Removing Medicare’s Outpatient Ban and Medicare and Private Surgical Trends

March 12, 2021
Michael R. Richards, MD, PhD, MPH

Jonathan A. Seward, MS

Christopher M. Whaley, PhD

The American Journal of Managed Care, March 2021, Volume 27, Issue 3

This article documents a 100% increase in privately insured outpatient knee replacement surgeries following Medicare’s decision to remove knee replacements from its Inpatient Only list.


Objectives: To examine changes in hospital outpatient surgery trends and case mix for Medicare and privately insured patients needing total knee arthroplasty (TKA) following Medicare’s removal of TKA from its Inpatient Only list on January 1, 2018.

Study Design: A retrospective analysis of all hospital discharge records in Florida from 2012 through 2018.

Methods: We tracked inpatient vs outpatient performance of TKAs at the state and hospital levels. We also combined our primary data with physician practice organization information to assess variation in the policy response according to physician-hospital ownership status. Supplementary analyses examined policy-induced changes in inpatient TKA case mix.

Results: We observed an immediate shift of roughly 15% of Medicare TKA cases to the outpatient setting. Importantly, there was a simultaneous near doubling of the number of TKAs performed as a hospital outpatient procedure among privately insured patients younger than 60 years. Hospitals allocated a similar proportion of TKA cases to the outpatient setting across the 2 payer groups, and we found evidence of selection against the potentially riskiest Medicare TKA patients for outpatient delivery. Vertically integrated orthopedic physicians retained their Medicare and privately insured TKA cases within the inpatient (higher-cost) setting.

Conclusions: Market and financial pressures are encouraging more outpatient care delivery; however, the speed of transition is dictated, in part, by regulatory constraints. Our results suggest that Medicare policy may influence surgical treatment approaches for Medicare and privately insured patients. Spillover implications need to be considered when weighing future Medicare regulatory decisions.

Am J Manag Care. 2021;27(3):104-108.


Takeaway Points

  • In the first year following Medicare’s decision to remove total knee arthroplasty (TKA) from its Inpatient Only list, Florida hospitals shifted 15% of TKA Medicare cases to the outpatient setting.
  • That same year, the total number of outpatient privately insured TKA cases doubled and represented 25% of all privately insured TKA cases in the state.
  • Medicare administrators and policy makers need to pay attention to potential for Medicare rulemaking spillovers on care delivery, and hence medical spending, for non-Medicare patients.


There is a growing shift toward outpatient care delivery throughout the US health care system, which is expected to benefit patients through lower costs and better convenience relative to inpatient treatment options.1 The hospital industry has been forced to confront these trends as outpatient revenue is now at near parity with inpatient revenue for US hospitals.2 Although market forces and financial pressures underlie some of these movements, regulatory interventions are also important. Specifically, Medicare is often a significant source of care delivery rules, which can affect the precise timing and speed of inpatient to outpatient care transitions.

A prominent and contemporary example comes from orthopedic surgery involving knee replacements (ie, total knee arthroplasty [TKA]). Each year, approximately 680,000 individuals receive a TKA, which costs more than $30,000 on average.3-6 In 2013, CMS first attempted to remove TKA procedures from the Medicare Inpatient Only (IPO) list, which prohibits outpatient surgery for listed procedures. The initial attempt was ultimately unsuccessful, but the policy initiative eventually gained sufficient support to culminate in TKA’s removal from the Medicare IPO list on January 1, 2018.7 The 2018 rule change granted providers the ability to perform the procedure for Medicare beneficiaries within a hospital outpatient department, although inpatient delivery remained permissible.8

The Medicare TKA rule change did not take place in a vacuum, as momentum had been growing toward outpatient delivery due to clinical and procedural innovations that shortened the required length of stay for major surgery. For instance, the average length of stay for a joint replacement procedure has decreased from 9 days to 4 days in the last 20 years—with outpatient delivery almost always resulting in same-day discharge.9-11 Outpatient TKAs have also been estimated to be as much as 30% to 50% less expensive than inpatient TKAs,2,12,13 and some forecast up to half of all TKAs taking place within an outpatient setting over the next decade.14

Thus far, there has been limited research on the 2018 TKA IPO decision. Evidence from 2 studies documents outpatient delivery take-up for Medicare cases across the United States, which averaged $3600 in lower Medicare payments and generated more than $300 million in savings,15,16 but neither study speaks to broader policy ramifications, particularly for non-Medicare TKA patients. Medicare accounts for about 20% of all US health care expenditures and is known to influence contracting and care delivery for the privately insured. For instance, prior research finds Medicare spillover effects onto private insurance fee schedules as well as providers’ treatment of private patients following Medicare incentive changes.17-25 However, Medicare’s regulatory externalities are just beginning to be understood. Geruso and Richards offer the only known study that explicitly investigates and documents spillover effects from Medicare rulemaking onto the privately insured segment of the US health care market.26 We believe such regulatory externalities are relevant in our context. In this setting, private insurers did not have uniform restrictions on the use of outpatient surgical services, but physicians may have been reluctant to perform procedures in multiple settings or bear higher perceived liability risks. Providers and private insurers could therefore have adopted the policies established by Medicare. Carey et al likewise posit that TKA removal from the Medicare IPO list could invigorate private insurer efforts to move more TKAs into the outpatient setting.27

