The Threshold Pricing Project aims to increase efficiency and decrease overall expenditure by reducing the unit cost of orthopaedic prostheses. It is envisaged that the accumulated savings from the reduced cost of the prostheses can be used to fund more operations thereby reducing surgical waitlists.

Expenditure on orthopaedic prostheses is one of the largest costs borne by hospitals in Sydney South West Area Health Service (SSWAHS), in 2006/2007 SSWAHS spent in excess of $10,000,000 on prostheses. Over the last twelve years joint replacement surgery has increased by 100.5% (AOA 2007). It is expected that the increase in Australia's ageing population will cause demand and expenditure for joint replacements, and health services in general to rise (Productivity Commission 2005).

A review of prosthetic prices within SSWAHS over a period of six months found that the cost for the same prosthesis varies between hospitals within SSWAHS depending on surgeon preferences with individual vendors. Average unit costs for knees varied from $5180 to $8135, and average unit costs for hips varied from $6983 to $9597. However, individual unit costs for knees could vary from $5,000 to $19,752 and individual unit costs for hips could vary from $3,260 to $34,289.

Meetings with stakeholders identified that at many hospitals the approval for orthopaedic prostheses was given retrospectively. There was little control over expenditure and surgeons were not required to provide clinical justification for their choice of prosthesis.

The combination of Australia's ageing population, new technologies and increased demand is expected to place significant pressure on future health expenditure (Productivity Commission 2005). As the costs of healthcare are expected to continue to rise there will be greater emphasis placed on the way in which funds are spent (NSW Department of Health 2007). In order to make the best use of resources and create sustainability, funding decisions will need to take in to consideration the efficiency, equity and evidence of interventions and services.

By reducing the individual unit costs and overall expenditure on prostheses without compromising patient care, some of the savings can be used towards increasing the number of surgeries performed. This will assist with increasing access to surgery which will decrease the number of patients on surgical long waitlists.

Orthopaedic threshold pricing was introduced at Fairfield Hospital in 2006, and reduced the unit price of knees by 8% and hips by 19%.  In 2007, a NSW Health Redesign Program that focused on gain sharing in orthopaedic surgery was implemented at four pilot sites: Fairfield, St. Vincent's, Sutherland and Royal North Shore (Courtenay 2007). The program identified that costs for prostheses can vary significantly from hospital to hospital and that large savings could be made if a ceiling price was set for joints. These savings could be returned to the Orthopaedic Department to permit research, purchase of equipment or provide an increased number of joint replacements.

Given the success of threshold pricing at Fairfield Hospital, the Chief Executive of SSWAHS decided that a similar program should be rolled out at all hospitals that performed orthopaedic surgery. Threshold prices for knees and hips were set following consultation with the Chief Executive and orthopaedic surgeons. The threshold price for knees was set at $5700 and the threshold price for hips was set at $6500. Major vendors were invited to a meeting in September 2007 to advise them of the Project and the threshold prices.

Data from the Australian Orthopaedic Association National Joint Replacement Registry was used to develop broad clinical guidelines. Flowcharts were designed to illustrate the communication and approval process for joints. Each hospital selected a manager or clinician to act as a gatekeeper. The recommended approach was that quotes for prostheses should be obtained prior to the operation. Surgeons were able to use their prosthesis of choice if it was at or below the threshold price. Surgeons could request prostheses that were higher than the threshold price if they provided clinical justification to the gatekeeper.

Each hospital collected data that was then forwarded to a central point for collation and analysis. Regular stakeholder meetings were held to provide feedback on performance.

A review of outcomes three (3) months post implementation of the area wide Threshold Pricing Project identified the average unit cost has been reduced leading to a reduction in overall expenditure on prostheses across SSWAHS, as illustrated in Table 1.1.

Savings were calculated using the average unit cost of prostheses prior to implementation and comparing it with the actual unit cost post implementation.  In the first three months of the project, SSWAHS saved a total of $302,264. Table 1.2 outlines the data for each month.

While there have been good short-term gains across the Area through the implementation of the Threshold Pricing Project, compliance with threshold prices has varied at some facilities. Compliance with threshold prices for hips has varied from 0% to 100%; average SSWAHS compliance is 57%. Compliance with the threshold prices for knees is better, and varies from 38.7% to 100%; the average compliance across the Area is 79%. Therefore, the potential savings that were initially expected at each facility have not been realised. Remedial work is underway to correct this anomaly, which will potentially lead to a dramatic reduction in the average price for hips, and improve the overall savings for the Area.

The pre-approval process and regular audits assist with ensuring that individual unit costs for orthopaedic prostheses remain at or below the threshold prices, and that clinical justification is provided for higher priced joints. Regular meetings with stakeholders to discuss performance, issues and strategies for improvement also contribute to the success of the project.

A quarterly report is provided to the Chief Executive and individual hospitals, so that they can gauge their performance. Scope exists to provide individual surgeons with data regarding performance. Hospitals overseas have found that providing surgeons with data regarding the cost of prostheses can assist with sustaining change and in identifying further strategies for cost reduction (Greene 2005).

The Threshold Pricing Project has succeeded in reducing the individual unit costs of orthopaedic prostheses and overall expenditure on prostheses at SSWAHS hospitals. The Project could be applied to any hospital that performed orthopaedic surgery. It is envisaged that threshold pricing could be expanded to include other high cost surgical implants such as stents, pacemakers and defibrillators, or even other consumables.

• Australian Orthopaedic Association National Joint Replacement Registry, 2007, Annual Report, Australian Orthopaedic Association National Joint Replacement Registry, Adelaide, viewed 9 Dec 2009.
• Courtenay, B. 2007, Funding the Surgery Program: Gainshare (pdf - 224 KB), NSW Health.
• Greene, J. 2005, 'A small hospital tackles implant costs', OR Manager, vol. 21, no. 11, pp. 18-19.
• NSW Department of Health, 2007, A new direction for NSW Department of Health - State Health Plan - Towards 2010, viewed 9 Dec 2009.
• Productivity Commission, 2005, Economic Implications of an Ageing Australia, Productivity Commission, Canberra, viewed 9 Dec 2009.

General Manager, Bankstown Hospital
Phone: 02 9722 8225