Editor’s Spotlight/Take 5: The Price-Quality Mismatch: Are Negotiated Prices for Total Joint Arthroplasty Associated With Hospital Quality in a Large California Health System?

The search for value in healthcare has been a driving force for decades. Simply put, value represents quality and desired outcomes on the one hand, and cost on the other. Thinkers and doers have spent considerable time and effort on both sides of that equation. Whether it’s discouraging the use of diagnostic or therapeutic tools that provide no benefit to patients or reducing length of stay for healthy patients, the goal is to receive the best quality care at the lowest possible cost [^4,5]. In many ways, this is intuitive. While I’m unlikely to buy a USD 6000 Brioni Brunico suit (even though it looks great!), I won’t be buying a USD 70 suit at Walmart either—in both cases, the value simply isn’t right for me. In a rational market, every individual makes daily decisions like this, and we think no more about it.

But healthcare isn’t a rational market. Patients know this: Determining the cost of a service has been almost impossible in the past. In 2014, Bernstein and Bernstein [¹] asked representatives at 20 Philadelphia hospitals how much parking and an EKG cost. While 19 of 20 could provide the cost of parking, only three could provide the price for an EKG—and those estimates ranged from USD 137 to USD 1200. Medicare reimburses a physician about USD 9 for reading one—there is no conceivable world in which the value added by a hospital amounts to USD 1191. And it seems unlikely that the hospital charging USD 1200 is nine times better than the one charging USD 137.

The inexplicably wide differences in prices and costs across the country, between regions, and among competing healthcare systems is something authors in Clinical Orthopaedics and Related Research® have looked at repeatedly over the years [^{2-3, 6, 8}]. It makes intuitive sense that the difference in costs within a given healthcare system should be negligible—after all, the patients within that system are probably pretty similar; the costs of labor, supplies, and equipment aren’t radically different; and contracts with payers should be similar across the system. If this is so, we should be able to take the system that provides the best care at the most reasonable cost and learn from it. This benefits everyone—good healthcare systems get better, while the laggards improve. Patients get better care, and costs are controlled. What’s not to like?

Well, that’s not what’s happening. In their study in this month’s CORR®, “The Price-Quality Mismatch: Are Negotiated Prices for Total Joint Arthroplasty Associated With Hospital Quality in a Large California Health System?” [⁹] Dr. Robin Kamal’s group showed that insurer-negotiated prices for total joint arthroplasty (TJA) varied considerably within a single, large California health system, and there was no evidence that the more expensive hospitals performed any better than the cheaper ones. The health system involved has been around for a century, it covers a substantial portion of Northern California, and it has a good reputation, so the findings from this study probably reflect what’s happening across the United States more broadly.

TJA has been a favorite target for legislators and regulators because it’s a high-volume, high-cost item, so getting better care for less money means a lot of potential savings. In the real world, where resources are finite, policymakers presumably understand that those savings might be available for other purposes. If there’s a clear benefit to spending more, patients and providers will continue to have a voice. But if it’s impossible to explain why prices within a single system vary so widely and with so little clinical impact, insurers will be seeking a race to the bottom, where the cheapest offering wins, regardless of care quality.

Join me now to go deeper on this topic in a Take 5 interview with Robin Kamal MD, MBA, senior author of “The Price-Quality Mismatch: Are Negotiated Prices for Total Joint Arthroplasty Associated With Hospital Quality in a Large California Health System?”

Take 5 Interview with Robin N. Kamal MD, MBA, senior author of “The Price-Quality Mismatch: Are Negotiated Prices for Total Joint Arthroplasty Associated With Hospital Quality in a Large California Health System?”

Paul A. Manner MD:In the past, we’ve used various seat-of-the-pants approaches to determine costs of care. My least favorite is the cost-to-charge ratio, in which a hospital essentially comes up with a percentage that says, “it costs us this much to provide our services and we charged this; therefore, this is our ratio going forward.” More recently, a number of investigators have used methods such as time-derived activity-based costing, which seems more accurate but is hard to do. You’ve examined 22 hospitals—is there any way to determine what a total joint replacement at any of these hospitals actually costs?

Robin N. Kamal MD, MBA: The market and what people pay for services is different in healthcare than it would be in a truly competitive market since contracts vary, and until now, consumers of services may not know what they were paying until after the service is complete (if ever). Because healthcare systems don’t compete in a perfectly competitive market, the costs that we identified—while being actual reimbursements paid to hospitals by insurers—are likely still higher than what it costs the hospital to provide a joint replacement (allowing for a profit margin). Our study showed that these reimbursements are not associated with quality of care and therefore are likely driven by other factors, such as regional market power. A potential follow-up study would be to combine time-driven, activity-based costing (to evaluate a good estimate of the cost of the joint replacement) with this reimbursement data to understand the magnitude of difference between reimbursements and the exact cost to a hospital for providing joint replacements.

