Trend tracker: A "PERFECT STORM" HITS THE ORTHOPEDIC SERVICE LINE

Despite widespread belief that the demand for hip and knee replacements is higher than ever, recent Thomson Reuters research shows these traditional orthopedic mainstays are either declining or flat.

KNEE AND HIP REPLACEMENT TRENDS HAVE FLATTENED

Source: Thomson Reuters Hospital Drug Database

Why?
The cost of surgical implants has skyrocketed, wiping out the margins on inpatient procedures. As a result, hospitals have become more dependent on outpatient procedures, particularly knee arthroscopies. However, competition from physician-owned independent facilities is cutting into the hospital market share.

Despite this, orthopedics continues to be one of the most important hospital service lines. Orthopedists are top earners among hospital specialties. In fact, orthopedic surgery is on par with general surgery, bringing in more than $1.8 billion in total Medicare-physician payments. Although hospital payments for orthopedic procedures are also high, they fall slightly below both cardiac and general surgeries.

After years of rapid increase, hip replacements are no longer growing and may be on the decline. Contrary to industry expectations factoring in the aging Baby Boomer generation, knee replacements have flattened out as well.

In addition to stagnating volumes, orthopedic margins are falling. This decline is due to several factors including:

• Double-digit annual increases in the cost of both hip and knee implants
• Knee implants that averaged more than 50 percent of Medicare DRG reimbursement according to Orthopedic Network News (other sources report even higher figures)
• Extreme price disparities between hospitals
• Relationships cultivated between vendors and physicians, bypassing hospital purchasing departments
• Decentralization of purchasing, which has eliminated
  volume discounts

The result
These declining margins have led hospitals to depend more on outpatient procedures, particularly on knee arthroscopies. Knee arthroscopy leads orthopedic surgeons' hospital outpatient revenue by nearly $10,000 annually. It is also the leading revenue driver in the ambulatory setting.

Source: Thomson Reuters Medicare Physician Summary Master Files, 2000-2006

However, this source of revenue is also seeing a challenge. Although knee arthroscopy has leveled out in the hospital and inpatient settings, it is rising in ambulatory surgery centers. The number of procedures in that setting has more than doubled since 2000. In Delaware alone, the ambulatory surgery center share of knee arthroscopies is at nearly 50 percent—up from only 2 or 3 percent in 2000.

AMBULATORY SURGERY CENTER SHARE OF KNEE ARTHROSCOPIES IN DELAWARE

Source: Thomson Reuters Medicare Physician Summary Master Files, 2000-2006

Nationally, orthopedists continue to be leading wage earners and bring in high Outpatient revenues to hospitals. Orthopedics is still a predominantly inpatient specialty dominated by hip and knee replacements. However, due to the lack of growth and decreasing margins in those inpatient procedures, the orthopedic service line is increasingly dependent on outpatient revenue. On the outpatient side, orthopedics is becoming heavily dependent on knee arthroscopies, but Outpatient knee and hip arthroscopy income is threatened by migration from hospitals to ambulatory care sites.