Fifteen or so years ago, many in the orthopaedic industry in the USA were predicting the end of the orthopaedic implant industry as it was known because of the extension of DRG to all patients in the USA. Dire warnings were given of companies going bankrupt, of margins squeezed so much that a profit could barely be made, let alone money be spent on R&D. A new era of implant pricing would put an end to innovation and research and would result in just a handful of companies making generic products. Surgeons would become little more than technicians, and hospitals would cluster into major 'joint factories' to perform mass surgery. In the words of one colleague from the US “We thought the sky was going to fall in”.
What actually happened was fifteen years of unprecedented growth in the orthopaedic sector, the introduction of many new technologies and products, surgeons and hospitals running successful businesses together, and the realisation that the surgeon is the most important variable in an orthopaedic procedure.
What is the UK experience of HRG?
In April 2006, the National Health Service (NHS) in the United Kingdom introduced “Payment by Results” (PbR) with a tariff for every single procedure undertaken in an NHS hospital. By 2008, the majority of the NHS budget became based on the PbR system. This has represented a major change in the funding flow of the NHS - from basically a command and control central budget set by government, to a payment by results system whereby a hospital gets paid precisely (and only) for everything it does.
Each procedure maps to an HRG. “HRG” stands for Healthcare Resource Group – standard groupings of clinically similar treatments which use common levels of healthcare resource. HRG4 was introduced in April 2009 and replaces HRG3.5 (which was used from 2006-2009). The HRG represents a description of a procedure or episode and the financial payment (tariff) made to a provider for delivering that procedure or episode.
HRG4 is intended to represent many of the lessons learned about tariff since the introduction of Payment by Results into the NHS - to better describe the care that a patient receives in terms of treatment and resources.
To do this, HRG4 now makes greater use of age, complication and co-morbidity splits than HRG3.5.
|Total Hip Replacement Cemented – no CC||H80||£5093||HB12C||£5220|
|Total Knee Replacement no CC||H04||£5663||HB21C||£4102|
What does this mean for the orthopaedic industry?
“Welcome to our world” a US hospital might say, as might a UK private hospital who already runs their business with an exact view of their accounts. However, there is a fundamental difference between the US and the UK – the sheer size of the NHS. It employs 1.3 million people in England and Wales alone and has a budget of over £90 billion ($135 billion). Every single man, woman and child in the UK is entitled to free healthcare at the point of need. Free healthcare is a central tenet of the NHS, has been since 1948 when the NHS was set up, and will be for the foreseeable future. Politicians know that the NHS is a hugely emotional issue in the UK and to change it too much is political suicide. We may have waiting lists, we may have overcrowded hospitals, but we have amongst the best surgeons, doctors and nurses in the world - and it's all provided free of charge. Logically, no country can afford to provide unlimited “free” healthcare to all its citizens unless tax is high - and politicians also know that high taxes can be political suicide too.
Factor in another policy - that the government committed that by the end of 2008 no patient can wait more than 18 weeks for their operation and within the next few years to 13 weeks (and there has even been talk of 8 weeks). Furthermore, patients theoretically choose from one of at least four local hospitals, or from any hospital in the UK should they so wish. Waiting lists in the UK for a hip replacement were up to 18 months in some areas, so moving from that to 18 weeks is a massive undertaking.
The final major factor is that alongside all this the NHS is committed to “plurality of service provision”. Combined with the tariff system, it means that the money follows the patient. This basically means that the NHS will pay for the patient's operation, but it does not have to be performed in an NHS hospital by NHS staff. This has led to the building of a number of new privately run hospitals and NHS hospitals bidding for work outside of their catchment area. Commissioning NHS work can now potentially be run by private companies rather than NHS bodies.
Overall, the general consensus is that this raft of changes is necessary to create a world class NHS which remains free at the point of delivery. However, as with all big changes there are many areas of impact.
So, what does all this mean for the patient?
The “18 week” policy means that waiting lists on the NHS are rapidly becoming a thing of the past. It means choice for the patient, but it may not mean that the patient can choose the surgeon, just the hospital. Is it better to choose the surgeon, the hospital or the implant - or all three? Should patients be able to choose all three? Is the right information publicly available to enable an informed choice?
Patients are beginning to realise that they can shop around. This is certainly a trend in the private sector. The “internet expert” is now a frequent occurrence. Set tariffs for certain procedures may herald the era of “top-up”. Already established in other European countries, it means that the government will for example pay for a basic metal on poly hip replacement, but if the patient wants, say, ceramic, then the patient has to pay for that over and above the tariff amount. Individual patient budgets are also under pilot in the UK.
