Hospitals Medicaid/Medicare Medicare

Medicare: Outpatient costs rise, inpatient costs fall

From 2004 through 2009, the volume of Medicare outpatient services per FFS beneficiary increased at roughly a 4.3 percent annual rate for a cumulative increase of 23 percent over the six-year period. During the same period, Medicare inpatient discharge volume declined at roughly a 0.9 percent annual rate, and inpatient discharges per FFS Part A beneficiary decreased by about 4 percent from 2004 to 2009.

Will this trend save or cost Medicare money?

According to MedPAC’s March 2011 report, there are two key reasons for this. The first is a shift in the site of service from inpatient to outpatient units. For instance, many routine surgical procedures can now be conducted in the outpatient setting. This development likely reduces cost per treatment, but may increase costs if individuals are more likely to receive invasive treatments. Alternatively, if physicians are more likely to have an ownership stake in the outpatient facility, surgery rates per diagnosis may increase.

Another reason for the rise in outpatient costs is hospital acquisition of physician practices. Hospitals want to acquire physician practices for two reasons: first, it makes their patients more likely to use their hospital, and second, fees for visits to physicians in hospital-based facilities (consider outpatient) are more lucrative to visits in free-standing facilities. Specifically, “When patients visit a physician office that is part of a hospital’s outpatient department, Medicare pays a facility fee to the hospital and a reduced fee for the physician’s services. The combined fees paid for visits to hospital-based practices are often more than 50 percent greater than rates paid to freestanding practices.”

Thus net effect of the shift to outpatient services, thus, has an ambiguous effect on total Medicare payments.


  1. If and when Medicare is seriously pressured to cut costs, then hospital outpatient payments will be impacted right away.

    If a procedure costs $500 when it is done in a doctor’s offce, why does Medicare (or private insurance) pay $1,500 for the identical procedure done in the outpatient wing of a hospital?

    It is true that many hospitals rely on this unearned income to stabilize their own budgets. Well, at some point, too bad for them. American hospitals on the whole are overbuilt, over-equipped, overstaffed, and overpaid.

    Incidentally, this post also mentions a slight decline in terms of acute care admissions. Unfortunately, the phenomenon of upcoding has enabled hospitals to get more money based on ‘intensity.’

    Between 2000 and 2010, Medicare spending on inpatient care grew from $108 billion annually to $193 billion annually — despite no material growth in the number of admissions. This is due to manipulation of the fee schedule, where Medicare has stupidly allowed hospitals to define more patients as needing ‘intensive care.’

    I do not know why the public discussion of Medicare cost control has focued on the ‘doc fix,’ when the real financial wastage is in hospitals.

    Bob Hertz, The Health Care Crusade

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