How Device Makers Lose When Medicare Bundles Knee, Hip Surgery Fees

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News that the Obama administration is shifting more Medicare dollars away from fee-for-service medicine when it comes to paying for knee and hip replacements could force device makers to become more competitive or lose sales.

The U.S. Secretary of Health and Human Services last week proposed moving doctors and hospitals in 75 geographic areas to bundled payments, which makes the hospital where the surgery takes place be “accountable for the quality and costs of the care for the entire episode of care – from the time of the surgery through 90 days after discharge.”

The potential for savings is huge. In 2013, hip and knee replacements cost Medicare more than $7 billion alone in hospital costs and the procedures vary in price across the country (see gallery at the end of this column). “By focusing on episodes of care, rather than a piecemeal system, hospitals and physicians have an incentive to work together to deliver more effective and efficient care,” HHS Secretary Sylvia Burwell said.

Bundled payments are already becoming more common among private insurers like UnitedHealth Group (UNH), Aetna (AET), Cigna (CI), Anthem (ANTM) and other Blue Cross and Blue Shield plans.

Those involved in early bundled payment efforts for knee and hip replacements say the costs are lowered and it’s the device makers who tend to bring their prices down when surgeons go out for bid and become tougher negotiators in effort to get more of the “at risk” bundled payment for themselves rather than the device maker. This could mean a squeeze on revenue for the likes of the Depuy unit of Johnson & Johnson (JNJ), Stryker (SYK) and Zimmer (ZMH).

“The basic premise is that what gets measured gets focused on,” Karen Timberlake,  who heads the University of Wisconsin’s Population Health Institute and is also is director of Wisconsin’s Partnership for Healthcare Payment Reform said in an interview last year. “When you start to shift the payments, there is some money at risk and it causes different questions to be asked and causes organizations to think differently.”

Timberlake’s organization has worked with doctors and hospitals on ways to lower costs and improve quality for total knee replacements from the first day the patient enters the hospital for surgery to 90 days after the patient is discharged.

Wisconsin providers save money after participating hospitals and surgeons went to all their device manufacturers, informing them that payments were changing. And that has led to better prices, she said in this article published as part of a series of stories funded by the Robert Wood Johnson Foundation.

“Could they get all the device manufacturers together to negotiate prices?” Timberlake asks.

In a shared savings arrangement, physicians can reap higher payments if prices go down on the devices used in the procedures. Thus, surgeons can still use the devices they want and benefit financially under a bundled payment arrangement even as fee-for-service medicine goes away.

“Many didn’t bring their manufacturers together until part of their reimbursement was at risk,” she said in an interview last year.  “Bundled payment was a new catalyst of conversation. It prepares for bigger changes that they all need to make.”

Health and Human Services Secretary Burwell said the five-year Medicare payment model for knee and hip replacements is the latest in the administration’s commitment to “pay for quality over quantity.”

“This model will incentivize providing patients with the right care the first time and finding better ways to help them recover successfully,” Burwell added. “It will reward providers and doctors for helping patients get and stay healthy.  And it’s what we hear that many doctors and providers want – to be able to give the best care possible to their patients.”

Wondering how bundled payments and value-based reimbursement works for patients in Obamacare? The Forbes eBook Inside Obamacare: The Fix For America’s Ailing Health Care System answers that question and more. Available now at Amazon and Apple.

Source: Forbes