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Orthopedics in the Age of Accountable Care Organizations and Population Health: From Profit-Center to Cost-Center

Author Affiliation | Disclosures

Authors’ Disclosure Statement: The authors report no actual or potential conflict of interest in relation to this article.

Dr. Clement is an Attending Physician, Department of Orthopedic Surgery, Children’s Hospital of New Orleans and Louisiana State University Health Sciences Center, New Orleans, Louisiana. Dr. Campion is Chair of Orthopedic Surgery, University of North Carolina, Chapel Hill, North Carolina. Dr. Shah is an Attending Physician, Department of Medicine, Duke University Medical Center, Durham, North Carolina.

Address correspondence to: R. Carter Clement, MD, MBA, Department of Orthopedic Surgery, Children’s Hospital of New Orleans, 200 Henry Clay Avenue, New Orleans, LA 70118 (

Am J Orthop. 2018;47(9). Copyright Frontline Medical Communications Inc. 2018. All rights reserved.

The way we are paid as doctors is changing. In some cases, the delivery of orthopedic care could change from healthcare institutions’ most significant financial asset to one of their most detrimental liabilities. These changes provide a chance to improve both the quality and efficiency of the care we deliver, but we are unlikely to capitalize on this opportunity unless we understand this shifting paradigm. This change requires us to first appreciate the recent history of our reimbursement environment.

Traditionally, healthcare has been a relatively lucrative field, especially for those providing surgical care: doctors are paid “physician fees” by insurance companies (including Medicare), and institutions where procedures are performed are paid “facility fees.” Profits are measured as revenue (ie, reimbursement) minus costs of providing care, and while there has always been the potential to make more money by lowering costs, providers have historically had much more to gain by increasing their revenue. This fact has been exacerbated by the “fee-for-service” (FFS) payment model, which unintentionally encourages physicians to provide high volumes of care by “paying more for doing more.” For example, rather than being paid a fixed sum to care for a patient’s knee arthritis, each provider involved in the patient’s care is paid for each intervention. Clearly, this system encourages providers to maximize their interventions (ie, earning revenue) rather than search for ways to cut costs.

The Centers for Medicare and Medicaid Services (CMS) partially addressed this issue during the 1980s by introducing the Diagnosis Related Group (DRG).1,2 Under this classification scheme, hospitals would be paid a pre-specified amount for a particular type of admission, often based on a specific procedure. For example, there is a DRG with a set payment for total knee arthroplasty (TKA).3 When reimbursement for the condition is set at a fixed amount, facilities are motivated to decrease their expenses since this is the only way to maximize the financial return for a given patient. This change, theoretically, encourages providers to cut their costs for providing a TKA as much as possible, potentially even to the point of sacrificing quality of care. As usual, when CMS makes a sweeping change, private insurers followed suit, and as a result, both government and corporate insurance is now structured around DRGs.

However, this was not a complete departure from FFS payment. We were still not paid to manage a patient’s knee arthritis as cheaply as possible; we were paid for each steroid injection, preoperative clinic visit, TKA (with numerous coding modifiers for complexity or comorbidities) as well as post-discharge admissions to skilled nursing and acute rehabilitation facilities. However, it was a start: for example, hospitals were no longer incentivized to keep TKA patients in house with a growing bill for each administered drug or therapy session. Yet, it is noteworthy that hospitals and physicians were still paid separately. This is important because doctors have historically made almost all treatment decisions and thereby determined the cost of care, yet hospitals have borne most of those costs, such as expensive implants or unplanned admissions, without a commensurate increase in reimbursement. As long as physicians are guaranteed their “fee,” they have little motivation to reduce those costs. Unsurprisingly, and as we well know, the advent of DRGs did not successfully curb our growing healthcare budget.

Recently, TKA and total hip arthroplasty reimbursement changed more dramatically. After experimenting with several pilots, CMS rolled out the Comprehensive Care for Joint Replacement (CJR) bundled payment program in 2015.1,4 Participation in CJR is mandatory for most arthroplasty providers in approximately half of all “metropolitan” areas. In this scheme, hospital and physician pay is intertwined. Specifically, hospitals are held accountable for costs, so if the total Medicare bill for a patient’s TKA exceeds the “target price,” the hospital faces a penalty. Conversely, a charge below the target can earn a bonus payment.4 The hospital and surgeons must decide how they will share the bonus (or penalty), which creates an incentive to work together to lower costs.

