Overview:
It seems like it is only a matter of when and not if CMS will remove Total Knee Arthoplasty (TKA) from the Inpatient Only list (IPO) , opening up this common procedure to competition from ASCs. HCA has the most to lose as it performs about 18 percent of major joint replacements of which approximately 57 percent are TKA. However, it appears to be in a position to mitigate the impact with its ownership of ASCs, asssuming existing orthopedic surgeon practice patterns are preserved. CYH, on the other hand appears to have few options other than shifting surgeries to its outpatient departments.
Sitting over at the White House awaiting approval is the Hospital Outpatient Prospective Payment System and the Ambulatory Surgery Center annual payment updates. The annual rule will, of course, include policy statements. Front of mind for us is whether or not total knee arthroplasty will be removed from the Medicare Inpatient Only list.
You have heard this before, we know.
In 2013, CMS proposed removing TKA (CPT code 27447) from the IPO list. At the time, CMS believed that the procedure could be provided and paid for as an outpatient procedure. They based their decision to propose the change on the following criteria:
- Most outpatient departments are equipped to provide the simplest procedure described by CPT Code 27447 to Medicare populations
- The procedure is related to codes that have already been removed from the IPO list
- A determination has been made that the procedure is being performed in numerous hospitals on an outpatient basis
- A determination is made the procedure can be appropriately and safely performed in an ASC and is on the list of approved ASC procedures or has been proposed for addition to the ASC list
CMS reports that the public comments on this proposal were “varied,“ which is code for “people hated the idea.” They withdrew the proposal and attempted to clear up some misunderstandings. Chief among those was the perception of commenters that removal from the IPO list means the procedure must be not that it could be done in an outpatient setting.
Last summer, CMS brought the topic up again but did not make a formal proposal and instead ask for answers to a few questions:
- Are most outpatient departments equipped to provide TKA to certain Medicare beneficiaries?
- Can the simplest procedure described by CPT 27447 be performed in most outpatient departments?
- Is the procedure described by CPT code 27447 sufficiently related to CPT code 27446?
- How often is the procedure described by CPT code 27447 being performed on an outpatient basis (either at an HOPD or and ASC) on non-Medicare patients?
- Would it be clinically appropriate for some Medicare beneficiaries to have the TKA as an outpatient which may not include a 24hr period of recovery in the hospitals?
- What changes if any need to be made to CJR and BPCI if TKA is permitted on an outpatient basis?
Unlike in 2013, CMS reported that the “overwhelming majority” of commenters supported removing TKA from the IPO list. What pushback there was came from a “few” commenters representing professional organizations, health systems and hospitals associations.
Commenters also expressed concern that removal of TKA from the IPO would have an impact on the pricing methodologies, targets and reconciliation process in the CJR and BBCI demonstrations.
With the caveat that the change in party control at HHS provides a bit of uncertainty, it appears that CMS is headed toward a formal proposal to remove TKA from the Inpatient Only List in the OPPS annual rule that should be released in a few weeks.
What does it mean?
The competition for Medicare TKA patients will get stiffer.
Medicare pays about $7 billion a year for approximately 460,000 procedures that are described by MS-DRG 470, Major Joint Replacement without Medically Complex Conditions. Of this amount about half were performed in the HCA’s, LPNT’s, CYH’s and THC’s market areas.
We are assuming that procedures described by MS-DRG 469, Major Joint Replacement with Medically Complex Conditions would not be significantly affected by the change – either because of physician selection or because of CMS guidance. In any event, Medicare paid for only 19,000 MS-DRG 469 procedures in 2014.
Source: CMS
Note: For the purposes of this analysis, we are using the Hospital Referral District descriptions defined by CMS to identify the hospital market area.
Approximately 57 percent of MS-DRG 470 procedures are TKA, according to CMS. The balance of MS-DRG procedures are total or partial hip replacement (42 percent) and other miscellaneous joint procedures such as ankle replacement and thigh reattachment which account for 1 percent.
Source; CMS
CYH has the largest addressable market with 133,000 MS-DRG 470 procedures – about 30 percent of the national Medicare total - performed in the geographical areas in which it had hospitals in 2014. In HCA’s geographical regions, there were 121,000 MS-DRG procedures performed in 2014 - or about 26 percent of the national Medicare total. Within THC’s and LPNT’s footprint, 90,000 and 60,000 procedures were performed – 20 and 13 percent, respectively of the national Medical total.
