Medicare Is Reducing the Cost of Knee Replacements (Here's How That Could Backfire)

Knee replacements are booming. Between 2005 and 2015, the number of knee replacement procedures in the United States doubled, to more than one million. Experts think the figure might rise sixfold more in the next couple decades, because of our aging population. Since many people receiving knee replacements are elderly, Medicare picks up most of the cost of such procedures. In response to this huge rise in expenditures, Medicare is experimenting with ways to reduce the cost of procedures. But that raises a disturbing possibility. If orthopedic surgeons make less money on each knee replacement they perform, they might start performing unnecessary procedures.
Consider Medicare’s recent experiments with reimbursing knee replacements according to “bundled payments.” Under such reimbursement, Medicare gives healthcare organizations a lump sum to cover the cost of a knee replacement–not just the cost of the operation but also the cost of post-operative x-rays, physical therapy, even time in nursing homes or rehab hospitals. Before bundled payment, providers would receive separate payments for each of these services, meaning inefficient providers might take more x-rays than necessary, or keep patients in rehab hospitals longer than they needed such comprehensive care, and be rewarded for this inefficiency by receiving additional payments. Under bundled payment, Medicare tracks all the knee-replacement costs for a given patient, over a 90-day period. If a patient incurs fewer expenses than expected, Medicare gives the providers part of these savings back as a reward. (Warning–this is a very oversimplified description of bundling.)
Early evidence suggests that bundled payments reduce the cost of knee replacements by an average of almost $1,200 per procedure. With a million such procedures performed in a year, that reduction could save over $1 billion. Moreover, these savings don’t seem to come at the expense of quality, at least as far as we can tell. (Quality measurement in healthcare is notoriously difficult.) For example, when knee replacements were paid for through bundled payments, there was no subsequent increase in readmission to the hospital or emergency room visits among patients whose procedures were reimbursed according to bundled payments. Same quality at a lower price–who could be against that?!
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