Analysis: Moving joint replacement procedures to the outpatient setting

• The continued shift of high-volume, high-margin joint replacement procedures to the outpatient setting was overshadowed in the OPPS proposed rule by the price transparency requirements and the implementation of E&M site-neutral payments.
• Although this continued shift is not a surprise, it doesn’t reduce the potential margin impact on providers.

The continued shift of high-volume, high-margin joint replacement procedures to the outpatient setting was largely overshadowed in the Outpatient Prospective Payment System (OPPS) proposed rule by both the price transparency requirements and the implementation of evaluation and management (E&M) site-neutral payments.

Medicare will now pay for total knee replacements performed in ambulatory surgery centers. And the proposed rule also removes hip replacements (THA) from the inpatient-only list and assigns them to a comprehensive Ambulatory Payment Classification. The proposed rule provides for a one-year moratorium on Quality Improvement Organizations referrals to the Recovery Audit Contractor (RAC) for site of service necessity for THA procedures.

Takeaway

Although the continued shift of high-volume, high-margin joint replacement procedures to the outpatient setting is not a surprise and even was anticipated, that doesn’t reduce the potential margin impact on providers.

Uncomplicated joint replacement (MS-DRG 470) was the second-most common Medicare discharge in 2016 accounting for over 500k discharges, according to CMS Inpatient Charge Data FY2016. And these cases tend to be profitable.

Despite the shift in setting, the orthopedics service line remains, from a volume perspective, a growth opportunity for health systems. However, as has long been projected that growth will occur in the outpatient setting (See the Figure 1 chart in the Vizient article, “Outpatient Joint Replacement: An Unnecessary Concern or Market Reality”).

Who’s best positioned?

• Systems that have developed ambulatory survey centers (ASC)s in joint venture with their orthopedists should be well-positioned to navigate the shift in setting (by at least retaining the volume).
• Those that have not are more likely to be adversely impacted by cream skimming, particularly if the orthopedists own their own ASC, or have a stake in another ASC. To that end, I suspect the anticipated shift in setting partially explains private equity’s interest in orthopedic practices, according to a Modern Healthcare article.

DRG mispricing: Also, for the foreseeable future, hospitals will be underpaid, to an even greater degree, by Medicare for uncomplicated joint replacement surgeries in the inpatient setting. Due to the lag in data used for DRG weight setting, rates for knee and hip replacements will not accurately reflect the severity/complexity of the cases that remain in the inpatient setting as more relatively healthy Medicare beneficiaries have the procedure done in the outpatient setting. This challenge will extend to target prices used in both Comprehensive Care for Joint Replacement and Bundled Payments for Care Improvement Advanced.