A 11 minute read
decipher-root-causes-of-surgical-price-variation
September 5, 2017

*updated January 15, 2020

As part of an ongoing effort to bring greater transparency to the hidden world of healthcare costs, we’re taking a fresh look into surgical price variation. Since the implementation of the Affordable Care Act, high deductible insurance plans have become commonplace — which has led to patients increasing awareness of out-of-pocket costs for their procedures. Despite cost containment efforts, the price for surgery is not subject to any regulations. 

A Los Angeles Times story from 2017 highlighted the relatively rare approach taken by the Santa Barbara County government: sending its 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 or more.

Why? To cut down on rising healthcare costs. This strategy has saved the county an estimated 50 percent across four total surgeries since the year prior to the article's release. It has also illustrated the long-suffered problem of price variation among U.S. hospitals, especially for certain surgical procedures. Existing research and a look at Definitive Healthcare data show that a variety of factors could be at work.

While cost variation exists for all medical servicessurgical procedures have traditionally garnered more attention, 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 diagnosis-related groups (DRGs) involving the surgeries with the most spending as of 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). 

Since this blog's original publication (September 5, 2017), Definitive Healthcare all-payor claims data shows a decreasing trend from 2017 to 2018 in both charges and payments for four out of five of these DRG codes. Total payments for DRG code 333 increased almost 24 percent, while DRG 460 total payments saw the opposite trend of a 28 percent decrease year-over-year.

Payment trends by DRG code

DRG Code Total Payments 2018 Total Payments 2017 Payments Trend
460 $4,711,513,040 $6,542,679,972 -28.0%
470 $17,441,646,793 $19,997,000,382 -12.8%
251 $236,125,423 $249,428,584 -5.3%
236 $1,688,512,085 $1,706,088,347 -1.0%
333 $48,484,031 $39,153,551 +23.8%

Fig 1 Data pulled from Definitive Healthcare's Inpatient Diagnosis Analytics on the Hospital platform in January 2020. This is inclusive of all-payor claims, excluding CMS data. Trended data is only available for the two most recent calendar years.

DRG 460: Spinal fusion

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 that cost variation exists, 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. Fifteen of the top 20 hospitals with the highest estimated payments per claim had fewer than 212 staffed bedsthe median figure for all hospitals that performed the surgery in 2015. 

DRG 470: Hip and knee replacement

DRG 470(hip and knee replacement without major complicating conditions) has been previously identified as a procedure type with wide variations in price. According to Definitive Healthcare data, the 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 lowest claims volume and a median overall size. 

Examining more cost variations

For percutaneous coronary angioplasty (DRG 251), colorectal resection (333), and coronary bypass surgery (236)the picture is much the same — all displaying significant cost variation. Existing research falls short of conclusively identifying any root causes and, instead, suggests only correlations.  

One consistent trend among these three procedures is that payments tend to increase with hospital size. However, this is generally true for all DRGs, as larger hospitals are typically located in urban areas with higher operating costs. Large facilities also possess the market clout to negotiate better rates from private insurers. 

While the cost variations across these 5 procedures are difficult to pin down, one study suggests that they may be the exception to the rule and that most cost differences in surgeries can be explained. Published in The American Journal of Surgery, the study 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 could 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 the unique characteristics of certain high-cost surgeries, and why such variation exists. 

Learn more 

Understanding these metrics not only provides greater insight into procedure price variation, but also enables those in the healthcare industry to have more informed conversations with care providers.  

Interested in learning more about how Definitive Healthcare can help you leverage financial data to sharpen your business strategiesWith our platform you can: 

  • Access interactive maps and visuals to understand key clinical and financial metrics 
  • Analyze physician referral patterns and trended financial data 
  • Identify which facilities receive the highest reimbursements 

Sign up for your free trial today! 



Continue Reading