This episode of Vital Viewpoints on Healthcare explores how evolving Medicare payment policy is reshaping where and how care is delivered. The discussion covers the phase-out of the inpatient only list and the operational and financial challenges tied to shifting procedures into outpatient settings. Zach Gaumer, regional director at Health Management Associates, shares his perspective on the policy mechanics, provider behavior, and market signals emerging from CMS rulemaking; while Rachel Stewart, senior consulting actuary at Wakely (an HMA Company), explains how plans are modeling uncertainty, navigating contract dynamics, and assessing the downstream impact on costs and quality across the healthcare system.
Jennifer Colamonico
Today, I'm joined by two experts who bring deep experience in Medicare and managed care. Zach Gaumer is a regional director from May in our Washington, D.C., office and brings nearly 20 years of health policy experience, including work at the Medicare Payment Advisory Commission known as Medpac, advising Congress on complex payment issues. He specializes in hospital and physician payment systems, telehealth, post-acute care, and value-based payment models.
Rachel Stewart is a senior consulting actuary at Wakely an HMA Company, and has been in the health actuarial field since 2013. She advises insurers, self-funded groups and providers on Medicare Advantage and prescription drug plans strategy, claim liability and risk sharing agreements. So today, Zach and Rachel will help us explore how payment policies and actuarial strategy influence care delivery provider incentives and quality outcomes across health care systems.
So welcome to you both. Thank you for being with us today. Zach, let me start with you. You you've spent years at Medpac working on different payment policies, and have spent much of your career in the hospital payment space. Most people listening to this podcast probably know that, we're here in April. We're about to kick off payment rule season where the government tells us all how they're going to pay for things.
This year and how Medicare specifically is going to pay for care. So as these rules start to roll out in this current environment, what are you most closely watching this year?
Zach Gaumer
There are a couple of different policies that are, important for the coming year, for the 2027 rulemaking cycle. In the hospital space in particular, in the last cycle, there was, site of service policy that was implemented, proposed and implemented, related to the inpatient only list. And we're expecting kind of a part two of, policymaking related to that inpatient only list in 2027.
And sometime this month, the inpatient, proposed rule will come out, and it'll provide some more detail about what we have in store for the next year and what hospitals and payers, should be thinking about.
Jennifer Colamonico
So, although people in listening to this podcast will know about payment rules, maybe not everybody lives in Medicare payment every day. So can you just explain what this inpatient only list is? Why this is important? Kind of why it is existed and why this is a big deal.
Zach Gaumer
Okay. Sure. Yeah, absolutely. So the inpatient only list is a policy that's been in place for many years. And what it does is it, establishes the procedures that can only be paid if they're done in the inpatient setting. This has been in place for a long time for a bunch of reasons. To ensure appropriate payment of these services, to protect patient safety, to guide provider decision making, meaning physician decision making, and and to control the pace of, the migration of cases from the inpatient to the outpatient side.
And we've seen a lot of this migration in general. And the inpatient only list has been a policy that's, slowed the migration of cases to the outpatient side. It's been contentious in the last, 8 or 9 years or so. And different administrations have had different viewpoints on this policy, but it stands to kind of slow that migration, as I was saying.
And, CMS in the last rulemaking cycle decided to, slowly phase it out, over the next couple of years. And the first phase of this was to identify, in the last rulemaking cycle, a group of procedures that would be the first to move off of the inpatient only list and therefore enable the flow of cases to the outpatient setting.
It can come with lower payment because the costs of doing the service are sometimes lower depending upon the service. And it, it can alter the capacity of the hospital as well. Big picture wise, the inpatient only list, although very much in the weeds of Medicare policymaking, is something that, other payers key off of. So in the commercial space, in the Medicare Advantage, space plans are looking to the inpatient only list to identify which cases they can pay on the outpatient side or which on the inpatient side.
And so Abby's in the IPO list. Physicians might be more aggressive in moving cases to the outpatient side. So this has potentially large implications for hospital revenues for patients. And for, for care in general.
Jennifer Colamonico
Yeah. Wow. So let's take a couple different issues I want to talk about sort of quality and outcomes, because obviously that's a big question that gets raised. Not everything should be done outpatient, but many things can. But before I do that, let's, Rachel, let me just ask you, obviously, a big piece of this, presumably, is to, be able to pay less if if a procedure is less costly in an outpatient setting and, you know, then that presumably is something that a plan would want to incentivize.
So in your work with Medicare Advantage plans and just general payment modeling. You know what stands out to you. What when you heard about this, you know, what kind of jumped out to you as an actuary. Thinking about how plans might see this change?
Rachel Stewart
Yeah. So, as I mentioned, most families did follow the inpatient only list. They weren't necessarily required to, but it was probably pretty widely adopted just to simplify operations. Most do have the ability and flexibility right to set their contracts with hospitals and providers however they see fit. A lot of them are tied to the Medicare fee for service payment structure and reimbursement.
But we do see a lot of unique, contracts out there. So and, you know, a big part of Medicare Advantage is utilization management. So while the inpatient only list was in place right. Mayo's they're trying to reduce cost. And so I think there probably was a lot of utilization management and prior OTS to move these types of services to the outpatient or the ASC setting.
That being said, given that that this was, you know, a Medicare requirement and the inpatient payment system was set up to handle these procedures, the outpatient payment system and the ASC payment system don't have payment methodologies to cover these procedures. So that that would have been maybe the operational step that most would need to take to figure out how they would reimburse for those types of procedures.
And negotiating contracts is a big part of Medicare Advantage. It's a big part of the bid process. So obviously it drives, right. The unit cost and ultimately the utilization. So just the overall total allowed costs. It's maybe a little early to say what the true impact will be in a Medicare advantage, setting. And it's probably going to greatly vary depending on payer and what their historical payment policies looked like with providers.
