Reducing the Price of Total Hip Arthroplasty Implant Costs Through Reference Pricing: An Economic Evaluation

December 2022 Vol 15, No 4 - Business, Original Research
Christopher J. Fang, MD; Jonathan M. Shaker, MS; Daniel M. Ward, MD; Carl T. Talmo, MD; Andrew Jawa, MD; David A. Mattingly, MD; Eric L. Smith, MD
Dr Fang is Surgery Resident, Department of General Surgery, Good Samaritan Regional Medical Center, Corvallis, OR, and Mr Shaker is Executive Director, Boston Sports and Shoulder Center, Boston, MA; Dr Ward is Surgeon, Department of Orthopedic Surgery, New England Baptist Hospital; Dr Talmo is Surgeon, Department of Orthopedic Surgery, New England Baptist Hospital; Dr Jawa is Surgeon, Boston Sports and Shoulder Center, and Surgeon, Department of Orthopedic Surgery, New England Baptist Hospital, Boston, MA; Dr Mattingly is Clinical Chair of Orthopedics and Surgeon in Chief, Department of Orthopedic Surgery, New England Baptist Hospital, Boston, MA, and Dr Smith is Chief of Arthroplasty, Department of Orthopedic Surgery, New England Baptist Hospital, Boston, MA.
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Abstract

BACKGROUND: Reference pricing establishes a set price an institution agrees to pay for total hip arthroplasty (THA) to all vendors. The hospital financially aligns itself with surgeons and then contracts with vendors to sell implants at newly dictated prices. Orthopedic surgeons may utilize any implant system using their best clinical judgement that has met the reference price.

OBJECTIVE: To compare THA implant costs before and after implementation of reference pricing and to determine if prices decreased and vendors and technologies changed.

METHODS: We retrospectively analyzed the 12 months before (May 2017-2018) and the most recent 12 months after (March 2019-2020) implementing reference pricing at our institution. We investigated differences in average prices for total implant and component costs. We evaluated cost of implants with respect to surgeon volume, assessed changes in implant utilization, and number of companies purchased from before and after reference pricing.

RESULTS: A total of 6199 THAs were included in the study: 3464 arthroplasties before and 2735 after implementation of reference pricing. Overall implant costs decreased by 22.7% (P <.0001). All individual hip components decreased by ≥21% (P <.0001). No difference in prices was found between surgeons (P = .98). Implant selection did not change (P = .18), and vendor business increased by 1 company after reference pricing.

CONCLUSION: The strategy of reference pricing significantly reduced costs for THA implants at our institution. The reduction in implant costs was regardless of surgeon volume and did not change surgeon implant selection. We conclude that this strategy represents a significant cost-savings approach for other hospitals.

Key Words: implant costs, practice management, reference pricing, total hip arthroplasty (THA), total joint arthroplasty (TJA), vendors

Am Health Drug Benefits.
2022;15(4):111-115

Manuscript received June 2, 2021
Accepted in final form January 14, 2022

Disclosures are at end of text

From 2000 to 2014 (the most recent data available), annual total hip arthroplasty (THA) incidence increased 105%, from 56.80 to 116.26 procedures per 100,000 population, and it is projected to grow 71% to 635,000 procedures annually in 2030.1 (Costs spent are categorized by diagnosis-related group [DRG], thus there is a lack of granularity for THA specifically.) In 2019, national health expenditure increased 4.6% to $3.8 trillion, with hospital spending increasing 4.5% to $1.2 trillion.2 This healthcare spending represented a 17.7% share of the economy.2 Major joint replacement as a DRG is the most prevalent condition in the Medicare population (4.7% of episodes) and accounts for the highest total Medicare episode payments (6.3%).3 It is estimated that >$19 billion was spent on hospitalizations alone for procedures related to osteoarthritis performed in 2017.4 On average, half of the expense from THA procedures comes from implant costs, with pricing continuing to increase.5,6

Value-based healthcare states that high value for patients, expressed as health outcomes achieved per dollar spent, should be the comprehensive goal of healthcare.7,8 With this objective in mind, finding solutions to lower implant costs is critical. Several strategies exist for reducing costs, including limiting purchases to a single vendor or designating a preferred vendor to leverage exclusivity for lower prices.9 This strategy can be limiting as it restricts surgeons from using certain implants and requires penalties for surgeon noncompliance.9 Another method, reference pricing, involves price ceilings to limit expenses, previously described in the literature as a price capitation put on patients when searching for arthroplasty care.10 This pricing strategy may also be applied to vendors to set a price at which a hospital-physician alliance will buy.11

Our institution implemented reference pricing in June 2018, establishing a set reference price to all vendors who could then choose to sell to us or not based on this proposal. Compared with single vendor strategies, this model allows for surgeons to have greater freedom in selecting implants, removing potential restrictions to optimal patient care based on inventory and decreasing expenses from implant costs for the hospital.