While bundled payments like CJR shift some of the risk for high costs to the hospital and surgeon, a much more extreme example of this type of shift is capitation (ie, paying a healthcare institution a set amount per patient to care for whatever maladies arise). Insurers have experimented with various forms of capitation in the past, which led to the expansion of health management organizations (HMOs) during the 1990s. In theory, capitation should encourage providers to invest in disease prevention to minimize the need for costly interventions. However, more nefarious incentives developed, resulting in “cherry picking” healthy patients, which restricts access to care for sicker patients, and even withholds care from patients in need. The most infamous example was arguably “drive-through deliveries,” where newborns and their mothers were prematurely discharged following birth.5 As a result, the “HMO backlash” occurred, and capitation temporarily fell out of favor. The heart of the problem was a strong incentive to reduce the cost of care without a counterbalancing incentive to maintain quality. CJR and other modern programs attempt to avoid similar adverse incentives by requiring participants to meet certain quality criteria.6

Since the passage of the Affordable Care Act in 2010, capitation has reemerged under a new name: Accountable Care Organizations (ACOs). Numerous forms of ACO’s exist with differing payment schemes7, but the most comprehensive version, named Next Generation (Next Gen), allows providers to choose full capitation.8 While early ACOs focused on individual patients, Next Gen ACOs are also focused on “population health.” That is, they must demonstrate outcomes for individuals and the patient population as a whole, while simultaneously assuming all financial risk via capitation. Specifically, these ACO’s are paid an “all-inclusive population-based payment” for each patient based on how much that type of patient’s care is expected to cost for the year.9 The ACO then provides all necessary treatment and, if the ACO cannot provide a necessary intervention, it is responsible for funding that care at another institution. Appropriately, there has been an increased focus on quality to avoid unintentional incentives to withhold care. Specifically, CMS has introduced mandatory quality metrics in the domains of patient experience, care coordination, preventive care, and management of at-risk populations.10 At present, unfortunately, these metrics are not nearly comprehensive enough nor adequately validated to assess the quality of care,11 especially for subspecialized fields like orthopedics where functional outcome scores are needed.

To date, very limited attention in the media or academic literature has been dedicated to subspecialty surgical care in the setting of ACOs even though implications for specialized surgeons could be immense. While ACOs bring numerous reporting requirements, the most essential first step for orthopedists in transition to this new reimbursement scheme will be a change in mindset. As explained above, orthopedics and other forms of specialized surgical care have traditionally been extremely profitable for healthcare institutions through relatively high revenue. However, within a capitated ACO all revenue has been paid upfront for each patient, and every orthopedic surgery performed represents a substantial cost to the institution rather than a large profit. For example, it has been reported that the average contribution margin earned by a hospital for an episode of care to provide a TKA (which includes postoperative care such as clinic visits, unplanned readmissions, and reoperations for complications) based on Medicare reimbursement is $11,726.12 This figure consists of reimbursement (median, $24,149) less variable costs (median, $10,190). Additionally, the surgeon currently receives $1400 in physician fees.13 These earnings represent a significant financial benefit for both the facility and doctor in the current FFS environment. However, a capitated ACO caring for a TKA patient would already have received full payment for his care for the year. As a result, providing a TKA would not afford any further financial benefit and would, instead, mean a loss of $10,190 (the aforementioned variable cost for the episode of care) directly from the bottom line. The orthopedic department within that ACO, along with other departments, can be expected to share that loss. This implies that upon becoming an ACO, an institution’s orthopedics department will change from a major profit-center to a major cost-center.

CMS must establish adequate quality assurance measures to ensure that ACOs do not withhold cost-effective care, like TKAs,14,15 from their patients. Hopefully, for both professional and ethical reasons, providers will be active partners in this process. Groups like the International Consortium for Health Outcome Measurement, which has convened international expert panels to agree on comprehensive outcome sets for total joint arthroplasty and the management of low back pain, among other non-orthopedic conditions, may be useful examples in this process.16-18

At the provider level, surgeons will be more likely to be salaried employees, contracting directly with the ACO rather than primarily working to earn physician fees from insurance providers. Surgeons will likely be judged (and rewarded financially) on their ability to direct nonoperative care, to find non-surgical solutions to problems that may currently be treated operatively, and to reduce costs for patients that require surgery. Additionally, with an increased focus on quality assurance, there will likely be more pressure from ACOs and CMS to demonstrate results of both operative and nonoperative care, likely in the forms of patient-reported metrics and objective measures of physical function. Surgeons will have a strong incentive to be leaders in the process of collecting such data.

It is also worth considering the position of orthopedic practices that are not part of an ACO. Some ACOs will not have the capacity to provide all (or possibly any) of the orthopedic care their patients require. When necessary, they will contract with outside orthopedic practices. Compared with CMS, ACOs are much smaller purchasers and can be expected to be more sensitive to price, likely negotiating intensely between local orthopedic providers. As a result, even orthopedists outside of ACOs may feel the cost pressure created by this new reimbursement model and may be driven to implement cost-reduction measures such as standardized implant choices and discharge pathways.

