What the site-of-care shift for joint replacement means for hospitals

Hospital patient volumes mostly have been on an upswing since the worst of the COVID-19 pandemic, but certain trends represent cautionary tales for long-term finances.

For example, the latest report (registration required) from Strata Decision Technology shows a year-over-year decline in August of more than 21% for inpatient primary knee replacement procedures. A shift to outpatient departments and ambulatory surgical centers (ASCs) has been underway ever since CMS removed total knee arthroplasty from the inpatient-only list for 2018. Outpatient volumes also were down for the procedure, though, by 4.7%.

The impact of the inpatient volume loss can be substantial, said Steve Wasson, chief data and intelligence officer with Strata.

“That changes the economics big-time for organizations because how you get paid, your margins, everything are different on the outpatient [side],” Wasson said.

One cascading effect is a change in the case mix whereby inpatient knee replacements essentially become reserved for more complex and higher-cost cases, yet Medicare still pays the same designated rate.

“I wonder about that in the next 12, 24 months — what’s the margin going to look like for an inpatient knee or hip replacement? I think it’s going to be deteriorating,” Wasson said.

With Donald Trump set to become president for the second time, it’s notable that CMS near the end of his first term significantly shrunk the inpatient-only list of medical procedures, seeking to boost competition and access. Nearly 300 procedures came off the list for 2021.

The Biden administration reversed course the following year, restoring most of the procedures in response to stakeholder concerns about patient safety.

Big-picture trends

Volumes increased by 3.8% year over year for inpatient admissions and 3.6% for outpatient visits, according to Strata’s report, which included data from 133 health systems and 691 hospitals.

Observation stays fell by 5.8% — perhaps a byproduct of recent federal guidance emphasizing that the two-midnight rule applies to Medicare Advantage — and emergency visits dropped by 2.9%.

The volume increases seen of late explain why hospital leaders want to invest in physical infrastructure. In HFMA’s latest Outlook survey of members, the most frequently selected answer to a question about upcoming investments and purchases was facility design, construction and management.

At 49.8% of 211 respondents in the most recent quarterly survey, which took place in September, the category outranked AI (40.8%) and roughly 25 other choices. The category also topped the list, at 42.7%, when considering responses from four cohorts of members who took the survey over the past year.

Even so, among answers by the past four cohorts about which area will require the greatest investment of resources over the next three years, health IT (55.1% of responses) and labor management (52.9%) both outpaced capital projects (36.9%).

A 2024 report by Sg2 forecasted volume changes over the next 10 years, projecting a modest increase of 3% in inpatient discharges. That’s 10 percentage points lower than what population trends would suggest in a vacuum. The increases stemming from population growth and epidemiological and sociocultural factors are expected to be countered by service line management within systems of care, as well as policy and technological changes.

Among specific service lines, inpatient orthopedics and spine procedures will fall by 7% and overall inpatient surgeries will remain flat, per the estimates.

Outpatient visits will rise by 17% through 2034, led by increases in behavioral health (26%), cardiovascular (25%), neurosciences (23%) and surgery (16%), among others.

Stemming the tide

Payer mix provides important context for volume changes.

At the for-profit hospital chain HCA Healthcare, for example, outpatient surgery volume has trended downward this year. But the company is seeing increased profitability per case because the decrease largely has manifested in the Medicaid and uninsured populations, Sam Hazen, president and CEO, said in October during a Q3 earnings call. Revenue for outpatient surgeries increased by 5% year over year.

“We’ve seen acuity growth, and we’ve also seen payer-mix improvement,” Hazen said.

Tenet Healthcare, another for-profit health system, hedged against losses from site-of-care shifts with its 2015 purchase of a majority stake in a joint venture with United Surgical Partners International (USPI) to create what was described as the nation’s largest ambulatory surgery provider. In recent years, the company has significantly expanded USPI’s footprint through acquisitions and new facilities.

“We made a decision that we wanted to be the unquestionable leaders in outpatient bone and joint care — more broadly, bone, joint, spine, etc., with a full range of outpatient-based services,” Saum Sutaria, Tenet’s chairman and CEO, said during a Q3 earnings call. “I think what we’re seeing is that we can provide those services in a high-quality manner at a lower cost than in other settings.

“The industry has moved pretty heavily towards outpatient-based care. Some of that care is still in the hospital outpatient-based environment versus in the freestanding environment. We still think there’s migration opportunity over the next few years into the freestanding environment.”

He said there does not need to be “cannibalization” of such services when hospitals and ASCs are part of the same portfolio.

“The market has been expanding for these services when you can offer [them] in an ambulatory setting,” Sutaria said.