Zach Gaumer
What Rachel raises is really important is that the codes that exist on the inpatient side for these services. And just for context, there's about 1700 procedures on the inpatient only list in year one, which started back in October. All of the musculoskeletal procedures are what we think of as or. So we'll move off or have moved off.
And so they are at the physician's discretion, can go to the outpatient side. And one of the big concerns stakeholders have had in the last year has been there may not be an outpatient code currently in the outpatient code framework for those cases to land in. And so fee for service patients. There's no way to pay those on the MMA side.
There's no code to kind of follow or modify as well. So it presents a big operational problem for CMS that if this, policy gets eliminated completely, how, you know, is there a coding structure that can facilitate this change? And I think CMS will be very quick to change this. But it will require a lot of resources at CMS as well to make this happen, because there's a lot of people behind the scenes making sure the codes are set appropriately.
Jennifer Colamonico
So then is it phased out? Is the inpatient only phase out this year or next year?
Zach Gaumer
Year one was this last year the year we're living in right now? For fiscal year 2026. So next year. So starting in 2027, in October coming, what will happen is CMS will tell us which are the next group of codes that are likely to come off. And these are going to be the short stay cases typically, you know, MD, C6 for digestive cases or circulatory.
That's MDC five and respiratory that's MDC four. Those are likely to be some of the procedures that could come off. And I'm speculating what CMS might do. But they will likely target cases or groups of, of procedures that tend to be more short stay oriented like the musculoskeletal. So they'll tell us in about a month or this month sometime what's going to come off in October, what's the next grouping?
And then a year later in the start of 2028, it will be the end of the IPL. So then everything will come off of the IPL list and it will go away completely.
Jennifer Colamonico
Got it. So CMS has to catch up on the other two payment rules at least by then, because we've got to establish these.
Zach Gaumer
Yeah, that's going to be a ton of comments in the after the proposed rule comes out about which of the cases will come next. Yeah, there'll be a ton of debate. And, providers as well as, manufacturers are very concerned about, you know, not being on the next list because a lot of folks want to stay on the inpatient side for patient safety reasons, for the flexibility of, reimbursement, and then to make sure that they're paid appropriately.
Jennifer Colamonico
Yeah. Rachel, how are plans responding to this? How are you seeing in terms of, you know, approach to bids or, you know, is this a net positive, in terms of looking at these procedures that are that are moving over to these other settings?
Rachel Stewart
Yeah. Good question. So that the timing really matters. So at the time of pricing, 2026 bids, which is the process for revenue setting for Mayo's, that was this time last year. And so during that time we weren't aware of this policy change. And so revenue was set thinking that the invitation only list was going to stay.
So if there's any contract changes due to the inpatient, only list like that, that is not baked into the development of the revenue for 2026. Currently we're pricing 2027 bids and those are due on June 1st. So this is a prime time for models and providers to be in negotiations for their contracts for the upcoming year, but a lot of it does rely on the proposed rules that come out.
And a lot of them aren't finalized even by the time we have to submit the bids to CMS. So it's still a bit of a guessing game. Asking my colleagues, you know, we have a lot of MMA clients here. I don't think a ton of people are too worried about it, of what the direct impact is going to be.
It's not something that's quite front of mind. But again, it just really varies depending on the mayo and how their contracts are set up with different hospitals. One thing that's maybe implicitly going to impact MMA plans, this is likely going to have a greater impact in the fee for service world, and fee for service costs directly impact the growth rate and the part fee benchmarks, which are the main driver of my revenues.
So the part fee benchmark is the maximum payment rate that in Mayo will be paid by county. And then they obviously need to bid lower than that. And the difference between that are the rebates that they can buy down on supplemental benefits and part D premiums. So if we expect to see a reduction in overall fee for service costs due to this policy change, that could mean a lower growth rate, which could have implications on on the flexibilities in the overall, you know, revenue year over year.
We do see lower inpatient trends in the 2027 and 2028 United States per capita costs. It's a little unclear at the moment of what's driving that. We do have some questions out to CMS. Curious if they're baking in some of this removal in those rates. But I would I would almost, yeah. Anticipate more of like an implicit, impact due to the growth rate versus really the contract eating situation and how costs will kind of roll out, within in Mayo.
Jennifer Colamonico
So you're modeling and remodeling and modeling all sorts of different scenarios.
Rachel Stewart
I guess, have to try.
Jennifer Colamonico
Yeah, to try to land it. So, and the translation of that back to hospitals back is, likely lower revenue, right? If they're moving more procedures out of the hospital. So, yeah, you know, what kind of I mean, hospitals are already facing financial pressures. We know that. So what do you how are you counseling, clients right now on this big picture?
Zach Gaumer
I think we're looking at, some revenue losses for hospitals in the first year of of impact, whenever a procedure comes off it, if it goes to the outpatient side, you're looking at a lower payment. It's hard to know exactly how big the delta will be between inpatient and outpatient for a given case. However, there is one thing that is known, and that is if an inpatient case goes outpatient.
Let's say this year an orthopedic knee procedure goes outpatient. We know that case will not get its dish payment, and we know that it won't get, the graduate medical education payment that typically comes with the inpatient case. So that together, those two things account for about 10% of the payment on the inpatient side. So that is immediately going to be lost on any case when it goes to the outpatient side.
But we don't know how that case will be paid specifically because there are not sometimes codes to identify what that will be. The other thing that will happen here, longer term is going to be over, like a two year period when a flood of cases go to the outpatient side, it's going to cause, rates to change. They might be more severe cases or more costly cases than normally happen on the outpatient side.
So that's going to cause payment rates to climb up a little bit on the outpatient side. And then on the inpatient side there's going to be a gap, a bunch of cases leaving. Let's say they're the easy cases or the less costly cases. They're going to go to the outpatient side and on the inpatient side, that's going to cause payment rates to go up.
