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Accounting for the transition from inpatient to outpatient surgery.

Early studies indicated that switching from inpatient to outpatient surgery could save money. In 1971, when a full day of inpatient care in Canada cost $176.38 and an outpatient day cost only $91.94, a savings of 48 percent could be gained. By 1975, an inpatient cost of $500 could be reduced 70 percent to an outpatient cost of $150.[1] Magerlein et al. in 1978 compiled cost differences produced by a combination of a new admission and scheduling control system, preadmission testing, concurrent review, and outpatient surgery. The introduction of the latter three items resulted in a modest 7 percent cost savings at one hospital. Critical to accurate assessment of cost savings is setting the budget point. Rapid detection of changes in arrival rates and lengths of stay were noted as key to setting the budget point. 2In 1982, it was still possible and desirable to adjust outpatient surgery prices downward to improve the hospital's competitive position relative to freestanding ambulatory surgery centers. Reducing outpatient charges while increasing inpatient charges had the virtue of bringing charges closer to actual costs. Processing billing through an automated surgical reporting system also brought charges closer to costs, but this was before the impact of DRGs took effect.[3]

By 1983, a comparison of inpatient and outpatient costs at the University of Alberta Hospital revealed that the inpatient cost for laparoscopy was $309.53 and the day surgery cost was $245.12, a savings of 21 percent. The author went on to list the disincentives to moving patients from inpatient to outpatient. Nursing staff cuts would be unpopular and resisted by the nurses' union. Physicians would be indifferent. Patients whose bills are paid by Medicare (Canada) would also be indifferent. Some would be too anxious to have surgery as an outpatient. Because only the provincial government would have an incentive to reduce costs, other incentives would have to be created in order to support such a move.[4]

The Mid-1980s: A Jumbled Transition

By the mid 1980s, it was well recognized that surgical procedures such as cataract removal, tonsillectomies and adenoidectomies (T&A), hernia repairs, hemorrhoidectomies, and laparoscopies could be done on an outpatient basis at less cost and with greater patient satisfaction. Deterrents to freestanding outpatient facilities, however, included substantial capital investment and startup expenses. Many hospitals were able to set up integrated outpatient surgical programs in existing facilities as declining, occupancy rates freed up floor space and staff. Analysis of surgical utilization data helped the community decide whether to do outpatient surgery in the hospital or go to a freestanding, surgical center. The era of transition from inpatient to outpatient settings surgical procedures accounts in part for the extensive variations in hospital admission rates noted by Wennberg and Barnes and others in their classic studies of small area variations. A study of T&A admission rates showed a 32-fold variation in Syracuse. N.Y., and a 17-fold variation in lowa. Much of the variation in Syracuse could be explained by the shift to outpatient services. The trend from inpatient to outpatient occurred in an irregular pattern and at an irregular rate for both type of procedure and size of hospital involved. Financial incentives were needed to generate momentum from inpatient to outpatient settings. The central New York insurance district published a purchaser's guide to health insurance to promote cost control. Outpatient procedures could be covered at 100 percent rather than with coinsurance and out-of-pocket payments. Waiving deductibles for outpatient surgery and denying, coverage for inpatient work were recommended to speed the trend toward outpatient surgery in this era.[5]

A hospital study in Philadelphia compared costs and time in operating rooms and recovery rooms for inpatient and outpatient surgical procedures. Preadmission testing, costs were compared for 157 day-surgery patients and for 127 inpatients. Day-surgery testing cost $1,261 while inpatient testing cost $5,893 per patient! Operating room times ran 20-45 minutes longer for inpatients, while recovery room times were 25-52 minutes longer for day-surgery patients. Nursing costs per minute were comparable, suggesting that the time saved in the day-surgery operating room was probably taken up by the longer recovery room stay. Another factor was the difference between the scheduling of cases in day surgery and in the main operating room. Day-surgery cases have always been scheduled for a specific time of day because the patients come from all over the community. Patients arrive an hour and a half early in order to prepare for the specific start time, whether it is 7:30 a.m. or 2:00 p.m. Traditionally, however, inpatient cases were done on a somewhat less formal schedule called the "to follow" approach. The main hospital operating rooms primarily serve inpatients. Because patients have been in the hospital for several days or overnight prior to surgery, operations can be done one right after another by bringing waiting patients down from their rooms on the floor when operating rooms are ready.