What does it mean for a surgeon?
It means that surgeons have to think very carefully about their future. They will have to think about how much choice they may have over implants.
They will have to think about ways in which to protect their income streams that have been built up in the context of a healthcare delivery model that has evolved over sixty years.
If patients don't have to wait for an operation, and they can choose where to have that operation, it means that surgeons will have to compete for business. At the very least, the traditional private market will change – many surgeons in the UK have relied on the private market for a secondary stream of income.
The NHS may not be their main employer in five years time, and they may find themselves in a chambers model, much as their US counterparts already do. In the UK, dentists essentially already do this, so why not surgeons? Many surgeons have set up or are setting up companies and Limited Liability Partnerships (LLPs). Some already are running very successful businesses - winning NHS business and hiring theatres and hospital beds themselves.
It also means that the operating surgeon is key to the coding of a procedure. The accurate description of the diagnosis, the actual operation performed, any co-morbidities and any other factors will drive the coding of the HRG for that procedure. Getting the wrong HRG may lead to a loss for the hospital, or an overcharge to the commissioner.
What does this mean for a hospital?
It means that the NHS has to look at what work it does, where it does it and how it does it. That means breaking with working practices that have been in place for 60 years, a pretty big undertaking when you employ 1.3m people. It also means that they have to make sure that every single operation is coded correctly. Basically, the NHS has a baseline tariff for each one of the 22,000 types of operations performed daily in the NHS. Under HRG4, specialist top up remains for orthopaedics.
For private hospitals it means that if they are treating NHS patients they have to be acutely aware of their costs compared to a private paying patient.
Every hospital will have to think about case-mix: some procedures earn more revenue than others. And some of the tariffs that have been set are tough price-wise, for example foot and ankle and some instrumented spine procedures. Using “expensive” implants reduces the profit that can be made at tariff. The first wave of independent hospitals were accused of “cherry picking” - they only did hips and knees on younger patients with no co-morbidities and avoided the cases where tariff was less rewarding. Changing the types of cases changes the hospital's revenue significantly. But not doing “unprofitable” cases flies directly in the face of the reason for the existence of the NHS - free healthcare for all, regardless of income.
Hospitals can also look at utilising their elective operating theatres at weekends, and a number of surgeon groups in the UK already do this.
So what does all this mean for the industry?
It means that for every single orthopaedic procedure there is now a 'price list', which in turn means that there will be price issues, much as there were in the US when DRG became widespread.
If a cemented hip attracts a tariff of say £5,000, how much of that can represent the implant? Will prices go down?
Will someone introduce a range of generic implants made in a country where overheads are low but where quality can be high (such as India and China)? If so, do market forces dictate that price will go to the lowest common denominator?
Will US hospitals start to wonder why a hip replacement can be performed for much lower cost in the UK than in the US?
There is no easy answer to any of these questions, but value is not just about price. It is about quality, service, reputation, reliability. Pay the lowest price and you probably won't get state of the art instruments, a highly trained rep in theatres, rapid and responsive service, and world leading research and development Unless you pay for it, you probably won't even get the box delivered to your hospital.
The customer to whom the invoice is sent to is already changing, instead of the hospital it might be the surgeon themselves, or a hub of surgeons, or a management company.
It does mean that orthopaedic companies will have to think smarter - clinical results and design philosophy will be a given. Companies will have to provide powerful health economic arguments not just based on the usual QALY arguments (and the fact is that there aren't even many of them in orthopaedics), but on why a specific implant should be used. Joint replacement will have to compete with other surgical interventions, so robust health economic arguments for orthopaedic interventions versus, say, cardiac care will have to be produced.
Companies are already helping surgeons and hospitals with their business models and plans and this activity looks set to continue. The often debated question of whether implant companies expand into running hospitals looks set to continue.
It may mean much more focus on direct to patient marketing, already tried with mixed success. If patients can choose, then companies need to persuade them to choose their products over others.
US companies with significant operations in the UK may do well to bring their longest serving managers together to see what can be learned from the US experience with DRG. At the very least, understanding the past is often a good way to plan for the future.
Michael Green is Chief Executive of Trust Health Ltd, a company specialising in setting up and managing clinician partnerships and LLPs in the UK. He has worked in the orthopaedic industry for 18 years.