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Overview. Addition of Total Knee Replacement to the Ambulatory Surgery Center Covered Procedure List, combined with payment reforms that adequately cover reimbursement of the device and changes to the annual payment update, are the best policy news the ASC industry has seen in decades. Medicare will pay $9,600 for a TKA in an ASC, versus $12,000 in a Hospital Outpatient Department. Medicare paid for 511,000 procedures in 2017 of which about 1/3, our field research indicates, would migrate to the ASC setting. The policy change, long overdue and strongly opposed by the hospital associations, will benefit THC's USPI unit and perhaps accelerate SGRY's turn-around. |
The 1980s were the heyday of the Ambulatory Surgical Center sector. The combined effects of technological progress, population shifts to suburbs and ex-urbs (read: away from hospitals) and a permissive attitude toward reimbursement created an explosion of centers and once unthinkable migration of procedures away from hospitals.
As with everything in health care, all good things must come to an end and by the late-1980s, the reluctant standard-setter that is CMS established a paltry payment system and tightened its grip on approved ASC procedures even when technological advancements seem to argue otherwise.
As a result of these hospital-centric policies, major procedure migration from Hospital Outpatient Departments to Ambulatory Surgery Centers stalled.
The Trump administration has set out to reverse that trend. Last year, in response to dozens of years of complaints from the ASC industry, CMS revised the reimbursement methodology and replaced CPI-U with the hospital market basket adjustment as an annual update factor.
The use of CPI-U, of course, does not account for many of the inflationary drivers of health care costs in the same way the IPPS market basket adjustment does. For that reason, annual ASC payment updates have followed a much flatter reimbursement trend than that for hospitals. The payment rates to ASCs has been a significant factor in reducing procedure migration to ASCs and providing meaningful competition to hospital systems.
With the issuance of the CY 2020 final ASC payment rule, the Trump administration took their policy another giant step forward with these changes:
- Added Total Knee Replacement to the Ambulatory Surgery Center Covered Procedure List effective Jan. 1, 2020.
- Designated TKA a “device intensive” procedure, thus reimbursing the implant at the same rate as for HOPDs (previously, CMS had reduced the threshold for a procedure being so designated from a device cost of 40% of the procedure to 30%.)
- Added two angioplasty and four cardiac stent procedures to the ASC Covered Procedure List.
- Removed Total Hip Replacement from the Inpatient Only List and designated it as “device intensive.”
The implications of these changes and the policy overall is a revival of the golden age of Ambulatory Surgery Centers which should benefit THC and SGRY and UNH’s SCAI unit.
Migration Should Take Place Over Next 3-5 Years. The Trump administration’s decision to lower the threshold for a procedure to be designated as "device intensive" from 40% to 30% increased the number of procedures for which device reimbursement was on parity with HOPDs.
This parity is important. If a procedure is not designated “device intensive” then Medicare reimbursement for a TKA in an ASC follows this formula:
ASC Conversion Factor ($47.75) * Relative Payment Weight (180.3081) = $8,609.17
For precisely the same procedure performed in a hospital outpatient department, the reimbursement rate is $11,899.39.
A 30% difference.
By defining TKA as device intensive, CMS reduces the gap between HOPD and ASC reimbursement. The formula for a device intensive procedure is:
Device Portion of OPPS Rate ($5,791.43) + (ASC Conversion Factor*Non-Device Portion of OPPS Conversion Factor ($47.75*72.019 = $3,438.92) = $9,640.92.
A 15% difference.
Payment to an ASC net of an approximately $4,500 implant cost will be approximately $5,140. Payment to a hospital will be $7,400. Although the hospital payment is higher, the physician is generally unable to participate in the overall economics of the service because of a federal prohibition on physician-owned hospitals. Most ASCs are at least minority-owned by physicians.
In addition to the CPI-U linked annual payment updates, the ASC industry has cited poor procedure reimbursement as a barrier to migration. The Trump administration has now addressed both concerns making a shift in Medicare volumes from HOPDs to ASCs likely over next three years to five years.
Addressable Market is about 1/3 of Medicare Procedures. In 2017, approximately 511,000 Total Knee Replacements were reimbursed by Medicare. Another 170,000 were reimbursed by non-Medicare payers. While Medicare has downplayed the migration, citing 800 procedures performed in ASCs and paid for by Medicare Advantage in 2018, our field work suggests one-third of the 500,000 Medicare procedures can migrate to an ASC. Some sources suggest as high as half of procedures and as low as 10-15% will migrate.
CMS’s estimate also ignores the spillover effects of Medicare’s new permissive policies. Although Congress has repeatedly pointed out that Medicare payment policies do not express a “standard of care” there are substantial liability risks associated with limiting coverage contrary to federal policy. For that reason, the new coverage policy is also likely to have an impact on non-Medicare insured where a super majority (2/3) of the 170,000 knee replacements could be performed in an ASC due to the younger and healthier characteristics of the commercially insured.
Not to be ignored is UNH’s recent medical policy release that establishes the ASC as the default site of service for a list of common outpatient services. These procedures, like cataract removal and colonoscopies are performed in HOPDs, ASCs and Physicians’ offices. UNH has established a policy that requires medical review if these services are performed at a HOPD.
UNH’s list does not include TKA . Instead, it consists of procedures that for many years have been performed in ASCs. A walk from the current UNH list to one that includes TKA, is a short one now that Medicare has greenlighted it for ASCs.
Pricing wil be Stable. The combined effects of Medicare lowering the threshold from for a procedure to be considered device-intensive from 40% to 30% and determining that 48.67% of the procedure reimbursement is for the device, means device prices would have to decline substantially, and that decline properly reported for CMS to demote TKA’s device intensive status. While hospitals must report their device costs on annual cost reports, ASCs do not. It could be several years after the device portion of the procedure declines below 30%, if that were to occur, before CMS would have the data necessary reduce reimbursement to ASCs.
Furthermore, our field work suggests that device prices many not be under pressure in the early years of the migration. ASCs typically do not have purchasing power to affect the device price quite like a high- volume hospital system.
Commercial pricing of TKA should experience a good bit of pressure, however, as demonstrated by UNH’s medical policy. Anecdotal evidence from orthopedic practices suggests national payers like UNH and AET are quick to force migration to lower cost site of services while regional insurers like Blues plans are not as aggressive. For that reason, impacts to commercial prices are going to be inconsistent across geographies.
Cardiac Procedures Outlook Less Certain. CMS's addition of these cardiac interventions to the ASC CPL holds less promise than TKA, and eventually, Total Hip Replacement. When stent placements and angioplasties go poorly, emergency intervention is required. We suspect that it will take longer for physicians to become comfortable these procedures can be performed in an ASC. We will have to conduct more field research on these procedures to reach any more definitive conclusions.
Total Hip Replacement Likely to Follow Same Path. The removal of Total Hip Replacement from the Inpatient Only List is the first step in its eventual migration to ASCs. We would expect CMS to propose it for addition to the ASC Covered Procedure List for CY 2022.
These policy shifts are obviously bad news for inpatient hospitals and clearly articulated by the American Hospital Association's blistering comment letter. They are also a vindication of THC's strategy in aquiring USPI and accretive to SGRY's turn around ambitions focused on orthopedics and cardiology.
Call with questions. We will be here reading the other 3,000 pages of new Medicare rules.
Emily Evans
Managing Director – Health Policy
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