Using the universe of data from all Florida hospitals for 2012-2018, we examined trends in inpatient and outpatient TKA surgeries for 2 key payer types: traditional Medicare and the privately insured (non-Medicare). We additionally explored the degree of correspondence in postpolicy outpatient preference across payers within the same hospital as well as changes in inpatient case characteristics. Importantly, a complementary database allowed us to assess if hospital employment of surgeons moderates any change in outpatient delivery. The differences in reimbursement across settings are salient to hospitals and could have led them to discourage employed surgeons from performing TKA procedures outside the (higher-paying) inpatient setting. Taken together, our findings reveal whether an abrupt Medicare policy intervention is associated with the degree to which different health care providers substitute lower-cost treatment options.


Study Sample

The administrative data set was obtained from the Florida Agency for Health Care Administration (AHCA) and comprised the universe of inpatient and outpatient (ambulatory) procedure discharge records from the state of Florida over the 2012-2018 period. The data are recorded quarterly; however, we annualized the analytic data to smooth out within-year seasonality in care delivery (see the eAppendix [available at] for quarterly-level analyses). Each discharge record contained information on the medical procedures being performed, the providers involved (eg, surgeons and hospitals), and patient characteristics, including the primary payer (eg, Medicare or private insurance). TKA cases were identified using the corresponding International Classification of Diseases, Ninth Revision (ICD-9) and Tenth Revision (ICD-10) procedure codes for the inpatient discharge records and the corresponding Current Procedural Terminology (CPT) codes for the outpatient discharge records. Across both settings, we observed approximately 17,000 to 20,000 Medicare TKAs per year and 10,000 to 14,000 privately insured TKAs annually (see Figure 1).


Our primary analyses longitudinally tracked the treatment setting selections for TKAs across our 2 key payer groups. We examined how often outpatient settings were used in 2018 for Medicare patients and to what extent the trend for privately insured patients corresponded to the timing of the Medicare policy change. We also examined the cross-payer concordance in 2018 outpatient use for TKAs within the same hospital.

We then conducted several supplementary analyses. The first examined the inpatient vs outpatient TKA decision for vertically integrated (ie, employed by a hospital or health system) orthopedic surgeons vs all others. We followed several recent studies and obtained information on physician vertical integration status from the SK&A physician office survey, which we linked to the discharge data via National Provider Identifier numbers.28-33 Next, we examined trends in site of care for all non-TKA procedures over our study period to ensure that 2018 was not remarkable in other ways. Finally, we explored changes in the inpatient case mix (ie, risk selection) for Medicare and privately insured TKAs in 2018 by comparing their patient characteristic trends against all other inpatient procedures belonging to each payer (see the eAppendix for full methodological details and results).

The study was approved by the Baylor University Institutional Review Board, and Florida AHCA was not responsible for any analyses or data interpretations.


Figure 1 displays the total number of TKA procedures performed per year among Medicare fee-for-service and private payer populations in Florida. The number of TKA procedures increased for both payers over time; however, neither payer group demonstrated meaningful TKA growth in 2018.

Figure 1 also displays annual percentage changes and hence growth in inpatient TKA delivery over our study period for each payer group of interest. From 2012 to 2016, both payers experienced similar increases in the volume of inpatient TKAs that then plateaued between 2016 to 2017. Once the Medicare prohibition on outpatient TKA delivery was lifted (2018), there was a sharp decline of inpatient TKAs. Inpatient Medicare TKA cases were 15% lower in 2018 compared with the 2017 volume, and the trends for privately insured TKA patients generally mirrored those for Medicare. Specifically, after years of positive growth, the privately insured TKA inpatient volume fell by 12% in 2018. Given that 2018 is not characterized by declines in total TKA cases, the reductions in inpatient TKAs must be offset by increases in outpatient TKAs.

Figure 2 presents the number of TKA procedures among the privately insured population performed in an outpatient setting from 2012 to 2018. Starting from a low base of 264 procedures (3% of all private TKAs), more than 1000 such cases had occurred across Florida by 2015. The trend changed abruptly in 2018, however, with more than 3000 outpatient privately insured TKA cases taking place in that year (24% of private TKAs). This marked a nearly 100% increase from the previous year (2017) and was concurrent with the Medicare IPO decision for TKA. Figure 2 also presents these trends based on the employment status of the operating physician. Physicians not employed by a hospital or health system accounted for 85% of the increased use of TKAs performed in outpatient settings. Although this lack of response to the Medicare policy change by vertically integrated surgeons could be suggestive of misaligned incentives and a strategic response by hospitals, we observed a greater share of TKA patients coming from rural areas among those treated by vertically integrated orthopedic surgeons. Longer travel distances and potentially limited health care resources near their home residence could have altered the cost-benefit calculation for these specific patients (eAppendix Table 1).