ACOs are in an active growth phase,19,20 and recent updates to ACO policies make it clear that CMS intends for this trend to continue.8 Since ACOs are still a nascent reimbursement model, orthopedists will still do better financially, in almost all markets, by continuing to expend their energy and resources pursuing revenue, rather than cutting costs or demonstrating outcomes. However, as ACOs and population health gain traction, those orthopedists who recognize this shift and plan accordingly will have a definite strategic advantage, whether their practice is within an ACO, interacting with external ACOs, or both.


1. Carter Clement R, Bhat SB, Clement ME, Krieg JC. Medicare reimbursement and orthopedic surgery: past, present, and future. Curr Rev Musculoskelet Med. 2017;10(2):224-232. doi:10.1007/s12178-017-9406-7.

2. Centers for Medicare & Medicaid Services. Acute Inpatient PPS. Published August 2, 2017. Accessed September 8, 2018.

3. Centers for Medicare & Medicaid Services. Draft ICD-10-CM/PCS MS-DRGv28 Definitions Manual. Accessed September 8, 2018.

4. Centers for Medicare & Medicaid Services. Comprehensive Care for Joint Replacement Model. Accessed September 8, 2018.

5. Volpp KG, Bundorf MK. Consumer protection and the HMO backlash: are HMOs to blame for drive-through deliveries? Inquiry. 1999;36(1):101-109.

6. Centers for Medicare & Medicaid Services. Quality Measures and Performance Standards. Published March 2, 2015. Accessed November 3, 2015.

7. Centers for Medicare & Medicaid Services. Accountable Care Organizations (ACOs): General Information. Accessed September 8, 2018.

8. Centers for Medicare & Medicaid Services. Next Generation ACO Model. Accessed September 8, 2018.

9. Centers for Medicare & Medicaid Services. Next Generation Accountable Care Organization (ACO) Model: Frequently Asked Questions. Accessed September 8, 2018.

10. Centers for Medicare & Medicaid Services. Quality Measure Benchmarks for the 2018 and 2019 Reporting Years. Published December 2017. Accessed September 8, 2018.

11. Toussaint J, Krueger D, Shortell SM, Milstein A, Cutler DM. ACO model should encourage efficient care delivery. Healthc (Amst). 2015;3(3):150-152. doi:10.1016/j.hjdsi.2015.06.003.

12. Clement RC, Kheir MM, Derman PB, et al. What are the economic consequences of unplanned readmissions after TKA? Clin Orthop Relat Res. 2014;472(10):3134-3141. doi:10.1007/s11999-014-3795-3.

13. Centers for Medicare & Medicaid Services. Physician Fee Schedule Search Results. Accessed June 4, 2015.

14. Losina E, Walensky RP, Kessler CL, et al. Cost-effectiveness of total knee arthroplasty in the United States: patient risk and hospital volume. Arch Intern Med. 2009;169(12):1113-1121; discussion 1121-1122. doi:10.1001/archinternmed.2009.136.

15. Mather RC 3rd, Hug KT, Orlando LA, et al. Economic evaluation of access to musculoskeletal care: the case of waiting for total knee arthroplasty. BMC Musculoskelet Disord. 2014;15:22. doi:10.1186/1471-2474-15-22.

16. International Consortium for Health Outcomes Measurement. ICHOM web site. Accessed November 3, 2015.

17. Rolfson O, Wissig S, van Maasakkers L, et al. Defining an international standard set of outcome measures for patients with hip or knee osteoarthritis: consensus of the International Consortium for Health Outcomes Measurement Hip and Knee Osteoarthritis Working Group. Arthritis Care Res (Hoboken). 2016;68(11):1631-1639. doi:10.1002/acr.22868.

18. Clement RC, Welander A, Stowell C, et al. A proposed set of metrics for standardized outcome reporting in the management of low back pain. Acta Orthop. 2015;86(5):523-533. doi:10.3109/17453674.2015.1036696.

19. Shortell SM, Colla CH, Lewis VA, Fisher E, Kessell E, Ramsay P. Accountable care organizations: the national landscape. J Health Polit Policy Law. 2015;40(4):647-668. doi:10.1215/03616878-3149976.

20. Centers for Medicare & Medicaid Services. CMS Proposes “Pathways to Success,” an Overhaul of Medicare’s ACO Program Published August 9, 2018. Accessed September 10, 2018.