A possible drawback of this strategy involves losing vendor business from those who do not agree to sell at reference price, thereby reducing overall device technologies and possibly altering surgeon practice. To determine whether this occurred in response to our strategy of reference pricing, we examined the number of vendors who sold to our hospital after reference pricing. Because of the emerging use trends and cost barriers that certain components represent, we assessed component utilization before and after reference pricing.

This strategy can theoretically reduce implant costs but may alienate vendors and limit their associated device technologies when unable to meet the agreed price. Accordingly, it is critical to investigate the impact of this strategy in reducing costs for implant components and how it effects vendor and surgeon implant selection. The objectives of our analysis were to identify costs before and after reference pricing for THA implants and components, examine influence of surgeon case volume on post–reference pricing implant costs, and determine if reference pricing affected the number of vendors and types of implants used. Our hypothesis was that vendors would meet the price set forth by the hospital, and the selection of different vendors and technologies would not change.

Methods

We retrospectively analyzed the 12 months before (May 2017-2018) and the most recent 12 months after (March 2019-2020) implementing reference pricing at our single-specialty orthopedic institution. We compared average prices before and after, and from the difference determined the percentage of reduction for individual implant components and total implant costs. THA component prices analyzed included acetabular liner, acetabular shell, femoral head, and femoral stem.

We evaluated the cost of post–reference pricing implants with respect to surgeon volume for our 25 surgeons. We also assessed the utilization of specific implant types for THAs as a result of reference pricing at our institution, as a proxy to determine if cost was a significant barrier for the use of any other implants or if surgeons were no longer able to use their preferred implants as a result of reference pricing. Finally, we added up the number of companies purchased from before and after reference pricing to identify the effect of reference pricing on vendor number.

Implant Costs

We used a third-party commercial medical cost-analysis database from Avant-garde Health (Boston, MA) to evaluate implant prices. Time-driven activity-based costing methodology was used to precisely determine all costs of the consumable implants at our institution, in accordance with previous studies.5,12 Avant-garde Health software and guidance were used to appraise the costs with input from the director for orthopedic surgery, financial office staff, and physicians at the hospital.

The surgeon, surgeon volume, surgical procedure, vendor, implants used, and the purchase prices were processed by the software. Patient-level data were screened for integrity through this software and were removed if screening failed (eg, implant prices outside of typical ranges or inconsistent labels). In total, 4% of patients were excluded because of screening failure. The actual reference price for THA implants was arrived at with the help of the third-party vendor using benchmarked price tags from institutions similar in size and volume.

Statistical Analysis

Student’s t-tests were used to compare the averages of implant costs before and after the intervention of reference pricing. Decreased costs for total implant and implant components were indexed as a percentage rather than dollar amounts to protect proprietary cost information. A one-way analysis of variance was used to measure post–reference pricing total implant costs by surgical case volume of a surgeon by 6 groups. Components used were compared before and after reference pricing using chi-square tests. Vendors were totaled before and after reference pricing intervention.

All statistical analyses were performed using SAS v9.4 (SAS Institute, Cary, NC). Significance was defined as P <.05. Because this study only included de-identified data in compliance with the Health Insurance Portability and Accountability Act, it was exempt from Institutional Review Board approval.

Results

A total of 6199 primary THAs were analyzed for this study: 3464 arthroplasties before implementation of reference pricing and 2735 arthroplasties after implementation. Overall implant costs for THAs decreased by 22.7% (P <.0001; Table 1). All individual hip components decreased in cost as well.

Table 1

Based on pricing data and our volume since implementing reference pricing, our institution has saved more than $4 million in THA implant costs. We were paying at the top 80th percentile for implants nationally, and this amount decreased to the 60th percentile.

No difference was found among implant post–reference pricing costs when comparing the case volume of a surgeon (P = .98; Table 2). Type of implants used after reference pricing did not differ significantly (all P >.18). In other words, surgeon implant type and vendor utilization did not significantly change after reference pricing. Our hospital purchased from 6 vendors before and 7 vendors after reference pricing.

Table 2

Discussion

Reference pricing significantly reduced costs for THA implants at our institution. Individual components and complete overall price of implant systems both decreased in cost. The reduction in implant costs was regardless of surgeon volume. Implant type utilization did not change for surgeons, and no vendor business was lost. In fact, another vendor became affiliated after reference pricing.