Figure 3 presents analogous trends for all non-TKA surgical procedures from 2012 to 2018 in Florida across these 2 payers. Neither the inpatient nor outpatient delivery trends indicate commensurately sharp and large changes in 2018 or any other year. The patterns in Figure 3 therefore offer further suggestive evidence that the very large change in site of care for TKAs in 2018 (ie, a doubling of outpatient delivery for the privately insured) was likely due to factors specific to TKA procedures.

In Figure 4, we plot the 2018 TKA outpatient shares by payer group within the same hospital. There is a central tendency to the scatter plot (ie, following the 45-degree line), implying that orthopedic surgeons and hospitals were often substituting toward the outpatient option to a similar degree for Medicare and privately insured TKA patients. There were also exceptions (ie, favoring outpatient for one payer type relative to the other), but these instances may have had more to do with the surrounding payer mix facing the surgeon and hospital than the appropriateness of outpatient TKA surgery.

We found limited changes in the case mix for inpatient TKAs following the Medicare IPO policy change (eAppendix). The single notable exception was some degree of selection against the oldest (ie, 75 years and older) Medicare beneficiaries receiving a TKA as an outpatient, which is not surprising when considering their likely elevated risks of complications and greater postoperative needs. Inpatient privately insured TKA case characteristics appeared unaffected by the sharp shift toward outpatient delivery in 2018.


An increasing share of medical care is migrating toward outpatient delivery. These trends pose strategic and financial challenges for US hospitals, but they are unlikely to be reversed. Preferences for outpatient care are not the only driving forces, however. Regulatory stances, such as those belonging to Medicare, can be influential.

We see evidence consistent with a regulatory barrier when evaluating the recent decision to move TKAs off the Medicare IPO list and thereby permit the outpatient surgery option for beneficiaries. Fifteen percent of Medicare TKA cases were reallocated from the inpatient to the outpatient setting (Figure 1), and uptake is observed across a variety of hospitals during the first deregulation year (Figure 4). The key and novel finding from our study is the alignment between the privately insured outpatient TKA trend break and the Medicare deregulation event. With an abrupt doubling of outpatient privately insured TKAs in 2018, our results are at least consistent with a Medicare policy spillover implication whereby outpatient provision was potentially restrained prior to the Medicare IPO decision. Greater use of outpatient hospital facilities following the deregulation event from Medicare may have improved care convenience for privately insured TKA patients and lowered costs for patients and their insurers. Such a positive externality as suggested by our data also comports well with Geruso and Richards’ findings from a recent study of a different Medicare surgical regulation from a decade prior.26

As Medicare makes further rule changes, future research will need to explore the implications within and beyond the Medicare program. Additionally, the long-run effects of the 2018 IPO change for TKAs will need to be tracked as providers have more time to adapt.


This study used data from a single state and therefore may not generalize to other markets. This limitation is balanced, however, by the timeliness and multipayer dimensions that the Florida data offer. Florida is also second only to California in terms of Medicare population, which makes it a relevant state for Medicare policy analysis, even in isolation.34 We also relied upon an observational study design, so the associated trend changes we observe may not be causal.


Medicare treatment restrictions and accompanying payment policies ultimately shape how care is delivered to Medicare beneficiaries. We show that the CMS decision to allow outpatient TKAs was associated with a simultaneous and striking increase in outpatient TKA delivery for privately insured patients. In this way, Medicare rulemaking consequences may extend beyond Medicare patients. Potential spillover implications deserve greater attention in future policy deliberations because Medicare rules may influence the norms and the pace of change for care delivery throughout the US health care system.


The authors thank the Florida Agency for Health Care Administration (AHCA) for providing data for the study and wish to note that AHCA was not responsible for any data analyses or interpretation of results for this work. Dr Whaley would also like to thank the National Institutes on Aging (1K01AG061274) for its generous financial support.

Author Affiliations: Hankamer School of Business, Baylor University (MRR, JAS), Waco, TX; RAND Corporation (CMW), Santa Monica, CA.

Source of Funding: National Institutes on Aging 1K01AG061274 (CMW).

Author Disclosures: The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (MRR, JAS, CMW); acquisition of data (MRR); analysis and interpretation of data (MRR, JAS, CMW); drafting of the manuscript (MRR, JAS, CMW); critical revision of the manuscript for important intellectual content (MRR, JAS, CMW); statistical analysis (MRR, JAS); and supervision (MRR).

Address Correspondence to: Michael R. Richards, MD, PhD, MPH, Hankamer School of Business, Baylor University, 1 Bear Pl, Waco, TX 76798. Email:


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