So you might see this kind of jockeying of rates in the near term, single year per case, hospitals will lose revenue per case. But over the long term, inpatient payment rates could go up for whatever cases are being lost. And those outpatient cases could see a little bit of a decline as well. So it could be a net neutral long term.
But I think year over year it will probably be a decline in revenue for hospitals. And I'll add one other thing here about patients and the patient impact, because of a policy that says that the outpatient cost sharing can't be any higher than the inpatient deductible, which is about $1,700. We're guessing that there's not going to probably be an impact on patient cost sharing, and the patients will probably not be affected financially by this.
If there are any quality issues or preferences for inpatient care, that might be a case, for patients to be concerned. But financially they don't seem exposed on this.
Jennifer Colamonico
You mentioned the kind of hydraulics of the inpatient and outpatient payment. I'm imagining hospitals are going to have to get creative here. In terms of, you know, making that up, I know we already see a lot of hospitals having kind of owning outpatient surgical centers or ambulatory centers. I mean, of course, not all of them are owned by health systems, but some are.
So how do you see that equation kind of working out? Are we going to see kind of more activity in that space, or what kind of market shifts might what might we see there?
Zach Gaumer
Yeah, that's a really good question. At the same time, the inpatient only policy is being changed. There's a corresponding change being made by CMS to the AC covered procedures list, which is essentially going to allow all of those outpatient procedures, those newly outpatient procedures, to be done in the AC setting as well. Again, it's up to the physicians discretion.
So if a physician wanted to take a knee procedure that was done in the inpatient setting last year and do it in the AC this year, in theory that could be done. And I'm using a hypothetical example, but I think that this could mean this kind of reinvigorating of the AC setting, which is an even lower cost setting or lower paid setting than outpatient, about 60%, I think difference between outpatient and AC in the payment rate, which is very, very significant.
I think you're going to see capital flooding into ASCs, either the hospitals investing in ASCs, or it could be private equity investing in ASCs, because this, is clearly where this administration is pushing cases down into lower cost settings, which could potentially create savings for the program for taxpayers. And that might be good. This will certainly invigorate outpace and AC investment.
Jennifer Colamonico
All right. You sort of hear all this. You think well all right. We're are we going to actually reduce the cost of care. Maybe that's a good thing. Or is it more convenient for patients. Maybe that's a good thing. But then there's that pesky bit of sort of quality and safety. And I you know, there are certain procedures, transplants, right?
We don't really want to do transplants in an, ambulatory surgical setting. So I guess, you know, what are the mechanisms? What do you expect to see? You know, and I would say both sides. Right. Both from the Medicare CMS side, but also from the plan side. And the plans don't want to be left holding the bag for higher risk for poor outcomes.
If we push too many things into the outpatient or ambulatory settings. So like how does that work out?
Zach Gaumer
I think a lot of that is going to be, debated this year. I think there's going to be ideas potentially put out there, for quality, like a quality backstop, to protect patients. I think there could be potentially, the plans could get involved and their trade associations in, in, thinking about how prior authorization needs to be leveraged here.
To your point. But I think there's this unopened or this unresolved question of, of quality in the patient perspective. And what is the backstop now? Because this is a significant change for the program, even though it lies in the weeds of Medicare.
Jennifer Colamonico
Yeah. Rachel, how are the plans kind of thinking about the quality monitoring and compliance. Obviously it'll affect their ratings and all of that as well.
Rachel Stewart
Yeah, quality is a huge component of Medicare Advantage. And the policies in the quality space are always changing. And so I think there is a lot of burden on Mayo's just currently to kind of keep up with with all of those quality and star rating changes and the different measures they need to stay on top of. So I'm imagining this will just introduce more complexities, more administrative burden.
But it's necessary, right? So yeah, to your point, you know, cost savings is one thing, but we need to make sure beneficiary safety is at the forefront. And I think, you know, the main goal of Medicare and Medicare Advantage is lowering costs and providing better overall care for all. Yeah. Nothing right now has been rolled out that I'm aware of for the quality space to kind of, you know, help safeguard these changes.
But I would imagine that we'll see some stuff in the proposed rule this year that may as well have to adapt.
Jennifer Colamonico
Well. And you think about the sort of the, the quality, programs and the things that I may plans have done to, you know, let's, you know, prevention related things in the primary care setting. I mean, what's the sort of corollary here? I mean, you know, how much how much prevention or how much, you know, how much can plans do on their side to, improve outcomes, to make sure that there are no, you know, unnecessary adverse events here?
You know, is there something that they can do from a just a benefit perspective?
Rachel Stewart
I think it more comes down to the contracting. So again, even though this rule is now in place or being removed, they still have flexibility of how they set up contracts with providers. So I like to think that with any site neutral policy, that any procedure that's being moved is really thought through, as being safe to perform in any of those settings and that there isn't necessarily a lag that's needed.
I think one question I've heard come up is, do we think there's going to be a little bit of a lag of the utilization shift as outpatient and ACS, get ready to be able to perform these procedures? And I think my answer is no. And maybe you would have a better a different answer. But I think the reason why these procedures are being moved is because they're proven to be able to be safely performed in those settings.
Zach Gaumer
I agree, I think we might see, proposals out there in the next year, that replace what our kind of the readmission measures on the inpatient side. You know, that's kind of been the mechanism in a lot of ways that has moved behavior generally on the inpatient side and fee for service. You could be looking at something similar like Ed bounce back rates or some other kind of measure to prevent, you know, cases where physicians or hospitals are moving cases into the settings, lower cost settings, or maybe too early or prematurely.