Brodke and colleagues initially described reference pricing as a price ceiling placed on patients by insurance companies, obliging patients to shop for total joint arthroplasty at facilities with fees below the reference price allotted to them for payment.10 This dynamic imposed the obligation of limiting overall costs onto the patient. In contrast to this strategy, our hospital-physician alliance negotiated directly with vendors to limit expenses on implants by executing a reference price, which we have done previously with knee implants.11 Because implant costs represent approximately 44% of total episode-of-care costs for primary total hip and knee arthroplasty (DRG 470), it is essential to explore strategies to reduce implant prices.5,13 At our institution, we were able to lower overall healthcare costs and deliver value-based healthcare using this strategy.

Our institution engages in a hospital-physician gainsharing co-management arrangement, in which a physician group contracts with the hospital to manage the total joint service line, aligning patients’ quality of care and financial incentives for mutual benefit to both. This unified front of a hospital with more than 20 orthopedic surgeons allows a stronger bargaining position for standardization of prices paid to vendors to lower overall implant costs. The authors believe that for this cost strategy to be translatable and effective at other institutions, joining a similar gainsharing co-management system is beneficial. Aligning providers and the health system will allow for a more effective negotiation with manufacturers, even at institutions with varied volumes and sizes.

It was projected that by 2030, THA volume would reach 572,000 annually.14 For this high-volume procedure, implant prices represent the dominant factor in overall total costs.5,15-17 Health systems will need to evaluate implant cost–reducing strategies going forward to control expenses and remain financially solvent, while providing excellent quality of care.

The literature on the association of hospital case volume and implant costs is controversial. Carducci and colleagues demonstrated increased case volume of a hospital was associated with a decrease in total costs for implants,5 whereas Haas and colleagues produced mixed results for case volume and implant prices.18 In another study, a significant but small in magnitude association was shown between case volume and decreased implant prices, but the investigators could not account for similar volume hospitals having wide variations in implant costs.19 A hospital’s overall case volume can position it for better negotiation with vendors but remains arguable in execution. In our study, we found no correlation between surgeon volume and implant prices. All surgeons received the same price for implants, and there was no need to limit surgeons on vendor selection. With the implementation of reference pricing, volume of a surgeon was inconsequential to implant cost, which is an important consideration when hospitals evaluate strategies to reduce implant costs.

Reference pricing can only succeed if surgeons can select their ideal implant based on patient evaluation and surgical experience.6 If surgeons are restricted from vendors and their associated familiar or modern technology as a result of cost-reduction strategies, patient care may suffer as a result. In our study, we did not lose any vendor business and thus surgeons were not limited in their implant selection. Every vendor continued to do business with their full inventory at the new reference price. In fact, we gained another vendor, improving the overall diversity of implant options. This outcome was likely due to vendors considering the reference price financially favorable compared with losing business with our hospital. Therefore, our surgeons maintained the ability to use all implants with no restraints to affect their practice.

Furthermore, we found no change in implant type/vendor utilization among surgeons after reference pricing. We interpret this result as the surgeons utilizing the implant type and vendor that they determined was best for the patient due to quality and experience with the component, without respect to cost. A major financial strategy was implemented to reduce costs and did not alter the clinical practice of any of our surgeons. These results are valuable for other institutions negotiating potential business decisions with both administrative and surgeon inclusion. With reference pricing, surgeons are free to select options based on evidence-based medicine and optimal care of the patient—while significantly decreasing overall implant costs.

In a program launched in 2011, an institution approached cost-savings in a similar design to our hospital’s reference pricing.20 They sought to decrease their joint implant prices by creating a 2-tier price system for their surgeons to choose from.20 This method blocked surgeons from readily selecting implants that were marked as higher price implants. In contrast, our more recent study analyzed >2 times more THA cases, had longer follow-up, and exemplified a model in which surgeons were free from restrictions, penalties, or administrative barriers on implant selection. To our knowledge, our study is also the first to include cost data to the degree of individual components for THA.

It should be noted that the costs to the patient, especially out-of-pocket costs, are a very important aspect of the healthcare system. When we used reference pricing for hip implants, the vendor and the utilization of implants did not change, but the cost at which the hospital purchased the implant was lowered. Therefore, this change did not result in lower costs for patients. Nevertheless, we believe this strategy benefits the patient: having all implant options available to the surgeons allows the selection of the best implant for the specific clinical scenario.

