Orthopedic companies and hospitals are barreling toward the April 1 implementation of the federal Comprehensive Care for Joint Replacement Model, a seminal CMS pay-for-performance payment policy designed to lower the 90-day cost of hip and knee and surgery. A quarter of the Medicare population in 67 population centers is served by the 1,800 hospitals subject to the mandatory policy.
Jefferies equity analyst Raj Denhoy says the policy poses little threat to implant pricing, at least in the short term. Most of the savings to Medicare from the CJR will be derived in the postprocedural acute care and rehabilitation period, which accounts for about half of the total life-cycle costs of the surgeries.
Most inpatient costs (such as the price of the implant) are already bundled into a fixed payment, that's set based on a so-called Diagnosis-Related Group (DRG) code, so savings achieved in that realm are mostly invisible to CMS, Denhoy wrote in an analyst note earlier this year. But, he said, "outpatient costs are much more granular, and days in an SNF or inpatient rehab, for example, are billed on a per use or per day basis. Reducing the use of higher cost outpatient services and limiting readmissions provide the best opportunities to demonstrate progress against CMS mandated targets."
The agency estimates it will produce cost-savings to the government of $343 million over 5 years.
In the long term, hospitals may demand lower-cost implants if they are unable to meet the cost-of-care targets, which would force them to pay a penalty to CMS to cover the excess cost. Another unintended consequence could be denial of service to the most complicated patients, Denhoy says.
"We do believe that it will lead to some consolidation of the market," said consultant Geoffrey Walton, vice president of Stryker Performance Solutions, in an interview. A high degree of hospital consolidation as a result of the CJR would likely reduce implant costs further in the long-run by increasing hospitals' leverage during price negotiations.
But consolidation is a trend that is already underway.
The CJR also provides devicemakers with opportunities, for hospitals will look to technology to help them contain costs. Walton said Stryker Performance Solutions' R&D budget is focused on improving data analytics, so that that the unit can provide hospitals with more and better information about complications such as infections rates, and insurance claims data about postprocedural care.
Indeed, thanks to CJR (and the plethora of other federal initiatives), device companies have the chance to leverage their expertise to recommend and implement new health care practices that help providers comply with federal mandates.
Reforms to postprocedural care at hospitals
Stryker's Walton discussed the impending changes to postprocedural care that Stryker Performance Solutions is recommending and helping to implement. He said the unit advises all hospitals, regardless of their use of Stryker ($SYK) implants.
Walton expects outpatient and home-based rehabilitation to gain momentum at the expense of in-patient care and nursing home facilities, saying the data show that the former are not only cheaper, but also more effective. Simply walking to the external facilities counts as part of the rehabilitation process, he said.
In addition, postprocedural care accounts for most of the variation in cost because it is conducted outside of the hospitals, who lack information such as the length of patients' stay at nursing homes, Walton said. The CJR is designed to drive integration and coordination between various care providers.
Hospitals who participated in a similar, voluntary CMS payment policy reduced the use of skilled nursing facilities from 29% to 24% of cases, and deployment of home health agencies increased from 28% to 34% of cases, Denhoy wrote in the research note.
Johnson & Johnson's ($JNJ) DePuy is looking to capitalize on the trend--which is set to accelerate thanks to the CJR--with the recent launch of a comprehensive program to optimize outpatient joint replacement at U.S. ambulatory surgical centers and outpatient hospitals.
In addition, Walton said Stryker Performance Solutions collects internal hospital data and compares it to aggregate benchmarks to help facilities see how they stack up against the competition. "They may not realize how different their infection rate is from others," he said.
The data has led to a reduction in the use of continuous motion machines during rehabilitation because they have been shown to be less effective than forced walking, Walton said.
The consulting arm is already helping hospitals comply with the voluntary federal Bundled Payments for Care Improvement program, initiated in 2013. In return for offering to pay the entire penalty if hospitals fail to meet their cost-of-care targets, Stryker Performance Solutions earns a share of the bonus that hospitals receive if they meet the CMS goal.
Under the CJR, hospitals must bear the cost of at least half of any penalty, and cannot share more than a quarter of the downside risk with any single collaborator (such as Stryker Performance Solutions), Denhoy wrote.
He added: "CMS has a goal that by 2018, 50% of payments will have shifted from the traditional fee-for-service method to alternate payment models (and 90% of all reimbursements to include some form of value-based payments) and the changes in payment for hip and knee replacement under CJR are the clearest sign yet that CMS is finally acting with some urgency."