and even authorizing DRG pass-through payments for Medicare patients, but broader adoption of biological products for use in spinal surgery may whittle profits if insurers balk at adequate payment.

Also, spinal fusion volume could be threatened by the introduction of artificial disks that treat spinal disk degeneration by replacing the damaged disk rather than fusing adjacent spinal segments. The provisional DRG classification codes artificial disk replacement as a relatively lower-paying back and neck procedure rather than as a more lucrative spinal fusion procedure. This disparity in cost versus reimbursement is a concern; unless the provisional classification is revised, artificial disks could have an adverse impact on spine surgery profits for several years.

In contrast, sports medicine profitability is faced with fewer challenges. Because implants are rarely involved, the subservice is immune to escalating implant costs. In the future, sports medicine will benefit from the adoption of new, less-invasive procedures to treat common activity-related injuries. These procedures are already popular with patients because they promise quick recovery. Among the procedures likely to spur volume are arthroscopic rotator cuff repair, unispacer knee implants, arthroscopic ankle reconstruction, Tommy John surgery, minimally invasive wrist fixation and arthroscopic ACL reconstruction.

Because sports medicine is an attractive niche, competition is expected to intensify. Already, more than a third of knee arthroscopies are performed outside the hospital, and ASCs are actively seeking to capture a larger share of the outpatient market. Rapid growth is on the horizon, but hospitals, ASCs and even individual practices will compete to see who will capture the lion’s share of the market.

Fracture care

Never a leading moneymaker, fracture care is likely to decline slightly in profitability, due to rising implant costs and flat reimbursement rates. The use of growth factors and other biological products to accelerate bone healing could escalate costs but not in the near future. As for growth in volume, that is likely to be sluggish. Increased use of osteoporosis prevention therapies will lessen the incidence of severe fractures, as it already has begun to do.

Nevertheless, people will continue to break their bones, and fracture care will remain a significant provider of overall orthopaedic volume. Some volume increases may come from increased longevity and the consequent vulnerability of the very elderly.

Length of hospital stay

Despite a projected 14 percent growth in inpatient orthopaedic admissions over the next decade, orthopaedic inpatient days are on a downward trend at an average rate of 0.6 percent yearly. Reduced length of stay will account for most of this trend, though some procedures will shift from inpatient to outpatient, particularly in the latter part of the decade.

Two factors will drive a significant decline in length of stay. One is the adoption of more efficient inpatient management protocols coupled with improved rehabilitation techniques. The other is the introduction of minimally invasive techniques, which radically shorten patient stays.

Forecast—not yet fact

The Innovation Center’s report is a mix of good and bad news. Key management initiatives that could make a difference include: lowering implant acquisition costs, restricting the use of premium implants to the most appropriate patients, further reducing length of stay, improving the payer mix, and negotiating more favorable contracts with commercial payers.

A change of just 10 percent in any of these key drivers would improve profits to some degree, and in some cases, the improvement would be dramatic. For example, a 10 percent boost in commercial reimbursement would nearly double the profits from joint replacement. Reducing the cost of implants by the same amount would have almost the same impact.

James H. Herndon, MD, MBA, is immediate past president of the AAOS and director of the Harvard Combined Orthopaedic Residency Program. He can be reached at jherndon@partners.org

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