Do Changes in Hospital Outpatient Payments Affect the Setting of Care

To contain outpatient health care spending, the Centers for Medicare & Medicaid Services (CMS) replaced the prior cost-based system for reimbursing hospital outpatient services in August 2000 with the Outpatient Prospective Payment System (OPPS). Under OPPS, CMS groups hospital outpatient services into ambulatory payment classifications (APCs) based on clinical and cost similarity and sets a common payment rate for all services in the same APC (CMS 2010a). Hospitals are reimbursed at the predetermined rate for services in a given APC instead of the actual costs incurred. Evidence suggests that OPPS reduced the generosity of Medicare payments for outpatient care overall (Becker unpublished data) and reduced Medicare payments for the most common outpatient surgical procedures (He and Mellor 2012). We examine whether the outpatient reimbursement cuts triggered by OPPS led hospitals to shift Medicare services from the outpatient setting into the inpatient setting. Although prior research has examined the effect of inpatient reimbursement on the setting of care (e.g., Coulam and Gaumer 1991), no prior study has examined whether OPPS-induced payment changes altered the setting of care. As the first to examine OPPS's effects outside the outpatient department, we provide insight on OPPS's potential to control health care costs broadly defined. Because OPPS caused reimbursement rates to rise or fall to varying degrees depending on the procedure and the hospital's historical payment, analyzing its effects requires procedure-specific payment rates at the hospital-level, pre- and post-OPPS.1 This study focuses on inguinal hernia repair surgeries performed in Florida hospitals from 1997 through 2008. One of the most common surgeries in the United States, inguinal hernia repair is performed in both inpatient and outpatient settings. Evidence shows that outcomes and satisfaction are similar in both settings even among older patients (Mitchell and Harrow 1994; Mattila et al. 2011). This suggests that providers may have the discretion to treat patients in either setting. Furthermore, the diagnosis of inguinal hernia is usually made by physical examination alone, so hernia repair surgery is unlikely to be affected by OPPS-induced changes in the payment of other procedures. This facilitates identification of the causal effect of changes in hernia outpatient reimbursement rates. We find that the average hospital experienced 4–10 percent cuts in Medicare payment rates for inguinal hernia repair surgeries over the 5-year period that OPPS was fully phased-in. Hospital fixed-effects regression results suggest that OPPS-induced cuts in outpatient hernia repair reimbursements decreased the volume of some outpatient hernia repair surgeries; however, we find no evidence that hospitals increased the number of inpatient hernia surgeries in response to outpatient payment cuts. Because hospitals’ ability to substitute hernia repair surgery across settings likely exceeds that of other common outpatient procedures, we conclude that outpatient cost containment efforts like OPPS are not seriously threatened by substitution to the inpatient setting.