Limitations

This study has several limitations. We calculated the number of procedures performed at our institution for case volume, but it is possible surgeries were performed outside of our hospital that may skew a surgeon’s total annual volume upwards. Because our analysis showed no difference between any surgeon’s volume and implant price, this potentiality may be negligible. Furthermore, we used component type utilization as a proxy for detecting changes in surgeon practice due to cost, but many factors are taken into consideration when selecting implants that do not involve implant price. In addition, our cost data come from a single high-volume, single-specialty orthopedic institution with hospital-physician gainsharing principles, which could limit the generality of the approach to smaller, multispecialty centers in which physicians have no stake in hospital finances. Finally, we only captured data for primary THAs. Future studies should investigate differences between primary and revision implant costs and the effect of cost strategies on prices.

Conclusion

Hospital costs for THA implants decreased by 22.7% after implementing reference pricing at our institution. Individual implant components all decreased in cost. The prospect of reducing device selection or quality with the loss of a vendor was eliminated. No change in implant selection was found among surgeons after reference pricing.

Understanding the impact of reference pricing for reducing high-volume THA procedure implant prices is important as hospitals continue to explore novel strategies to reduce costs and improve the value of care. Reference pricing represents a significant cost-savings approach for other hospitals to use.

In this study, the pricing strategy only affected the hospital margin. Given the undisclosed nature of hospital financial data, our study remains an influential model for cost-management strategies. Future research on how institutional margins directly and indirectly affect patient costs/access is necessary.

Author Disclosure Statement
Dr Jawa receives royalties from Depuy Synthes, is a Speaker for and Consultant to DJO Global, is Consultant to Ignite Orthopaedics, has equity in Boston Outpatient Surgical Suites, and is Associate Editor for the Journal of Shoulder and Elbow Surgery; Dr Mattingly receives royalties from and is Consultant to Depuy; Dr Smith is Consultant to and has received research support from Depuy and Conformis, and is on the committee of AAOS and AOA; Dr Ward is Consultant to Stryker Orthopedics and holds stock or stock options in Arthromeda; Dr Talmo receives royalties from and is Consultant to DJO Global; Dr Fang and Mr Shaker have no conflicts of interest to report.

References

  1. Sloan M, Premkumar A, Sheth NP. Projected volume of primary total joint arthroplasty in the U.S., 2014 to 2030. J Bone Joint Surg Am. 2018;100:1455-1460.
  2. American Medical Association. National Health Expenditures, 2019: Steady Spending Growth Despite Increases in Personal Health Care Expenditures in Advance of the Pandemic. Accessed June 15, 2020. https://www.ama-assn.org/system/files/2021-05/prp-annual-spending-2019.pdf.
  3. Dobson A, DaVanzo JE, Heath S, et al. Medicare payment bundling: insights from claims data and policy implications: analyses of episode-based payment. Final report. October 26, 2012. Accessed June 15, 2020. www.aha.org/system/files/2018-11/ahaaamcbundlingreport.pdf.
  4. Agency for Healthcare Research and Quality. Healthcare Cost and Utilization Project Nationwide Inpatient Hospital Costs: The Most Expensive Conditions by Payer, 2017. Accessed December 1, 2022. https://www.hcup-us.ahrq.gov/reports/statbriefs/sb261-Most-Expensive-Hospital-Conditions-2017.pdf.
  5. Carducci MP, Gasbarro G, Menendez ME, et al. Variation in the cost of care for different types of joint arthroplasty. J Bone Joint Surg Am. 2020;102:404-409.
  6. Healy WL. Gainsharing: a primer for orthopaedic surgeons. J Bone Joint Surg Am. 2006;88:1880-1887.
  7. Porter ME, Lee TH. The strategy that will fix health care. Harv Bus Rev. October 2013. June 15, 2020. https://hbr.org/2013/10/the-strategy-that-will-fix-health-care.
  8. Porter ME. What is value in health care? N Engl J Med. 2010;363:2477-2481.
  9. Boylan MR, Chadda A, Slover JD, et al. Preferred single-vendor program for total joint arthroplasty implants: surgeon adoption, outcomes, and cost savings. J Bone Joint Surg Am. 2019;101:1381-1387.
  10. Brodke DJ, Guo C, Aouad M, et al. Impact of reference pricing on cost and quality in total joint arthroplasty. J Bone Joint Surg Am. 2019;101:2212-2218.
  11. Fang CJ, Shaker JM, Stoker GE, et al. Reference pricing reduces total knee implant costs. J Arthroplasty. 2021;36:1220-1223.
  12. Menendez ME, Lawler SM, Shaker J, et al. Time-driven activity-based costing to identify patients incurring high inpatient cost for total shoulder arthroplasty. J Bone Joint Surg Am. 2018;100:2050-2056.
  13. Fang CJ, Shaker JM, Ward DM, et al. Financial burden of revision hip and knee arthroplasty at an orthopedic specialty hospital: higher costs and unequal reimbursements. J Arthroplasty. 2021;36:2680-2684.
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