Dr. Manner:In fairness, a total joint replacement is a complex procedure, with a lot of personnel involved and a substantial outlay of resources. Is there a way to get a better sense of how costs are determined for a single test or procedure? For example, I find that MediCal (California’s Medicaid program, serving low-income individuals and families) will reimburse about USD 28 for a four-view radiograph of the knee—but UCSF’s chargemaster shows a price of USD 940. Do you have an understanding of why these are so far apart?

Dr. Kamal: This gets at your earlier point, in which hospitals use an elusive “cost-to-charge” ratio in negotiating actual reimbursements from charges. The charge seems to be a starting point (or anchor) for negotiation rather than an accurate estimate of actual reimbursements for anybody other than the small minority of patients who pay the full price for a procedure. In contrast, the cost data used in our study represent actual reimbursement data from insurers. While we were able to determine that these reimbursements are not correlated with hospital quality, what their main drivers are is an open question.

Dr. Manner: Hospital costs often seem like a “black box,” and it’s hard to determine where the money’s going. Did you find differences in how the money is being spent at the higher-priced hospitals compared to the lower-priced hospitals? Were staffing models different? Were there qualitative differences in the patient populations?

Dr. Kamal: Hospitals are complex organizations with different organizational and financial structures that indeed make it hard to know where money is going, how costs are derived and attributed, and where the profit or surplus comes from. This was one of the reasons we decided to limit our analysis to a single, large, regional health system. Within the same health system, these factors are more likely to be similar than to be drastically different. While there may be some variation across hospitals within the same system, we would not expect substantial differences in staffing models or patient populations given the unified ownership and limited geographic reach. Nevertheless, future studies might be able to address this question by linking data sources with hospital-specific information or by combining qualitative assessments of individual hospital organizational structures and operations with costs and reimbursement data.

Dr. Manner:Following the previous question, are metrics such as readmission or patient satisfaction the best measures of quality? In the case of the former, a higher percentage of patients undergoing readmission may reflect patients with a higher disease burden or reduced resources; in the latter, even a small change in the number of patients reporting a “top box” score could make a big difference in scoring. Are there other ways we can assess quality?

Dr. Kamal: You point out two important points that underlie studies on quality, including ours, that use quality metrics as an outcome. The first is that perhaps current approaches at case-mix adjustment don’t adequately account for important variables such as psychosocial factors and frailty. And the second is that best measures of “quality” may not adequately account for quality from the patient’s perspective (including such things as communication or comfort). While metrics like readmission rate and patient satisfaction have the advantage of being readily available and encompass at least part of how patients define quality, they do not capture all aspects of quality of care, which is multidimensional. This is why the incorporation of patient-reported outcome measures along with objective, data-driven metrics is so important as the field of quality measurement within orthopaedic surgery evolves.

Dr. Manner:Finally, you note the importance of patient access to and use of price and quality data, but that patients often don’t use price tools, and that quality information is rarely presented with pricing information in practice. What should I do as a clinician in this setting? Should I bring patients to lower-cost hospitals? Should I take the initiative to provide data? What options might I have at a broader level?

Dr. Kamal: These are great questions, but I’ll first start with the understanding that patients are interested in these data and make decisions accordingly. A prior study [⁷] found that patients were willing to pay higher out-of-pocket costs for higher quality of care for their joint replacement. As clinicians, we can take an active role in ensuring that our patients understand the true costs of surgery if they desire to, and especially that they know the costs they personally will see in the form of deductibles, coinsurance, and copays. We can take steps within our own practices to make these costs more transparent, even by simply disclosing the average cost by payer type, involving a social worker versed in healthcare costs in the preoperative setting, or working with a patient’s insurance carrier to review the out-of-pocket costs a patient will face after surgery.

On a broader level, we can advocate for patient-facing value dashboards that can be used to identify high-quality, low-cost physicians for their elective surgery. This phenomenon already occurs in an unstructured way through narrow networks (directed consults to centers of excellence, for example) and through direct-to-patient advertising of low-cost ambulatory surgery centers (ASCs), where surgery can be performed at a fraction of the cost of a hospital setting for some patients. I expect that with time, as patients become more aware of their own costs, they will begin seeking out lower cost sites of service, such as ASCs. Similarly, as patients become more aware of quality measurement as a concept, the field will move past basic assessments of quality (like satisfaction and mortality) to more patient-centered outcome measures that include portfolios of objective and patient-reported measures that vary by diagnosis and over time. Armed with information on both quality and cost, patients can make informed decisions about their surgical procedures, driving value improvement.

Robin N. Kamal MD, MBA