The Demise of the Medicare Inpatient-Only List – The Myths and Facts

Centers for Medicare & Medicaid Services are proposing to eliminate the inpatient-only list over the next three years.

Medicare’s often-misunderstood inpatient-only list may soon be departing, as the Centers for Medicare & Medicaid Services (CMS) has proposed to eliminate it over the next three years, as outlined in the 2021 Outpatient Prospective Payment System (OPPS) Proposed Rule.

First introduced 20 years ago, the list designates surgeries that require inpatient care because of the invasive nature of the procedure, the need for at least 24 hours of postoperative recovery time, or the underlying physical condition of the patient requiring the surgery. CMS determined that such surgeries must be performed as inpatient, and would not be paid by Medicare under the OPPS. With the list’s elimination, the myths, truths, and facts warrant review.

Myth: It is dangerous to perform certain surgeries as outpatient.

The facts: There is no clinical difference between performing a surgery as inpatient or outpatient in the hospital. Whether designated as inpatient or outpatient, the surgeon will perform the surgery in the same operating room, with the same equipment and the same staff. The patient can remain in the hospital as long as is clinically indicated for their recovery. The designation of inpatient or outpatient only affects how the facility is paid for the care provided. If performed as inpatient, the claim is billed as a Part A claim, and if outpatient, it is billed as a Part B claim.

CMS maintains a separate list of surgeries that are approved to be performed at an ambulatory surgery center (ASC). There is a significant clinical difference between a surgery performed at a hospital and at an ASC, such as the availability of equipment and specialists to quickly respond to complications, and the capacity to provide recovery care to patients for prolonged periods of time. CMS’s decision to allow surgeries to be performed at ASCs does involve assessing that risk. The proposal to eliminate the inpatient-only list should not be considered a proposal to allow any surgery to be performed at an ASC. It should be noted, though, that the ASC-allowed list, also known as addendum AA, does not apply to Medicare Advantage, or any other payors. Those payors are free to allow any surgery to be performed at an ASC, as they and the surgeon deem appropriate.

Myth: Surgeons are paid less for the same surgery performed as outpatient than as inpatient.

The facts: There is generally no difference in payment. The surgeon’s fee is always billed to Part B, and payment is independent of the site of service, as is the assigned global period. But if the surgeon or the surgery are part of one of the many iterations of bundled payment or shared savings programs, such as the Bundled Payment for Care Improvement Advanced program, there may be shared savings that get distributed to the surgeon when the affected claims are reconciled. The patient’s admission status may affect whether the stay is part of that program. For example, in 2020, a total hip arthroplasty is only part of the Comprehensive Care for Joint Replacement program if the status is inpatient.

Truth: Hospitals are paid differently depending on whether the surgery is inpatient or outpatient.

The facts: The payment to a hospital for a surgery performed as outpatient uses the Medicare-approved amount, with a positive or negative adjustment for the hospital’s wage index. The inpatient payment is much more complex, adjusting not only for a base rate and the wage index, but also for indirect medical education, disproportionate share payments, uncompensated care payments, capital payments, value-based purchasing, readmission reduction, hospital-acquired conditions, and more.

To illustrate this using 2020 payment rates from the Medicare Inpatient Pricer for total joint replacement, a common surgery that can be performed as both inpatient or outpatient, a surgical specialty hospital in Arkansas would be paid $10,660 for outpatient surgery and $10,980 for inpatient surgery, a 3-percent difference. A suburban Chicago hospital without a teaching program would be paid $12,360 for outpatient surgery and $13,594 for inpatient surgery, a 10-percent difference, and a large teaching hospital in San Francisco would be paid $17,539 for outpatient surgery and $27,548 for inpatient surgery, a 57-percent difference. It is clear that the revenue implications vary depending on the hospital characteristics, so for some, ensuring that the status determination is made accurately can have significant revenue implications.

Myth: If the inpatient-only list is eliminated, all surgeries must be performed as outpatient.

The facts: CMS has stated that if the list is eliminated, the physician’s designation of the admission status of all surgeries will be based on the two-midnight rule that was adopted in October 2013. That rule states that the admission status of a patient should be based on three factors: the two-midnight expectation, the two-midnight benchmark, and the case-by-case exception for patients with an expected length of stay of one midnight. These guidelines have been in place for total knee replacement since 2018, and continue to cause confusion and consternation amongst physicians and utilization review staff. It is not yet known if CMS will release additional guidance.

This means that the physician will be asked pre-operatively to make a determination if the patient is expected to need two or more midnights in the hospital for care; if the outpatient who was expected to need fewer than two midnights of care now needs a second midnight for medically necessary care; or if there are specific reasons why one midnight of care is expected, but inpatient admission is warranted.

This decision is simple for many surgeries. A patient having coronary artery bypass or a colon resection will always require over two midnights of care and should be admitted as inpatient, and a patient having a hernia repair or an arthroscopy should always be outpatient, but for many surgeries, there is significant variation, depending on the surgeon’s clinical practice and the patient characteristics. In some areas, 90 percent of joint replacements are one-day stays, but in other areas, patients routinely remain hospitalized for two post-operative days. It is not clear whether Medicare or the audit agencies would consider inpatient payment appropriate when there is such practice variation.

