Impact of Orthopedics on Anesthesia Practices: Review and Analysis
SUMMARY: While the anesthesia specialty is seeing a general downward trend in reimbursement due, in part, to an increase in Medicare payer mix and a growing stinginess on the part of third-party payers, orthopedics continues to be a relatively profitable line of business.
Over the past months, we have tended to focus on policy updates and practice trends that have, or have the potential to, impact our clients negatively. We believe that such updates are critical to effective strategic planning for all practices in an ever-changing environment. It is important to note that not all practice developments threaten to undermine the potential financial viability of each practice. For example, the administration of anesthesia for orthopedic cases appears to have been and continues to be one of those bedrock services that has remained fairly constant. Obviously, not all practices benefit equally, which may be an indication that orthopedics is a preferred and desirable line of business to pursue.
Assessing the Trends
To assess the significant financial trends associated with this line of business, we considered the role of orthopedics for ten client practices from across the country and tracked performance over a period of five full years and six months of 2021 (January through June). As the chart below indicates, case volume, as a percentage of total cases, has remained relatively consistent at about 31 percent, with a slight drop in 2021. Meanwhile, the percentage of total revenue has also remained constant at 35 percent, a fact that clearly indicates the yield per unit for these cases exceeds that of other lines of business. To further put this in perspective, total orthopedic revenue for these practices was flat for the first three years (2016-2018) and then up two percent in 2019. Covid-19 had the inevitable effect of diminishing case volume and revenue in 2020, resulting in an 11 percent drop in revenue. Volume and revenue for 2021, however, appears strong and we would anticipate at least a 7 percent increase in revenue for 2021 as compared to 2020. There is every reason to believe that 2022 orthopedic revenue should match or exceed 2019 revenue.
Whenever we conduct such a review, we are always focused on at least two significant aspects: the mix of procedures being performed and the payer mix, both of which are subject to factors beyond the control of the practice. We also find it quite useful to track the overall average yield per case. To understand the impact of case mix trends, we looked at three categories of orthopedic procedures that appeared to be most representative of significant developments: total hips, total knee replacements and arthroscopic procedures—many of which are now performed in outpatient venues. The chart below indicates the respective trends. Over the six years, the only category that increased was the percentage of total hips, which went from two percent in 2016 to two and a half percent in 2020—a trend which is consistent with the increase in the Medicare population for this period. As Americans age, they tend to wear out their hips.
Scrutinizing the Changes
Monitoring changes in payer mix is one of the fundamental tools to evaluate the future revenue potential of a practice. For purposes of simplicity and clarity, we have consolidated all the various payer categories we typically track into four broad categories:
- Public payers for which rates are set by various governmental authorities and over which practices have no control
- Contracted plans where groups have some leverage to negotiate rates
- Non-contracted commercial plans
- Self-pay, which typically reflects patients with no insurance
As we have mentioned in previous e-blasts, all practices are seeing the percentage of public payers (PPP) increase as the American population ages. As indicated in the chart below, this has resulted in a consistent migration of contracted commercial cases to public payer, which—for orthopedics—typically means Medicare. The problem is simple: while the average contracted rate is $65, the average Medicare rate is $23. Theoretically, this means that the average practice is seeing its orthopedic revenue potential erode dramatically. In fact, this potential erosion is being mitigated by the percentage of total knees and arthroscopies that are being performed on younger patients with good insurance. Over time, the concern is that commercial arthroscopies and knees will become Medicare hips.
As has been indicated above, the economics of orthopedic anesthesia is a multi-factorial equation. Negative trends with regard to some aspects may be temporarily offset by other aspects where the trends are still positive. As the chart below indicates, thus far, orthopedics is a fairly stable and reliable revenue source for the average practice, although there appears to be some erosion in 2020 and 2021, which is no doubt attributable to the impact of Covid-19.
Final Thoughts
Clearly, the consistent erosion of payer mix due to an increasing Medicare population and commercial payer intransigence with regard to the renegotiation of rates will ultimately impact all lines of business. It just appears a little less pronounced with regard to orthopedic cases. We understand that most practices have very few options when considering where and how they will provide anesthesia; but, to the extent they do, orthopedics continues to be a relatively profitable line of business. As always, feel free to reach out to us at info@anesthesiallc.com.
With best wishes,
Tony Mira
President and CEO.