Legal and Regulatory Compliance

Providers should prepare for a possible expansion of Medicare site-neutral policies

October 22, 2020 8:27 pm
  • In the 2021 OPPS rule, CMS has proposed phasing out the Inpatient Only (IPO) list over three years.
  • Unless CMS adjusts MS-DRG weights to account for the increased resources required by the sicker patients who will continue to receive inpatient care when services can be provided in an outpatient setting, it will have a negative impact on Medicare contribution margins.
  • While CMS proposes to provide a two-year moratorium on patient status reviews for any procedure removed from the IPO, unless CMS provides a permanent moratorium this change likely creates a de-facto site-neutral policy for certain procedures.

A trend that started in earnest under President Obama has picked up steam under President Trump’s administration. The Medicare Shared Savings Program introduced an incentive for participating providers to ensure that Medicare beneficiaries received care in the most cost-effective site of service. And not surprisingly, we’ve seen some successful physician- led ACOs shift referrals for outpatient diagnostic services from the provider-based to free-standing setting.

From a purely site-neutral prospective, first it was the non-excepted Hospital Out Patient Department (HOPD) policy, passed by Congress, that mandated that Part B services provided in certain off-campus HOPDs that failed to meet requirements would be paid at rates equivalent to the physician fee schedule. Then it was the site-neutral E&M policy promogulated by the Trump administration along with a creeping removal of services from the inpatient-only list (e.g. hip and knee replacements, certain cardiac procedures) that were subsequently greenlighted for coverage in ambulatory surgery centers (ASCs).

The Trump administration in the CY2021 OPPS rule (HFMA summary available here) proposed a significant expansion of site neutrality when it indicated that it will eliminate the Inpatient Only (IPO) list over the next three years. If finalized, the 1,740 procedures on the list could be performed in an outpatient setting and covered by Medicare if a physician believes the outpatient setting is appropriate. CMS proposes to start the phase-in process by removing 266 musculoskeletal services from the IPO list for 2021. These services are listed on table 31 of the proposed rule.


There are a couple things to consider from both a policy and operational prospective for providers.

From a policy perspective, there are two issues as follows.

1. Exacerbated underpayment: Unless CMS adjusts the method it uses to rebase MS-DRG weights eliminating the IPO list will further exacerbate Medicare’s underpayment issue.  As CMS removes additional MS-DRGs from the IPO list, healthier patients will be shifted into an outpatient setting, leaving sicker, more costly patients to have their procedures performed in the inpatient setting. The “weight” for MS-DRGs that the procedures in Table 31 of the proposed rule are a part of, like all MS-DRGs, are a blended historical average of all Medicare patients who have the diagnose(s) that require one of the procedures in Table 31. It will be approximately two years before MS-DRG weights are based on claims experience that incorporate this policy. In the interim, hospitals will be under-reimbursed for providing medically necessary procedures to Medicare beneficiaries unless CMS proactively adjusts the weights for MS-DRGs that are impacted by this policy shift (HFMA recommended CMS does make such adjustment in its comment letter to CMS).

2. De-facto site-neutral policy: CMS is extending a two-year moratorium on a Beneficiary Family Centered Care-Quality Improvement Organization (BFCC-QIO) for “patient status” (that is, site-of-service) review for procedures that are transitioned off the IPO list. However, HFMA is concerned that once the two-year moratorium expires for a set of procedures, this will become a de-facto site-neutral payment policy, subjecting hospitals to increased administrative costs related to increased patient status reviews.

In its comment letter to CMS, HFMA recommended that CMS maintain a “shadow IPO list” using its existing criteria. Any procedure that remains on the “shadow IPO list” would be exempt from site-of-service reviews while it met the criteria to be on the list. However, it could still be performed in an outpatient setting if the physician believed it was appropriate.  

From an operational perspective, if the rule is finalized as proposed without significant modifications to CMS’s MS-DRG weight-setting process, it heightens the need for hospitals to do the following.

  • Expand outpatient/ASC capacity: With increased demand for more complex procedures to be performed in the outpatient setting, (from both Medicare and commercial payers, we’re likely to see investments in ASCs continue to increase. In order to accelerate the development of these facilities and increase their potential for volume capture, we may also see an increase in ASCs developed as a joint venture.
  • Continued aggressive cost management: Procedures removed from the IPO list will face additional contribution margin pressure as Medicare FFS payments will not fully capture the increased acuity of the patients who require these services on an inpatient basis. To the extent that hospitals and Medicare Advantage (MA) plans use the FFS MS-DRG weights as the basis for payment for MA patients, this issue will also creep into the MA population. Therefore, hospitals will need to look for additional opportunities to reduce cost both in the affected procedures and across the organization in general.

Cost management resource

HFMA’s Value Project Report on Strategies for Reconfiguring Cost Structures offers several best practices for sustainably reducing cost. 


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