Timing procedures is not as critical for inpatient surgery as it is in the outpatient setting. Case turnover and efficient use of inpatient operating rooms are not as good as in outpatient settings. Because of differences between the inpatient and outpatient surgery scheduling at one hospital, 5.1 arthroscopy cases could be done in the outpatient surgical facility each day while only 3.3 cases were done in the main operating room. The loss of 1.8 cases per day in the inpatient facility led to the introduction of specific start times for surgery in the main operating room.[6]

Medicare did its part to provide incentives for outpatient care. Short-stay beds (23 hours and 59 minutes) were made available by a hospital in Nevada in 1985 in order to save Medicare patients the $560 deductible that they had to pay if admitted. In this case, a separate unit was created because of the high costs of staffing such a unit. Medicare Part B covered this treatment option. The patient could be converted to an inpatient status. Patients were enthusiastic about this outpatient program because it saved them the out-of-pocket deductible if they were admitted. Physicians could better deal with the uncertainty of patient status and concentrate on the treatment. The hospital's rate of denial of payment by Medicare was reduced from 12 percent to less than 3 percent, and revenues were correspondingly enhanced.[7]

The 1990s: The Party's in Full Swing

Patients have been quick to recognize the accessibility and convenience of outpatient health care. Hospital responses are mixed, but hospitals are striving to enhance revenues and improve operations through outpatient care. A southern hospital was able to go even further in meeting customer needs by fielding an aggressive home health care program. The program developed at an annual rate of 43 percent from 1986 to 1990 and at an even higher rate between 1991 and 1992. The hospital had little competition in home health in both its primary and secondary market areas and was able to accelerate to growth rates of 60 plus percent in 1991 and 1992.[8]

Impediments to growth in outpatient services at yet another hospital included an inadequate patient registry, with long waits and difficulty in finding the registration area. Late reporting of preadmission testing results, lack of staff before 8 a.m., and lack of staffing over the lunch hour also slowed progress. Once identified, these operational problems were solved with a combination of computerized bookkeeping, staffing changes, and productivity standards. Time series analysis of the arrival times of ambulatory patients was done to adjust the number of scheduled appointments and to decrease waiting times. Staffing for earlier start times helped out. Patient education regarding pre- and postoperative care was introduced. Preadmission testing was done 48 hours preoperatively. With all of these efforts, rapid growth in ambulatory services and revenues was possible. Market share of outpatient business was doubled. The shift from inpatient to outpatient care may be an occasion to strengthen overall operations. The authors concluded that these measures were critical for the not too distant day when ambulatory services will reach 50 percent of hospital operations.[8]

The authors of another article on this topic reviewed 14,005 outpatient cases from Florida and 31,771 cases from North Carolina. Eighty-nine percent of the cases reported from Florida and 84 percent of the cases in North Carolina were done in hospital-based outpatient surgery centers. In 1990, the hospitals in North Carolina charged 44.6 percent more for outpatient surgery than did freestanding facilities. Hospitals in Florida charged 25.35 percent more for outpatient surgery than did freestanding facilities. At the same time, the freestanding surgery centers preserved quality. A U.S. Department of Health and Human Services study in 1988 concluded that hospital and freestanding surgery centers were "equally safe." Access, convenience, and a more personal orientation are offered by the freestanding centers. The authors concluded that hospitals will feel threatened by freestanding ambulatory surgery center requests to provide overnight observation of surgical patients. Hospitals will attempt to influence regulation and licensure to discourage these overnight stays. Hospitals will campaign to affect the reimbursement criteria of the payors as well. But cost containments will prevail. Better justification of charges from hospitals and freestanding ambulatory surgery centers will be required. Cost accounting may yet be called on to tell the story of ambulatory surgery center operations.[9]