Since this is now a physician's discretion issue, you could see the medical societies get involved and the specialty societies get involved to make sure that they're policing their own specialists to make sure that no rogue specialist is making a bad name for the group. You know, I would not be surprised if, the, the societies fill the void here and step in with some ideas for CMS.
Rachel Stewart
Yeah, maybe I'll just add one more thought that we do see a lot of risk sharing arrangements in the Medicare Advantage space where, you know, while there is a contract. Right. So there's an agreed upon fee for service component of how reimbursement will be paid. The providers are also tied to an MLR, a medical loss ratio. And so they're required to keep costs, you know, at a certain level.
And if they do keep it up at a level and their savings realized by the Ma plan, the provider will share in some of those savings. In addition, we see a lot of quality incentives and bonus payments that are shared with the Mayo and the provider. So, you know, while there is obviously a, you know, fear probably from hospital systems and providers that costs will be lower and they might lose revenue.
There is also incentive in the mail space in that savings. Right? A reduction of costs will produce additional payment from the mayo to the provider. So it's very nuanced and very circular. And, and I think a lot of that's already going on right now. So I think that's again when we when we talk about really the overall impact in the space, that might not be as drastic as we as it might be in the fee for service space.
Jennifer Colamonico
So do you think the infrastructure is there because you said it exists already? It's just going to be, you know, unleashed.
Rachel Stewart
Yeah, I think that's a fair statement.
Jennifer Colamonico
And the presumption is that it decreases costs. Obviously that's the sort of reason for doing it. But are there, you know, are there any potential unintended behaviors, any kind of self protection measures that could be introduced? Like, are we really going to see costs decrease here?
Rachel Stewart
I'm not a clinician, so I probably can't speak as eloquently as a clinician could, but I would imagine yeah, the the pre-op and the post-op maybe looks different in an outpatient setting than an inpatient setting. And so to the extent pre-op and post-op increases, that could be an offset to the cost savings. We've obviously seen, a lot more fraud cases right in the past handful of years with DME and the skin substitutes.
So while we don't want to anticipate that is going to happen, right, there's always bad apples out there that could find ways to kind of sneak in, cost it to offset the reductions overall. Kind of going back to Zach's like first point, I think long term it'll likely be a net neutral, really where we see, like in the the advocacy work that I've been involved in for site neutral policy modeling, really, most of the savings we see is when it's moving from an outpatient setting to ASC or to professional, whereas the inpatient to outpatient is, I think, more net neutral.
You'll obviously see shifts in the mix and shifts in the unit cost and utilization. And so that can impact Medicare Advantage or ACOs differently depending how those cost structures are set up. It'll be interesting to see. Yeah, what kind of spikes up from it and where we see the actual cost reductions.
Zach Gaumer
Yeah. I think there'll be a lot to study as a result of this and a bunch of tangential policies that have to be modified, most likely. A couple of things to consider is, you know, the three day stay rule, which enables sniff payment, skilled nursing facility payment, outpatient doesn't count towards that. So if you've got a patient that needs skilled nursing on the outpatient side, that's not going to be, possible as much so that that the two midnight rule, there are several things that need to be factored in as this gets implemented, that CMS will have to kind of adjust and modify.
Rachel Stewart
Over the past decade, we've seen a lot of health systems strategically navigate, you know, inpatient systems buying ASC settings. And so I think, when you think about where the money's going, I think a lot of it still will be sustained in the health system itself. It's not like the hospital is going to now lose that revenue to a competitor.
It will be sustained within their health system. If they were strategic and purchasing and acquiring different outpatient and ASC facilities. So that's an important concept to of like it's again, it's not a total loss, it's just a redistribution of where the costs are flowing.
Jennifer Colamonico
So larger, more diversified health systems will withstand this change more than smaller standalone hospitals that maybe have not invested in these kinds of.
Rachel Stewart
Yes. Yeah, I would imagine it would impact rural hospitals. More so than right metropolitan areas. There are safeguards for rural hospital systems or they're already paid a higher rate. So hopefully there'd be some protection there.
Jennifer Colamonico
Yeah, that's a whole other topic for a whole other podcast. The rural health implications of that. That's interesting.
Well, one of the questions we always like to ask on this podcast is, kind of giving you the opportunity to wield the magic wand. So in your kind of respective areas of expertise, Zach, maybe I would ask you kind of on the, the, you know, policy side and then, you know, Rachel, in terms of the payment and risk side, if you had a magic wand and could shape or could you kind of use it to shape how this change unfolds, you know, how would you use that to kind of ensure that, that this works best for, for all parties involved?
Zach Gaumer
I think that the first thing that I would probably do is to make sure that the codes exist on the outpatient side for, an easy transition for the cases that do come off and go to the outpatient side, that that's the secret, I think, to making this policy, implement. Well.
Rachel Stewart
I would echo that and probably add transparency. I think transparency is right. A hot topic and really key to actuaries and what we do. So as CMS releases no cost projections on the USBc fees and that impacts the growth rate, it's really important for us to understand where their heads are at and where they think the costs are shifting.
We rely again, because so many Mayo's contracts are tied to Medicare fee for service. We really rely on how that system is changing. And so any transparency is always appreciated and welcomed. And I think we could always use more of it.
Jennifer Colamonico
The transparency wand is often wielded in these conversations. So, always, always an important one. Never can have enough of that. Well, I appreciate this conversation. Even though it's sort of a wonky one, I feel like you guys both have explained it in a way that, you know, is easy to understand and also, like, appropriately informative that this is actually a big deal that people need to be paying attention to.
So, it's been a pleasure. Thank you for being with us.
Rachel Stewart
Thank you.
Jennifer Colamonico
This episode of Vital Viewpoints on Healthcare is sponsored by HMA Information Services. HMAIS is a subscription based service that provides state level data on publicly sponsored programs like Medicaid, from the latest managed care enrollment, market share, and financial performance data to up to date RFP calendars and state by state overviews, HMAIS has all the information you'll need to power your initiatives to success.
