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Deciphering the Root Causes of Surgical Price Variation

A recent Los Angeles Times story highlighted the relatively rare approach taken by Santa Barbara County: sending employees on long-distance, paid trips to undergo surgeries at high-performing but comparatively inexpensive hospitals. In one cited case, a patient requiring knee replacement surgery traveled 250 miles to a San Diego hospital to receive care rather than visit a local hospital that would have cost over $30,000 more. The strategy has saved the county an estimated 50 percent on four surgeries since the previous year. It also illustrates the long-recognized problem of price variation in the U.S. hospital industry, especially for certain surgical procedures. Existing research and a look at Definitive Healthcare data show a variety of factors could be at work.

While variation exists for all services, surgical procedures have traditionally been the focus given their high cost and that they are usually planned medical events. Because the number of surgical procedures is so vast, the following analysis focuses on five DRGs involving the surgeries with the most spending in 2014 and with the most claims in each category: spinal fusion (DRG 460), hip and knee replacement (470), percutaneous coronary angioplasty (251), colorectal resection (333), and coronary artery bypass graft (236).

The greatest price variation was found in spinal fusion procedures, represented by DRG 460. A relatively complicated procedure, the median average estimated payment was $24,633 with a standard deviation of over $10,000, the highest of any of the DRGs analyzed. Several researchers have identified the phenomenon, but few have attempted to explain it. One analysis found that surgical costs for multiple types of spinal fusion procedures correlated to regional costs of living. Definitive data suggests a positive correlation between cost and bed size, though there are plenty of exceptions. 15 of the top 20 hospitals with the highest estimated payments per claim had fewer than 212 staffed beds, the median figure for all hospitals that performed the surgery in 2015.

DRG 470, hip and knee replacement without major complicating conditions, has been previously identified as a procedure type with wide variation in price. According to Definitive Healthcare data, median average estimated payment in 2015 was $11,390 with a standard deviation of about $5,700. Again, the reasons for the variation are not entirely clear. A 2012 study determined 36.5 and 59.5 percent of the cost differences among knee and hip replacement procedures, respectively, stemmed from unidentified hospital-related factors other than patient and hospital characteristics. Definitive Healthcare data showed a slight negative correlation between cost and both hospital size and total claims when divided by quartile, though the most expensive hospitals tended to have the least claims and a median overall size.

Median Total Claims by Quartile DRG Payment, 2015

Median Staffed Bed Count by Quartile DRG Payment, 2015

 

For percutaneous coronary angioplasty, colorectal resection, and coronary bypass surgery, the picture is much the same. All display significant cost variation, but existing research falls short of conclusively identifying the root causes and can only identify correlations. One consistent trend in the three DRGs is that payments tend to increase with hospital size. However, this is generally true for all DRGs, as larger hospitals are usually located in urban areas with higher prices and operating costs. They also possess the market clout to negotiate better rates from private insures. In addition, most academic medical centers have high bed counts and receive larger payments from both public and private payers.

Despite the variation in the five procedures, one recent study suggests that they may be the exception to the rule and that most cost differences in surgeries can be explained. Appearing in The American Journal of Surgery, it determined that 86 percent of price variations for major surgical procedures were attributable to patient factors like race, sex, insurance status, and presence of comorbidities. Surgeon- and hospital-specific practices only affected the remaining 14 percent. If accurate, the study’s findings suggest that some procedures are more likely to have wider price variations than others. Given the potential savings to consumers and the healthcare industry as a whole, future research should attempt to discover what’s unique about specific surgeries and why such variation exists.

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Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our databases include detailed clinical and financial metrics for hospitals and other healthcare providers.

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