On the other hand, it is appropriate for a surgeon to vary their status determinations for the same surgery based on specific patient characteristics. A spine surgeon planning a cervical spine fusion on a healthy patient may feel that outpatient status is appropriate, since the patient should be able to be discharged the next day, but they may determine that the same surgery for a patient with diabetes on chronic anticoagulation medication will warrant a two-day, in-hospital recovery to monitor for drainage, bleeding, and swelling. If those factors are documented, then inpatient status is appropriate.

Myth: Medicare patients will no longer have access to skilled nursing facility (SNF) care after surgery.

The facts: Current Medicare law requires a patient to be hospitalized as an inpatient for three consecutive days, not counting the day of discharge, and to have skilled needs to gain access to the Part A SNF benefit. (See this article for a review of the history of this benefit.) Under the two-midnight rule, and as outlined in the 2018 OPPS Final Rule, if a physician determines that there are specific clinical and safety reasons that a patient will require care in a SNF for skilled care after their surgery, the physician should document those factors and admit the patient as an inpatient.

Truth: The use of the case-by-case exception is confusing.

The facts: When CMS established this exception in the 2016 OPPS Final Rule, CMS stated that “the following factors, among others, would be relevant to determining whether an inpatient admission where the patient stay is expected to be less than two midnights is nonetheless appropriate for Part A payment: the severity of the signs and symptoms exhibited by the patient; the medical predictability of something adverse happening to the patient; and the need for diagnostic studies that appropriately are outpatient services (that is, their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more).”

Excluding the last factor, which has never been clearly understood, CMS advised looking at the two factors, risk and severity, that were used prior to the two-midnight rule (which led to the crisis that ultimately resulted in CMS developing the rule). Nonetheless, CMS doubled down on this in the 2018 OPPS Final Rule that removed total knee replacement from the inpatient-only list, clearly stating that if the physician felt the patient was at high risk to undergo surgery, documented that risk, and had an expectation that the patient would be discharged the day after surgery, the patient could compliantly be admitted as inpatient. This article, written in 2018, when the case-by-case exception was described as applied to total knee replacement, may assist readers in understanding that exception.

It is also worth noting that although CMS added this case-by-case exception in the 2016 OPPS Final Rule as a “rare and unusual” exception, they also stated that “we would like to clarify that our proposed modification to the current exceptions process does not define inpatient hospital admissions with expected lengths of stay less than two midnights as rare and unusual. Rather, it modifies our current ‘rare and unusual’ exceptions policy to allow Medicare Part A payment on a case-by-case basis for inpatient admissions that do not satisfy the two-midnight benchmark.”

Myth: The physician can just ask the case manager to order the right status.

The facts: Medicare law only allows a provider licensed in the state, and with privileges to admit patients to a hospital, to designate and order the admission status of a patient. Case managers, utilization review specialists, and physician advisors can guide the physician, based on the available clinical details, but it is ultimately the physician’s obligation to order the correct status. The physician should consider the complexity of the planned surgery, the patient’s medical and psychosocial history, the time of day, and the expected peri-operative course in making the decision. A surgery that may be routine in the low-risk ambulatory patient who is brought to the hospital, such as an open reduction and internal fixation of an ankle fracture from slipping on a carpet, would warrant being performed as outpatient, whereas the same surgery in an diabetic patient with osteoporosis who fell on ice and also had a head injury, with brief loss of consciousness, and who arrives at the hospital at 10 p.m., would warrant inpatient admission. A patient with mild, well-controlled hypertension on one medication scheduled for an elective lumbar laminectomy, who is expected to go home the next day, would be appropriate for outpatient surgery. But a patient with sleep apnea on CPAP who also has insulin-dependent type II diabetes with an HbA1c of 7.8 percent and hypertension, on three medications, but who is also expected to go home the next day, may warrant inpatient admission with proper documentation – because they are at higher risk of a perioperative complication and will require closer monitoring. CMS has stated that they would never expect the case-by-case exception to be applied to a patient who is discharged the same day of surgery.

The case-by-case exception is a bit more complex to interpret in the case of surgeries that are currently inpatient only, but have an expected length of stay of one day, such as carotid endarterectomy or transcutaneous aortic valve replacement or elective cardiac stenting with a left ventricular assist device. These patients, almost by definition, are at high risk due to the nature of their disease that requires surgery. So, if these patients are all at high risk, can they all be admitted as inpatients for their procedures? The answer is, at this point, unknown.

Myth: CMS is not allowing denials for two years so we can admit everyone as inpatient.

The facts: Although CMS has proposed to prohibit status determination audits by the Recovery Audit Contractors (RACs) for two years after a surgery is removed from the list, the Quality Improvement Organizations (QIOs) will be performing educational audits, and CMS will be monitoring claims data for evidence of gaming or intentional avoidance of compliance with regulations.

Truth: CMS reads and responds to comments submitted on proposed rules.

The facts: The comment period on the 2021 OPPS rule is open until Oct. 5. You can read the whole rule and submit your comment by going online here: If you submit a comment and/or ask for clarification, you will not get a personal answer to your comment, but the final rule will address the issue you raise. Fair warning, though, that all comments are posted for public viewing, so ensure that your comment is coherent and professional.

CMS has waived the normal 60-day rulemaking period in light of the public health emergency, so the final rule will be released in early December, rather than November. So start planning for a busy December, adapting to all the changes CMS adopts in the final rule.

Programming Note: Ronald Hirsch, MD is a permanent panelist on Monitor Mondays. Listen to his live reporting every Monday at 10 EST.

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Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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