This podcast was produced by myself, Jennifer Colamonico along with Tiffany McKenzie in collaboration with our guests. The content is the property of Health Management Associates.
Today, I'm joined by two experts who bring deep experience in Medicare and managed care. Zach Gaumer is a regional director from May in our Washington, D.C., office and brings nearly 20 years of health policy experience, including work at the Medicare Payment Advisory Commission known as Medpac, advising Congress on complex payment issues. He specializes in hospital and physician payment systems, telehealth, post-acute care, and value-based payment models.
Rachel Stewart is a senior consulting actuary at Wakely an HMA Company, and has been in the health actuarial field since 2013. She advises insurers, self-funded groups and providers on Medicare Advantage and prescription drug plans strategy, claim liability and risk sharing agreements. So today, Zach and Rachel will help us explore how payment policies and actuarial strategy influence care delivery provider incentives and quality outcomes across health care systems.
So welcome to you both. Thank you for being with us today. Zach, let me start with you. You you've spent years at Medpac working on different payment policies, and have spent much of your career in the hospital payment space. Most people listening to this podcast probably know that, we're here in April. We're about to kick off payment rule season where the government tells us all how they're going to pay for things.
This year and how Medicare specifically is going to pay for care. So as these rules start to roll out in this current environment, what are you most closely watching this year?
Zach Gaumer
There are a couple of different policies that are, important for the coming year, for the 2027 rulemaking cycle. In the hospital space in particular, in the last cycle, there was, site of service policy that was implemented, proposed and implemented, related to the inpatient only list. And we're expecting kind of a part two of, policymaking related to that inpatient only list in 2027.
And sometime this month, the inpatient, proposed rule will come out, and it'll provide some more detail about what we have in store for the next year and what hospitals and payers, should be thinking about.
Jennifer Colamonico
So, although people in listening to this podcast will know about payment rules, maybe not everybody lives in Medicare payment every day. So can you just explain what this inpatient only list is? Why this is important? Kind of why it is existed and why this is a big deal.
Zach Gaumer
Okay. Sure. Yeah, absolutely. So the inpatient only list is a policy that's been in place for many years. And what it does is it, establishes the procedures that can only be paid if they're done in the inpatient setting. This has been in place for a long time for a bunch of reasons. To ensure appropriate payment of these services, to protect patient safety, to guide provider decision making, meaning physician decision making, and and to control the pace of, the migration of cases from the inpatient to the outpatient side.
And we've seen a lot of this migration in general. And the inpatient only list has been a policy that's, slowed the migration of cases to the outpatient side. It's been contentious in the last, 8 or 9 years or so. And different administrations have had different viewpoints on this policy, but it stands to kind of slow that migration, as I was saying.
And, CMS in the last rulemaking cycle decided to, slowly phase it out, over the next couple of years. And the first phase of this was to identify, in the last rulemaking cycle, a group of procedures that would be the first to move off of the inpatient only list and therefore enable the flow of cases to the outpatient setting.
It can come with lower payment because the costs of doing the service are sometimes lower depending upon the service. And it, it can alter the capacity of the hospital as well. Big picture wise, the inpatient only list, although very much in the weeds of Medicare policymaking, is something that, other payers key off of. So in the commercial space, in the Medicare Advantage, space plans are looking to the inpatient only list to identify which cases they can pay on the outpatient side or which on the inpatient side.
And so Abby's in the IPO list. Physicians might be more aggressive in moving cases to the outpatient side. So this has potentially large implications for hospital revenues for patients. And for, for care in general.
Jennifer Colamonico
Yeah. Wow. So let's take a couple different issues I want to talk about sort of quality and outcomes, because obviously that's a big question that gets raised. Not everything should be done outpatient, but many things can. But before I do that, let's, Rachel, let me just ask you, obviously, a big piece of this, presumably, is to, be able to pay less if if a procedure is less costly in an outpatient setting and, you know, then that presumably is something that a plan would want to incentivize.
So in your work with Medicare Advantage plans and just general payment modeling. You know what stands out to you. What when you heard about this, you know, what kind of jumped out to you as an actuary. Thinking about how plans might see this change?
Rachel Stewart
Yeah. So, as I mentioned, most families did follow the inpatient only list. They weren't necessarily required to, but it was probably pretty widely adopted just to simplify operations. Most do have the ability and flexibility right to set their contracts with hospitals and providers however they see fit. A lot of them are tied to the Medicare fee for service payment structure and reimbursement.
But we do see a lot of unique, contracts out there. So and, you know, a big part of Medicare Advantage is utilization management. So while the inpatient only list was in place right. Mayo's they're trying to reduce cost. And so I think there probably was a lot of utilization management and prior OTS to move these types of services to the outpatient or the ASC setting.
That being said, given that that this was, you know, a Medicare requirement and the inpatient payment system was set up to handle these procedures, the outpatient payment system and the ASC payment system don't have payment methodologies to cover these procedures. So that that would have been maybe the operational step that most would need to take to figure out how they would reimburse for those types of procedures.
And negotiating contracts is a big part of Medicare Advantage. It's a big part of the bid process. So obviously it drives, right. The unit cost and ultimately the utilization. So just the overall total allowed costs. It's maybe a little early to say what the true impact will be in a Medicare advantage, setting. And it's probably going to greatly vary depending on payer and what their historical payment policies looked like with providers.
Zach Gaumer
What Rachel raises is really important is that the codes that exist on the inpatient side for these services. And just for context, there's about 1700 procedures on the inpatient only list in year one, which started back in October. All of the musculoskeletal procedures are what we think of as or. So we'll move off or have moved off.
