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Current & Critical

Pricing Strategy Shifts from Operating Room to Episode of Care

Episode of care: three small words that could play a large role in influencing device pricing and innovation in the future.

As healthcare reform has moved toward
value-based payments, changes in the way implants are purchased have shaped strategic activity in the orthopaedic industry. That’s hard to refute when you consider the number of acquisitions that have taken place, expanding product portfolios in an effort to meet customer needs and gain market share. It’s also clear that payment structures are evolving as hospitals, ASCs, ACOs, GPOs, etc. test new delivery and pricing models to get the best patient outcomes at the most cost effective prices.

Such changes fueled conversation at the State and Future of the Orthopaedic Industry™ Symposium, when ORTHOWORLD® Members and their colleagues convened in Nashville, Tennessee on January 20.

A two-hour CEO panel highlighted market segment drivers and adoption of new technologies, from materials to robotics to orthobiologics. Insights gleaned will be shared in future issues of ORTHOKNOW. First, we’ll cover the panel’s take on shifts underway at the hospital and surgeon level.

The following article outlines takeaways from the Symposium, including how the different groups—from hospitals to insurance companies to the government—are attempting to control price, profitability and power.

Symposium panelists included:


  • Doug Kohrs, Managing Director of Responsive Orthopedics and Past President and CEO of Tornier
  • B. Sonny Bal, M.D., J.D., MBA, Chairman, President and CEO of Amedica and a total joint surgeon
  • Rod K. Mayer, President, Nextremity Solutions


Mr. Kohrs asked the panel to describe the industry in two words. Dr. Bal used “change” and “innovation.” Mr. Mayer used “increasingly challenging.”
Mr. Kohrs admittedly stretched his word allotment to three and used “episode of care,” a phrase he asked attendees to write down, research and remember.
The Centers for Medicare and Medicaid Services (CMS) rolled out the Bundled Payments for Care Improvement (BPCI) initiative in 2013, and is fully implementing it for interested parties in 2015.
Essentially, Medicare believes that by bundling the cost for the patient’s entire episode of care, quality of care will go up and costs will go down. To an extent, orthopaedic surgeons and groups expect those outcomes as well. Nearly 80 percent of the first cohort to sign up for the initiative focused on total joint replacement.
        CMS Update

On January 26, CMS announced long-term goals for establishing a value-based purchasing system that focuses on effective management of a population or an episode of care, further solidifying the adoption of bundled payments, accountable care organizations and other alternative models. 
CMS noted that in 2014, an estimated 20 percent of Medicare reimbursements shifted to these models. The Department of Health and Human Services charged CMS with reaching 30 percent of reimbursement through these models by the end of 2016 and 50 percent by 2018. 
A more in-depth outline of these models can be found here.

Mr. Kohrs described it further.

“What hospitals and practices are starting to focus on is not just the day of surgery, but what happens in the 90 days after surgery, and how you manage that patient within those 90 days.

“To put it into perspective, if you look at the average Medicare patient at the hospital, the day of surgery is about $20,000, depending on what part of the country you’re in. What’s interesting is, the 90 days afterward for a Medicare patient is $7,800 of just stuff. That could be going back to the emergency room, staying in long-term care, physical therapy, etc.

“What Medicare has said is, sign up for an episode of care, we’ll give you a fixed price based on that, and then anything that you save from that price you get to keep. What’s happening is that the hospital or practice is negotiating with Medicare. They get that price and they have the ability to cash in those savings and share those. It’s another form of gainsharing.

“No one knows the effect it will have on overall healthcare. It will probably lower the cost, but no one knows the effect on quality.”

Mr. Mayer added that he has seen bundled payments adopted by a foot/ankle specialist who is attempting to stay ahead of the curve of government taking power from private payors.

“This surgeon has brought 11 foot and ankle surgeons together; he believes that as the government goes, so will the private payors, and it would be wise for him to proactively consider how he can take a leadership role in doing this.

“It’s beginning to pop up on the horizon. I think the question to ask is, who is willing to take the leadership role in that process when there are so many other variables to consider: occupational therapy, physical therapy, administration of various decisions in that process? Who leads those negotiation processes? Who determines the blue light special price?”

Those are several points of concern. Early adapters have shown proof of concept, but questions remain on how to scale and what types of procedures are best for bundling.

Consultants have cornered the market and are advising hospitals, surgery centers and private practices on execution, such as
how to understand an organization’s readiness to follow through, how to complete a financial assessment of the opportunity and how to identify a capable leader before committing.

A bundled payments pilot program that involved private payors in California recently made headlines for its failure to execute. Six of the ten participating hospitals and surgery centers dropped out of the program, because they found that it took more time and effort than they originally anticipated, as well as a lack of trust, competing interests and inadequate technical infrastructure.

Whether or not bundled payments are a success, two staples of Medicare’s initiative—fixed pricing and a focus on post-procedural care—will continue to play throughout the entire healthcare market.

Dr. Bal noted that the focus on standardizing post-surgery processes is at its infancy. As a surgeon and professor at the University of Missouri-Columbia, he sees a large push to collect better evidence and roll out standardized protocols for surgery, antibiotics, physical therapy, etc., to rein in total cost.

Part of the original push to gain subscribers to the BPCI initiative was the fact that Medicare provides participants previously-unavailable claims cost data for their regional competitors. Program registrants can look at individual and competitor information to gain insight on clinical, quality and financial strengths and weaknesses, and also to assist in the negotiating process for setting payment rates.

Bundled payments and capitated prices are being
tested in the private insurance and free markets. As Mr. Kohrs mentioned, a practice he works with has set total knee replacements in a surgery center venue at $13,000, and they’re making money.

More private practices are marketing to self-insured companies and cash-only patients seeking price transparency and a single rate for day-of and total episode of care.

The full picture of what this means for device companies remains to be seen. Organizations like AdvaMed and The Network for Excellence in Health Innovation have expressed concern over the impact on innovation and patient care. Setting a bundled payment for a particular procedure could hinder the adoption of breakthrough devices and technologies that often cost more upon launch.

At the same time, greater opportunity awaits for companies that can quantify their products’ value in terms of clinical, patient process and cost-related outcomes benefits and for companies that can capitalize on patient care throughout the post-90 days.

There is concern that once these models have successful patient and financial outcomes, Medicare and private insurance companies will set lower prices and remove any negotiating power. Where will cuts come from, if waste has already been removed? Companies can’t assume that device prices will be immune.

As healthcare reform shifts, Mr. Kohrs believes that insurers will have the power over pricing.

“I think we’re heading for a significant change: the patient having more power and the doctor having less power, and hospitals trying to get into the mix to not give up their power. But it’s going to be the insurers that are going to drive it from a pricing perspective, and it’s going to start with capitation.

“The examples I used where there is a fixed price set for that episode of care on the day of surgery, that’s going to be set at a high level so that they get people to participate, but then it’s going to be like anything else. They’re going to take that level, once it exists, and keep ratcheting it down. Then it will start to look more like Europe.”

Carolyn LaWell is Content Manager for ORTHOWORLD. She can be reached by