The urgency of staying ahead in the reimbursement game is revealed in an article on the see-saw struggle between Medicare and eye, ear, nose, and throat (EENT) hospitals. When, in 1983, Congress imposed a prospective payment system to reduce Medicare Part A payments, Part B (outpatient) reimbursements were initially spared. Hospitals responded by moving services to the outpatient setting, where costs were less and cost-based reimbursement was still offered. But, after three years, Congress put on the brakes and imposed a blended payment scheme. Initially, the Medicare payment was 50 percent of the ambulatory surgery center and 50 percent of hospital-based costs. This has since shifted to 42 percent ambulatory and 58 percent hospital-based, with an attendant drop in reimbursement. Hospitals are still expected to cover fixed costs, charity care, bad debt, reserves for replacement of equipment, and emergency services, education, and research from their dwindling resources. None of these functions has to be done by an independently owned ambulatory surgery center. So the EENT hospitals had to lobby Congress to grant first a three-year and then a five-year extension of the meager payment rate, now 25 percent ambulatory surgery center and 75 percent hospital cost-based. The olden era of reducing, costs and increasing reimbursements by moving to the outpatient side had passed.[10]

Even by 1991, it was too late. In New Jersey, outpatient hospital costs jumped 35 percent between 1990 and 1991, while inpatient costs only rose 15-18 percent. While DRGS suppressed inpatient revenues, outpatient charges were allowed to run rampant. Medical inflation rates ran 23-24 percent a year from 1989 to 1991 in New Jersey, where DRGS were introduced six years earlier. Trends were unabated by utilization review, second opinions, and preadmission testing. This explains in part the waffling diligence with which hospital administrators switched from inpatient to outpatient services.[11]

A Game of Cat and Mouse Through

Reimbursement Loopholes

When hospital operations were largely inpatient-based and stable and costs could be determined, trends in reimbursement could be tracked and budgeting could be used to plan effectively for the future. But, in an era of rapid change of both incompletely known costs and uncertain reimbursement, it became difficult to know "when to hold `em, when to fold `em." Going for a new service or a new setting could not be easily defended when comparative costs for each activity were not well defined. In fact, price-setting for ambulatory surgery centers may have been faulty as well. While ambulatory surgery centers seemed to be less expensive, incomplete knowledge of costs could have led to underpricing at many centers. It may be that profits from outpatient operations can only be realized when costs are falling faster than reimbursements. By the time a new equilibrium is reached and providers have cut costs to the bone, payers will have ratcheted down payouts to narrow or invert margins. This game of cat and mouse through reimbursement loopholes could hardly o on forever.

Ambulatory surgery centers in general were built to provide a setting for specific procedures, control costs and quality, and streamline delivery of care. Ambulatory surgery center growth followed not only technological advances, but also financial incentives. The number of ambulatory surgery center procedures reimbursed by Medicare ballooned from 100 in 1982 to 1,200 in 1991. The number of freestanding centers increased from 127 in 1980 to 1,221 in 1989.[9] Most payers still base reimbursements on charges, so freestanding ambulatory surgery centers can better capture an inceased market share by charging less than hospital-based centers. Employers regard outpatient care as a way to reduce costs and are quick to recognize the differences in charges between the two settings. Hospitals that have cost shifted to in-house centers may no longer be able to do so. Hospitals have traditionally had to make up for revenue shortfalls in emergency department and trauma care and in maternity and pediatric units, in addition to allocating fixed costs from major support centers in the hospital. They have done this by shifting costs to operating rooms, whether inpatient or ambulatory.

