Hospitals losing money on joint replacements? Say it ain't so.
According to this report, inpatient Orthopedic visits lead to an average loss of $3,630 in 2023 driven mostly by hip and knee replacement surgeries. Inpatient primary hip replacements had a total margin of -$3,498 while inpatient primary knee replacements came in at -$1,402. At the same time, outpatient knee replacement volumes were 5x higher than inpatient volumes, and outpatient procedures had positive margins (+$3,466 for THA and +$2,879 for TKA). Such findings point to a dramatic shift in what are considered lucrative (read: "money-maker") procedures for health systems with potential downstream effects on hospital dynamics. Are we witnessing the decline of Orthopedics as a desirable service line?
The devil is in the details.
In the always straightforward and clear nomenclature of payors, the term "outpatient" is not equivalent to "same day." Outpatient joint replacements include not only same day discharges but also patients who stay overnight (23-hour observation, extended stay, or whatever other confusing term you prefer). In other words, all same day joint replacements are outpatient, but not all outpatient joint replacements are same day. (For many doctors, determining admission status is a hopeless, pointless game only an administrator could love).
From a process perspective, extended stay joint replacements are more or less equivalent to inpatient joint replacements in most facilities. The main difference is that patients classified as "inpatient" today are usually publicly insured Medicare/Medicaid patients (read: lower paying) and/or complex patients with higher co-morbidity burden/complication rates (read: more expensive). In short, selection bias mostly explains why inpatient joint replacements are now money-losers.
The rise in outpatient procedures (and the fact that they still generate positive margins) means we shouldn't feel too sorry for hospitals and health systems just yet. However, payors (including Medicare Advantage) are getting increasingly aggressive in approving joint replacement procedures only as "outpatient” status. Admitting the patient can lead to a denial of payment or a bigger out of pocket expense for the patient. Similarly, CMS removing hip and knee replacement from the Inpatient Only List a few years ago created mass confusion led to hospitals and health systems wrongly assuming that these procedures could only be performed on an outpatient basis.
The distinction between inpatient and outpatient and the shift of healthier patients from the former to the latter is financially impactful for hospitals. Outpatient hip and knee replacements are reimbursed at a lower rate than inpatient. Hospitals now losing money on inpatient joint replacements means more of the healthier patients are being shifted to the lower reimbursing "outpatient" status. So, while hospitals are still making money on those patients, the margins are less favorable than the good ol' days where all joint replacement patients (including better paying commercial patients) were classified as inpatient.
Hospitals and health systems are acutely aware of this shift and the margin squeeze it creates. If it's not an outright threat to their economics (it may well be for many), it's at least caught their attention. Add to that a downward trend in total margin for outpatient hip and knee replacement, and there is reason for concern.
The migration of joint replacement procedures to ASCs is another threat to hospitals — one that is no longer existential but very real. While most ASCs can provide an extended stay, in practice the majority of “outpatient” TJAs done in ASCs are true same day discharges. Same day joint replacement isn’t for everyone, but studies show it’s safe for carefully selected patients with lower readmission rates and fewer complications than similar procedures done in hospital outpatient departments (HOPDs). The catch: reimbursement for HOPDs tends to be lower than for ASCs. The migration of joint replacements to ASCs (including those owned by physicians or part of MSO-backed MSK platforms) is in full swing, and there’s no going back. As processes and protocols improve, more patients will be medically appropriate for the ASC setting. The pandemic, during which outpatient surgery was the only option for many, turned patients on to the safety and convenience of same day joint replacement.
As a side note: these factors also may make the debate about Physician Owned Hospitals moot — at least as it pertains to MSK. Many Orthopedic procedures shifted to the ASC setting long ago including hand, shoulder, and elbow surgeries along with Sports surgeries such as rotator cuff repairs and ACL reconstructions. Hip and knee replacements and spine surgeries, once felt to be inappropriate for ASCs, are now a source of significant leakage from hospitals and the inpatient setting. An MSK POH is no longer a necessity. Just tie an ASC to an outpatient office (complete with ancillary services such as imaging, DME, and physical therapy) and you have a modern day microhospital with a lot less hassle — and fewer hand wringing articles from the AHA. (You also happen to have a very attractive model for a non-traditional entrant into healthcare. Big Retailers seem content to pour billions into Alt Primary Care while a much better opportunity is staring them in the face. But I digress.)
Any way you look at it, a fascinating shift is occurring with Joint Replacement surgeries and their place in the hierarchy of service lines. There are additional incentives that will further drive the migration of these cases to ASCs. Cost savings can average in the tens of thousands, centers can engage in direct contracting with employers (and self-pay patients), and physician ownership means those doing the work get to reap more of the reward. This last point is increasingly important in an environment with significant downward pressure on reimbursement for the professional component of hip and knee replacement (i.e., what the surgeon gets paid for performing the procedure). Will Orthopedic Surgery, specifically Joint and Spine procedures, lose its place near the top of the hospital service line mountain? If so, is it a good thing or a bad thing?
There is a similar shift happening for healthy young women in pregnancy, in the previously lucrative world of labor and delivery floors. More births of otherwise uncomplicated pregnancies are happening in outpatient birthing centers or via midwife assisted home births. This is especially true among wealthier commercially insured populations. Inpatient labor and delivery is increasingly reserved for higher risk pregnancies. Interesting times...