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August 23, 2018

Why Gundersen Lutheran charged $50k for a knee replacement? It didn't know the real cost was only $10,550.

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    Read Advisory Board's take on this story.

    After nearly a decade of annual price increases, the average list price for a knee replacement surgery at Gundersen Lutheran Medical Center was more than $50,000—until an 18-month internal hospital review revealed that the real cost was only one-fifth as much, a discovery that shines light on industry-wide difficulties in setting hospital prices, the Wall Street Journal reports.

    Hospital finds the actual cost of knee-replacement surgery

    Knee replacement surgeries are one of the most common hospital procedures in the United States, yet like many hospitals, Gundersen Lutheran Medical Center—one of Gundersen Health System's six hospitals—"had no real idea what it cost to perform the surgery," the Journal reports.

    According to the Journal, few hospitals are aware of the actual cost of the services they provide or have a clear rationale behind price increases. Instead, hospitals tend to increase prices to meet specific profit targets.

    At Gundersen, officials typically replied on consultants to set knee-replacement surgery prices and ensure the hospital's prices were competitive and within the orthopedic department's margins, the Journal reports. Based on that method, the hospital had spent nearly a decade raising the price an average of 3% annually, "using a combination of educated guesswork and a canny assessment of market opportunity," according to the Journal.

    When Medicare and private insurers began raising concerns over the price—which topped $50,000 in 2016—officials at Gundersen Lutheran Medical Center launched an internal review to determine the price. The review took 18 months and involved "an efficiency expert [who] trailed doctors and nurses to record every minute of activity," the Journal reports.

    The review took into account factors including delays in dispatching physical therapists, mismatches in available post-surgery beds, the time nurses spent moving carts, and unnecessary spending on bone cement.


    Ultimately, the hospital's review determined the cost of performing a knee replacement at Gundersen ranged from $7,300 to $10,550, on average, in 2016—only about a fifth of the price the hospital had been charging

    The review's minute-by-minute breakdown of knee replacement surgeries also brought to light previously unknown pain points regarding how the hospital handled the procedure.

    For example, the review showed the hospital on busy days did not have beds available for post-operative patients in the orthopedic unit. According to the review, patients without a bed could stay in temporary post-surgical units for up to 24 hours—which delayed their recovery, as physical therapists waited to start therapy until they were transferred to the hospital's orthopedic unit.

    The review also found inconsistencies in how surgeons performed the procedure that increased the cost of the procedure, as well as patients' risk for complications. For example, one surgeon always inserted a drain in patients to prevent hematomas, which is the collection of blood under the skin, but this technique increased patients' risk of infection and added to the cost of the procedure. 

    In addition, the review highlighted inefficiencies with discharge procedures. According to the review, nurses prepared patients for discharge on an individual basis—a time-consuming process that could more efficiently be completed in a group setting.

    Beth Krage, a clinical nurse leader for Gundersen, said, "We didn't know it was a problem until it was down on paper. We were just trying to keep our head above water."

    With the review, hospital identifies waste—and saves on costs

    After the review, Gundersen implemented several changes to improve efficiency. For example, the hospital determined it would be more effective to coach patients in a group class before their procedures rather than individually. The hospital also brought in a technician to help position patients before surgery, which decreased time in the OR by 5 to 10 minutes, and began using generic cement, which cut hospital spending on cement by 57%.

    As a result, the hospital has lowered the cost of knee-replacement surgery to a maximum of $8,700 on average, representing an 18% cost reduction.

    Scott Rathgaber, chief executive officer of Gundersen Health System, said, "We were inefficient. We didn't know it" (Evans, Wall Street Journal, 8/21; Baker, "Vitals," Axios, 8/22).

    Advisory Board's take

    Doug Thompson, Senior Research Director, Health Care IT Advisor

    On the one hand, Gundersen's story is a powerful example of the value of good cost data at U.S. health care providers, but on the other hand it's a sobering tale of the difficulty that most U.S. providers face in determining just what their costs are. Gundersen needed an 18-month study to determine the cost for just one high-volume procedure. But what about all of the other procedures they perform, and conditions they treat? How can any hospital afford to do a lengthy, manual study for every one of them? And what happens when those costs change, which they will, even before such a study can be completed? How can this information be updated so as to remain relevant?

    The answer is electronic cost accounting systems (CAS). While most U.S. hospitals have some sort of a CAS, too many are based on rudimentary methods and outdated technology—and surveys show few hospital finance executives and clinicians trust their CAS's for the sort of critical information that Gundersen used to great effect.

    It doesn't have to be that way. A robust CAS that incorporates the latest technology and data sources can give timely, accurate information about costs, profitability, and opportunities for improvement for not just one but many high-volume, high-cost procedures and conditions, and keep these costs up-to-date with minimal effort. This is information that hospitals need to make clinical and business decisions that will affect both their patients and their long-term viability, and newer CAS’s can deliver it more efficiently than ever before.

    For more information about what's new in cost accounting systems, and what that means for U.S. hospitals, see our recent report, A Cost of Doing Business: Taking Another Look at Cost Accounting Systems.

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