Hospitals now have to cover below-cost reimbursement from negotiated discount agreements with Medicare and managed health plans. Hospitals with freestanding ambulatory surgery centers organized under separate budget centers may be able to hold down costs and increase market share by meeting price competition from independent centers, but they will not be able to cover cost overruns and allocate costs from elsewhere in the usual manner and still meet the competition from lower cost providers.[9] In a recent interview, Thomas Wilburn, CEO of Bethesda Hospitals, Cincinnati, Ohio, confirmed that more money could have been saved if the hospital had gone to outpatient surgery centers more decisively. He agreed that cost accounting would have helped save money when it was still possible to use outpatient facilities as cost containment centers rather than cash cows.[12] Early optimism about saving money by moving from inpatient to outpatient services has faded. When hospitals could have been reducing costs, they were shifting costs instead. Perhaps the business world would not be in such an uproar over health care costs if health care managers had earlier exploited this opportunity for cost containment rather than relying on cost shifting and charge inflation.

Better Late Than Never

The chance for cost savings, the opportunity to save medicine from the upward price spiral of the 1970s through the 1990s, was lost because hospitals were not able to convert from inpatient to outpatient care in time to exploit the initial cost differentials when outpatient care was less expensive than inpatient care. By the time health care managers made the move from inpatient to outpatient care, reimbursement for inpatient services had shrunk to the point that cost shifting to outpatient services was required in order to make ends meet. Savings that might have been gained by moving to the outpatient setting were lost. Better cost accounting would have enabled managers to make the shift from inpatient to outpatient early enough to harvest the savings. The high price of delay is continued rampant acceleration of health care costs and the imposition of regulatory rather than market controls.


[1.] Evans, R., and Robinson, G. "Surgical Daycare: Measurements of the Economic Payoff." Canadian Medical Association Journal 123(9):873-80. Nov. 8. 1980. [2.] Magerlein, D.. and others. "New Systems Can Mean Savings." Healthcare Financial Management 32(5):18-26. May 1978. [3.] Jackovitz, D., and Caron. J. "A Price Methodology for Maintaining Hospital Outpatient Surgery Services in a Competitive Environment." Journal of Ambulatory Care Management 7(1):40-46. Feb. 1984. [4.] Karpman, S. "Day Surgery Versus Inpatient Surgery: A Cost Comparison." Health Management Forum 4(2):54-63, Summer 1983. [5.] Lagoe, R., and others. "The impact of Outpatient Surgery on Hospitalization." Business and Health 3(5):38-40, April 1986. [6.] Kitz, D., and others. "Hospital Resources Used for Inpatient and Ambulatory Surgery." Anesthesiology 69(3):383-6, Sept. 1988. [7.] Likes, D. "Developing the Outpatient Short-Stay Program." Financial Managers Notebook 41 (10):pp. 127-8, Oct. 1987. [8.] Zuckerman, A. "Making the Most of the Shift to Outpatient Services." Healthcare Strategies Management 10(7):11-2, July 1992. [9.] Wolfson, J., and others. "Freestanding Ambulatory Surgery: Cost-Containment Winner?" Healthcare Financial Management 47(7):27-32, July 1993. [10.] Kessler, D., and Davis, E. "Preparing for Medicare Outpatient Payment Reform." Healthcare Strategic Management 10(6):9-11, June 1992. [11.] Crosson, C. "Outpatient Hospital Costs Outpacing Inpatient Costs." National Underwrite 95(31):26, Aug. 5, 1991. [12.] Wilburn, T. Personal interview, July 19, 1993.

Frank Welsh, MD, MHA, is a plastic surgeon in Cincinnati, Ohio. The author wishes to Acknowledge the encouragement and support of Molly M. Rogers, a professor of finance at the Graduate Program in Health Services Administration Xavier University, Cincinnati, Ohio.
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Author:Welsh, Frank
Publication:Physician Executive
Date:Jun 1, 1995
Previous Article:System reform in integrated health systems.
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