Source: CMS
Although Medicare paid for fewer procedures in HCA's markets, the hospital giant was better than any of the other publicly traded hospital companies at getting their share of the Medicare business relative to the addressable market and on a per bed basis. For that reason, they would be most at risk for any change to Medicare policy.
Source: CMS
Source: CMS
Source: CMS
HCA can mitigate the risk somewhat due to its ownership of about 117 Ambulatory Surgery Centers. Of these, 96 perform orthopedic surgical procedures. Of the 96 that perform orthopedic surgeries (which may or may not include TKA), about 49 are located within the same ZIP code as an HCA inpatient hospital.
Source: Company Filings and CMS
Source: CMS
THC through its joint venture with USPI will also be able to redirect Medicare TKA patients to one of its 180 ASCs that performs orthopedic surgery. .
Source: Company Filings and CMS
Source: CMS
LPNT and CYH do not own any ASCs. They may be able to retain some of the procedures performed in their market areas through their outpatient departments. However, it would depend on how surgeons will react to the change.
Estimates on how many of TKAs performed annually would move to an outpatient setting range from 10-15 percent to as much as 25 percent. According to AHRQ, about 5 percent of TKAs across all payer types were performed on an outpatient basis in 2014, down from 8 percent in 2012.
Source: HCUP
Assuming the distribution of MS-DRG 470 procedures is still consistent with CMS’s national figure, as many as 65,000 MS-DRG 470 Medicare procedures could move to the outpatient setting. The figure could be higher if some portion of MS-DRG 470 (Major Joint Replacement with Medically Complex Conditions) were also to migrate to outpatient.
Source: CMS
In terms of revenue impact, HCA, CYH, LPNT and THC hospitals were paid $630 million from Medicare and other sources for MS-DRG-470 procedures – or about 9 percent of total payments. HCA, CYH, LPNT and THC's share of those payments mimics its share of procedures with HCA consistently receiving about 18 percent of payments.
Source: CMS
Source: CMS
Source: CMS
Medicare paid on average $20,140 for a MS-DRG 470 procedure in 2014. The median payment that year was $18,899. Average payment per procedure in 2014 was $22,320 including other payment sources like secondary insurance and co-payments. The median payment from all sources was $20,888. Because total knee replacements performed in ambulatory surgery centers or outpatient departments are reimbursed almost exclusively by commercial plans, there is little reliable data on cost. Estimates range from half to 1/3 of the amount paid by Medicare and its beneficiaries.
HCA, CYH, and LPNT all have historically been paid less than the average Medicare payments.
Source: CMS
Removing TKA from the IPO wlll also have some downstream effects on post-acute providers. About 50,000 of the 381,000 IRF cases are for a lower extremity joint replacement (including hip and knee total and partial replacement) in 2015. CMS does not provide explicit data on how many SNF admissions are TKA patients. Certainly some patients who undergo TKA will be discharged to a post-acute setting but the traditional pattern of 3 day hospital stay followed by discharge to and IRF or a SNF and then home health care will be disrupted.
Complicating things for CMS is the CJR mandatory demonstration. HHS Secretary Price has been a critic of mandatory demonstration programs. On May 18, CMS delayed for the second time implementation of the cardiac bundled payment for Acute Myocardial Infarction leading policy observers to believe it will never be implemented on a mandatory basis.
In those 67 Metropolitan Statistical Areas that are included in the CJR, inpatient hospitals are the episode initiators. If TKA is removed from the Inpatient Only list, CMS would need to adjust the demonstration to outpatient venues as episode initiators. It would not be a difficult matter to include hospital outpatient departments and hospital affiliated ambulatory surgery centers as episode initiators but ambulatory surgery centers would certainly cry foul.
Making ambulatory surgery centers episode initiators is difficult due to legacy coding, billing and data infrastructure. When proposing the CJR in 2015, CMS contemplated the use of initiators other than inpatient hospitals but determined the logistics required to overcome the shortcomings of the infrastructure were too demanding for the quick rollout CMS envisioned.
Removing TKA from the IPO would present Secretary Price with an opportunity to alter the CJR to address his long standing concerns. Using the removal of TKA from the IPO would give him cover to make changes to the program - including moving it to a voluntary basis. Hospitals which have already implemented the payment system would continue to do so, using either inpatient or outpatient capabilities. ASCs, meanwhile, could perform TKA and be paid outside the bundle system.
Given Secretary Price’s aversion to mandatory bundles and his bias toward physician and patient decision making, suggest he would be inclined to remove TKA from the Medicare Inpatient Only list.
Call with questions
Emily Evans
Managing Director
Health Policy
@HedgeyeEEvans
