Why the costs for an increasingly common surgery should vary so much across and within regions is the key question Blue Cross companies are trying to answer, as new research find that pricing swings are still the norm.
Costs for knee and hip replacement surgeries vary greatly, sometimes by tens of thousands of dollars, according to a study by the Blue Cross Blue Shield Association and Blue Health Intelligence.
Based on claims from Blue Cross insurers representing 64 regions, the study found that a total knee replacement without complications costs on average $31,000 -- but within a range of $11,300, in Montgomery, Alabama to $69,600 in New York City. The cost of hip replacements ranged from $16,000 in Montgomery, Alabama to $59,000 in New York.
The Big Apple and the state of New York are of course more expensive than Alabama. But the relative cost-of-living differences are not enough to translate into such a dramatic range of prices for knee and hip surgeries on the order of 140 percent. Alabama's median household income as of 2013 stood at $41,000, 27 percent less than the $54,000 median income in New York State.
Price variation in services such as knee and hip surgery are less related to local costs of living and more related to the dynamics of America's multi-payer fee-for-service healthcare financing, with reimbursement based in large part on the relative clout of insurers or hospital systems. Doubtless Blue Cross and Blue Shield of Alabama's 90 percent share of the state insurance market is a major reason why the costs of hip and knee replacements are so low in Montgomery.
According to the BCBSA report, prices for the same surgeries can vary greatly within markets. In Dallas, Texas, a total knee replacement could cost anywhere from $16,772 to $61,585 depending on the hospital. In greater Boston, a knee replacement could cost anywhere from $18,000 to $52,000.
"Extreme price variation in healthcare can have obvious financial consequences for individuals and employers as well as serious implications for the sustainability of a U.S. healthcare system that is exceeding its economic capacity," said Maureen Sullivan, senior vice president of strategic services and chief strategy officer at BCBSA.
"To effectively address healthcare costs and ensure access to care," she continued, "consumers, employers and industry leaders must have information on these price variations and be provided with the tools to become informed shoppers."
Knee and hip surgeries are good indicators of variation because they together they represent more than $20 billion in annual U.S. healthcare spending. The two surgeries are also projected to continue their growth -- rates tripled from 1993 to 2009, to some 645,000 hip replacements and 306,600 knee replacements -- as Baby Boomers age and try to stay active, and as the nation's obesity problem leaves more younger individuals contemplating the option of joint replacements.
Amid that trend, insurers are trying to use bundled payments or accountable care in hip and knee replacements, to control costs and creative incentives for limiting compilations, whose rates range from 1 to 2 percent for hip replacements and up to 6 percent for knee replacements.
Blue Cross insurers have been plying their own value-based orthopedics strategy with the Blue Distinction Centers designation, recognizing hospitals with consistently successful outcomes in surgeries and a 20 percent savings compared to their regional peers.
There is also evidence of value in giving patients more information in the decision to get an elective knee or hip replacement in the first place. A 2012 Health Affairs study found that patients who used a risk-benefits decision aid at a larges Seattle health system received 26 percent and 38 percent fewer hip and knee replacements and saw lower per-patients costs of 12 to 20 percent over six months.