And so they are at the physician's discretion, can go to the outpatient side. And one of the big concerns stakeholders have had in the last year has been there may not be an outpatient code currently in the outpatient code framework for those cases to land in. And so fee for service patients. There's no way to pay those on the MMA side.
There's no code to kind of follow or modify as well. So it presents a big operational problem for CMS that if this, policy gets eliminated completely, how, you know, is there a coding structure that can facilitate this change? And I think CMS will be very quick to change this. But it will require a lot of resources at CMS as well to make this happen, because there's a lot of people behind the scenes making sure the codes are set appropriately.
Jennifer Colamonico
So then is it phased out? Is the inpatient only phase out this year or next year?
Zach Gaumer
Year one was this last year the year we're living in right now? For fiscal year 2026. So next year. So starting in 2027, in October coming, what will happen is CMS will tell us which are the next group of codes that are likely to come off. And these are going to be the short stay cases typically, you know, MD, C6 for digestive cases or circulatory.
That's MDC five and respiratory that's MDC four. Those are likely to be some of the procedures that could come off. And I'm speculating what CMS might do. But they will likely target cases or groups of, of procedures that tend to be more short stay oriented like the musculoskeletal. So they'll tell us in about a month or this month sometime what's going to come off in October, what's the next grouping?
And then a year later in the start of 2028, it will be the end of the IPL. So then everything will come off of the IPL list and it will go away completely.
Jennifer Colamonico
Got it. So CMS has to catch up on the other two payment rules at least by then, because we've got to establish these.
Zach Gaumer
Yeah, that's going to be a ton of comments in the after the proposed rule comes out about which of the cases will come next. Yeah, there'll be a ton of debate. And, providers as well as, manufacturers are very concerned about, you know, not being on the next list because a lot of folks want to stay on the inpatient side for patient safety reasons, for the flexibility of, reimbursement, and then to make sure that they're paid appropriately.
Jennifer Colamonico
Yeah. Rachel, how are plans responding to this? How are you seeing in terms of, you know, approach to bids or, you know, is this a net positive, in terms of looking at these procedures that are that are moving over to these other settings?
Rachel Stewart
Yeah. Good question. So that the timing really matters. So at the time of pricing, 2026 bids, which is the process for revenue setting for Mayo's, that was this time last year. And so during that time we weren't aware of this policy change. And so revenue was set thinking that the invitation only list was going to stay.
So if there's any contract changes due to the inpatient, only list like that, that is not baked into the development of the revenue for 2026. Currently we're pricing 2027 bids and those are due on June 1st. So this is a prime time for models and providers to be in negotiations for their contracts for the upcoming year, but a lot of it does rely on the proposed rules that come out.
And a lot of them aren't finalized even by the time we have to submit the bids to CMS. So it's still a bit of a guessing game. Asking my colleagues, you know, we have a lot of MMA clients here. I don't think a ton of people are too worried about it, of what the direct impact is going to be.
It's not something that's quite front of mind. But again, it just really varies depending on the mayo and how their contracts are set up with different hospitals. One thing that's maybe implicitly going to impact MMA plans, this is likely going to have a greater impact in the fee for service world, and fee for service costs directly impact the growth rate and the part fee benchmarks, which are the main driver of my revenues.
So the part fee benchmark is the maximum payment rate that in Mayo will be paid by county. And then they obviously need to bid lower than that. And the difference between that are the rebates that they can buy down on supplemental benefits and part D premiums. So if we expect to see a reduction in overall fee for service costs due to this policy change, that could mean a lower growth rate, which could have implications on on the flexibilities in the overall, you know, revenue year over year.
We do see lower inpatient trends in the 2027 and 2028 United States per capita costs. It's a little unclear at the moment of what's driving that. We do have some questions out to CMS. Curious if they're baking in some of this removal in those rates. But I would I would almost, yeah. Anticipate more of like an implicit, impact due to the growth rate versus really the contract eating situation and how costs will kind of roll out, within in Mayo.
Jennifer Colamonico
So you're modeling and remodeling and modeling all sorts of different scenarios.
Rachel Stewart
I guess, have to try.
Jennifer Colamonico
Yeah, to try to land it. So, and the translation of that back to hospitals back is, likely lower revenue, right? If they're moving more procedures out of the hospital. So, yeah, you know, what kind of I mean, hospitals are already facing financial pressures. We know that. So what do you how are you counseling, clients right now on this big picture?
Zach Gaumer
I think we're looking at, some revenue losses for hospitals in the first year of of impact, whenever a procedure comes off it, if it goes to the outpatient side, you're looking at a lower payment. It's hard to know exactly how big the delta will be between inpatient and outpatient for a given case. However, there is one thing that is known, and that is if an inpatient case goes outpatient.
Let's say this year an orthopedic knee procedure goes outpatient. We know that case will not get its dish payment, and we know that it won't get, the graduate medical education payment that typically comes with the inpatient case. So that together, those two things account for about 10% of the payment on the inpatient side. So that is immediately going to be lost on any case when it goes to the outpatient side.
But we don't know how that case will be paid specifically because there are not sometimes codes to identify what that will be. The other thing that will happen here, longer term is going to be over, like a two year period when a flood of cases go to the outpatient side, it's going to cause, rates to change. They might be more severe cases or more costly cases than normally happen on the outpatient side.
So that's going to cause payment rates to climb up a little bit on the outpatient side. And then on the inpatient side there's going to be a gap, a bunch of cases leaving. Let's say they're the easy cases or the less costly cases. They're going to go to the outpatient side and on the inpatient side, that's going to cause payment rates to go up.
So you might see this kind of jockeying of rates in the near term, single year per case, hospitals will lose revenue per case. But over the long term, inpatient payment rates could go up for whatever cases are being lost. And those outpatient cases could see a little bit of a decline as well. So it could be a net neutral long term.
But I think year over year it will probably be a decline in revenue for hospitals. And I'll add one other thing here about patients and the patient impact, because of a policy that says that the outpatient cost sharing can't be any higher than the inpatient deductible, which is about $1,700. We're guessing that there's not going to probably be an impact on patient cost sharing, and the patients will probably not be affected financially by this.
If there are any quality issues or preferences for inpatient care, that might be a case, for patients to be concerned. But financially they don't seem exposed on this.
Jennifer Colamonico
You mentioned the kind of hydraulics of the inpatient and outpatient payment. I'm imagining hospitals are going to have to get creative here. In terms of, you know, making that up, I know we already see a lot of hospitals having kind of owning outpatient surgical centers or ambulatory centers. I mean, of course, not all of them are owned by health systems, but some are.
So how do you see that equation kind of working out? Are we going to see kind of more activity in that space, or what kind of market shifts might what might we see there?
Zach Gaumer
Yeah, that's a really good question. At the same time, the inpatient only policy is being changed. There's a corresponding change being made by CMS to the AC covered procedures list, which is essentially going to allow all of those outpatient procedures, those newly outpatient procedures, to be done in the AC setting as well. Again, it's up to the physicians discretion.
So if a physician wanted to take a knee procedure that was done in the inpatient setting last year and do it in the AC this year, in theory that could be done. And I'm using a hypothetical example, but I think that this could mean this kind of reinvigorating of the AC setting, which is an even lower cost setting or lower paid setting than outpatient, about 60%, I think difference between outpatient and AC in the payment rate, which is very, very significant.
I think you're going to see capital flooding into ASCs, either the hospitals investing in ASCs, or it could be private equity investing in ASCs, because this, is clearly where this administration is pushing cases down into lower cost settings, which could potentially create savings for the program for taxpayers. And that might be good. This will certainly invigorate outpace and AC investment.
Jennifer Colamonico
All right. You sort of hear all this. You think well all right. We're are we going to actually reduce the cost of care. Maybe that's a good thing. Or is it more convenient for patients. Maybe that's a good thing. But then there's that pesky bit of sort of quality and safety. And I you know, there are certain procedures, transplants, right?
We don't really want to do transplants in an, ambulatory surgical setting. So I guess, you know, what are the mechanisms? What do you expect to see? You know, and I would say both sides. Right. Both from the Medicare CMS side, but also from the plan side. And the plans don't want to be left holding the bag for higher risk for poor outcomes.
If we push too many things into the outpatient or ambulatory settings. So like how does that work out?
Zach Gaumer
I think a lot of that is going to be, debated this year. I think there's going to be ideas potentially put out there, for quality, like a quality backstop, to protect patients. I think there could be potentially, the plans could get involved and their trade associations in, in, thinking about how prior authorization needs to be leveraged here.
To your point. But I think there's this unopened or this unresolved question of, of quality in the patient perspective. And what is the backstop now? Because this is a significant change for the program, even though it lies in the weeds of Medicare.
Jennifer Colamonico
Yeah. Rachel, how are the plans kind of thinking about the quality monitoring and compliance. Obviously it'll affect their ratings and all of that as well.
Rachel Stewart
Yeah, quality is a huge component of Medicare Advantage. And the policies in the quality space are always changing. And so I think there is a lot of burden on Mayo's just currently to kind of keep up with with all of those quality and star rating changes and the different measures they need to stay on top of. So I'm imagining this will just introduce more complexities, more administrative burden.
But it's necessary, right? So yeah, to your point, you know, cost savings is one thing, but we need to make sure beneficiary safety is at the forefront. And I think, you know, the main goal of Medicare and Medicare Advantage is lowering costs and providing better overall care for all. Yeah. Nothing right now has been rolled out that I'm aware of for the quality space to kind of, you know, help safeguard these changes.
But I would imagine that we'll see some stuff in the proposed rule this year that may as well have to adapt.
Jennifer Colamonico
Well. And you think about the sort of the, the quality, programs and the things that I may plans have done to, you know, let's, you know, prevention related things in the primary care setting. I mean, what's the sort of corollary here? I mean, you know, how much how much prevention or how much, you know, how much can plans do on their side to, improve outcomes, to make sure that there are no, you know, unnecessary adverse events here?
You know, is there something that they can do from a just a benefit perspective?
Rachel Stewart
I think it more comes down to the contracting. So again, even though this rule is now in place or being removed, they still have flexibility of how they set up contracts with providers. So I like to think that with any site neutral policy, that any procedure that's being moved is really thought through, as being safe to perform in any of those settings and that there isn't necessarily a lag that's needed.
I think one question I've heard come up is, do we think there's going to be a little bit of a lag of the utilization shift as outpatient and ACS, get ready to be able to perform these procedures? And I think my answer is no. And maybe you would have a better a different answer. But I think the reason why these procedures are being moved is because they're proven to be able to be safely performed in those settings.
Zach Gaumer
I agree, I think we might see, proposals out there in the next year, that replace what our kind of the readmission measures on the inpatient side. You know, that's kind of been the mechanism in a lot of ways that has moved behavior generally on the inpatient side and fee for service. You could be looking at something similar like Ed bounce back rates or some other kind of measure to prevent, you know, cases where physicians or hospitals are moving cases into the settings, lower cost settings, or maybe too early or prematurely.
Since this is now a physician's discretion issue, you could see the medical societies get involved and the specialty societies get involved to make sure that they're policing their own specialists to make sure that no rogue specialist is making a bad name for the group. You know, I would not be surprised if, the, the societies fill the void here and step in with some ideas for CMS.
Rachel Stewart
Yeah, maybe I'll just add one more thought that we do see a lot of risk sharing arrangements in the Medicare Advantage space where, you know, while there is a contract. Right. So there's an agreed upon fee for service component of how reimbursement will be paid. The providers are also tied to an MLR, a medical loss ratio. And so they're required to keep costs, you know, at a certain level.
And if they do keep it up at a level and their savings realized by the Ma plan, the provider will share in some of those savings. In addition, we see a lot of quality incentives and bonus payments that are shared with the Mayo and the provider. So, you know, while there is obviously a, you know, fear probably from hospital systems and providers that costs will be lower and they might lose revenue.
There is also incentive in the mail space in that savings. Right? A reduction of costs will produce additional payment from the mayo to the provider. So it's very nuanced and very circular. And, and I think a lot of that's already going on right now. So I think that's again when we when we talk about really the overall impact in the space, that might not be as drastic as we as it might be in the fee for service space.
Jennifer Colamonico
So do you think the infrastructure is there because you said it exists already? It's just going to be, you know, unleashed.
Rachel Stewart
Yeah, I think that's a fair statement.
Jennifer Colamonico
And the presumption is that it decreases costs. Obviously that's the sort of reason for doing it. But are there, you know, are there any potential unintended behaviors, any kind of self protection measures that could be introduced? Like, are we really going to see costs decrease here?
Rachel Stewart
I'm not a clinician, so I probably can't speak as eloquently as a clinician could, but I would imagine yeah, the the pre-op and the post-op maybe looks different in an outpatient setting than an inpatient setting. And so to the extent pre-op and post-op increases, that could be an offset to the cost savings. We've obviously seen, a lot more fraud cases right in the past handful of years with DME and the skin substitutes.
So while we don't want to anticipate that is going to happen, right, there's always bad apples out there that could find ways to kind of sneak in, cost it to offset the reductions overall. Kind of going back to Zach's like first point, I think long term it'll likely be a net neutral, really where we see, like in the the advocacy work that I've been involved in for site neutral policy modeling, really, most of the savings we see is when it's moving from an outpatient setting to ASC or to professional, whereas the inpatient to outpatient is, I think, more net neutral.
You'll obviously see shifts in the mix and shifts in the unit cost and utilization. And so that can impact Medicare Advantage or ACOs differently depending how those cost structures are set up. It'll be interesting to see. Yeah, what kind of spikes up from it and where we see the actual cost reductions.
Zach Gaumer
Yeah. I think there'll be a lot to study as a result of this and a bunch of tangential policies that have to be modified, most likely. A couple of things to consider is, you know, the three day stay rule, which enables sniff payment, skilled nursing facility payment, outpatient doesn't count towards that. So if you've got a patient that needs skilled nursing on the outpatient side, that's not going to be, possible as much so that that the two midnight rule, there are several things that need to be factored in as this gets implemented, that CMS will have to kind of adjust and modify.
Rachel Stewart
Over the past decade, we've seen a lot of health systems strategically navigate, you know, inpatient systems buying ASC settings. And so I think, when you think about where the money's going, I think a lot of it still will be sustained in the health system itself. It's not like the hospital is going to now lose that revenue to a competitor.
It will be sustained within their health system. If they were strategic and purchasing and acquiring different outpatient and ASC facilities. So that's an important concept to of like it's again, it's not a total loss, it's just a redistribution of where the costs are flowing.
Jennifer Colamonico
So larger, more diversified health systems will withstand this change more than smaller standalone hospitals that maybe have not invested in these kinds of.
Rachel Stewart
Yes. Yeah, I would imagine it would impact rural hospitals. More so than right metropolitan areas. There are safeguards for rural hospital systems or they're already paid a higher rate. So hopefully there'd be some protection there.
Jennifer Colamonico
Yeah, that's a whole other topic for a whole other podcast. The rural health implications of that. That's interesting.
Well, one of the questions we always like to ask on this podcast is, kind of giving you the opportunity to wield the magic wand. So in your kind of respective areas of expertise, Zach, maybe I would ask you kind of on the, the, you know, policy side and then, you know, Rachel, in terms of the payment and risk side, if you had a magic wand and could shape or could you kind of use it to shape how this change unfolds, you know, how would you use that to kind of ensure that, that this works best for, for all parties involved?
Zach Gaumer
I think that the first thing that I would probably do is to make sure that the codes exist on the outpatient side for, an easy transition for the cases that do come off and go to the outpatient side, that that's the secret, I think, to making this policy, implement. Well.
Rachel Stewart
I would echo that and probably add transparency. I think transparency is right. A hot topic and really key to actuaries and what we do. So as CMS releases no cost projections on the USBc fees and that impacts the growth rate, it's really important for us to understand where their heads are at and where they think the costs are shifting.
We rely again, because so many Mayo's contracts are tied to Medicare fee for service. We really rely on how that system is changing. And so any transparency is always appreciated and welcomed. And I think we could always use more of it.
Jennifer Colamonico
The transparency wand is often wielded in these conversations. So, always, always an important one. Never can have enough of that. Well, I appreciate this conversation. Even though it's sort of a wonky one, I feel like you guys both have explained it in a way that, you know, is easy to understand and also, like, appropriately informative that this is actually a big deal that people need to be paying attention to.
So, it's been a pleasure. Thank you for being with us.
Rachel Stewart
Thank you.
Jennifer Colamonico
This episode of Vital Viewpoints on Healthcare is sponsored by HMA Information Services. HMAIS is a subscription based service that provides state level data on publicly sponsored programs like Medicaid, from the latest managed care enrollment, market share, and financial performance data to up to date RFP calendars and state by state overviews, HMAIS has all the information you'll need to power your initiatives to success.
This podcast was produced by myself, Jennifer Colamonico along with Tiffany McKenzie in collaboration with our guests. The content is the property of Health Management Associates.
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Vital Viewpoints is hosted by HMA Vice President, Strategy and Communications, Jennifer Colamonico.
