News Alert: Expect Disruptions Associated with Knee Replacements and Bundled Payments

Removal of total knee replacement from the Medicare inpatient-only list will cause major disruptions to the CMS bundled payment initiatives – BPCI and CJR – in several different ways.

When the Centers for Medicare & Medicaid Services (CMS) started the move from volume to value with their bundled payment programs, it was not hard to see why total joint replacements were chosen for inclusion. The surgery in most cases is elective, the pre-, intra-, and post-hospital course can be easily predicted, and there is a great deal of “discretionary” spending for the implant and for post-hospital care. In fact, many of the commercial payers had already started paying hospitals a fixed sum to cover all 90-day costs for elective joint replacement surgery for employees of large companies.

CMS first introduced the Bundled Payments for Care Improvement (BPCI) program as a voluntary program with four models encompassing various permutations of the inpatient admission and the 90-day period that follows hospital discharge. BPCI included 48 clinical episodes, from acute myocardial infarction to urinary tract infection, from which participants can choose. For joint replacement, they included all admissions billed with DRGs 469 and 470, which includes not only elective joint replacement, but also hip fracture with surgery.

Once CMS had experience with BPCI, it took the leap from voluntary to mandatory and introduced the Comprehensive Care for Joint Replacement (CJR) program in 2015 in 67 metropolitan service areas, encompassing 791 hospitals. CJR also included DRGs 469 and 470, with each episode starting with the day of surgery and encompassing the 90 days following hospital discharge.

And prior to Jan. 1, 2018, these programs worked well for hospitals. The BPCI report from the Lewin Group on joint replacement bundles for year three noted that the reduction in spending was statistically significant, primarily due to a decrease in spending on post-acute institutional care such as that provided in skilled nursing facilities. The first year CJR preliminary results showed that over $37 million incentive payments was doled out to hospitals, to be shared with their partners.

But that is all about to change now that total knee replacement is no longer on the inpatient-only list. Here’s why:

There will be fewer low-cost patients to offset the high-cost patients.

One of the keys to success in a bundled payment program is to have a large enough volume of “simple” patients who generate lower-than-average 90-day costs to offset the “complex” patients whose 90-day costs will far exceed the average. As of Jan. 1, patients with few or no comorbidities, those who are not expected to need a skilled nursing facility, and those who are expected to require fewer than two midnights for in-hospital recovery are having their knee replacements performed as outpatient procedures. The short hospital stay of these “healthy” patients will not be billed as an inpatient admission and not paid as a DRG, and their episode of care will not be included in the BPCI or CJR programs. These are the patients who don’t need institutional post-acute care and often do not even require home care. They have few medical issues so they won’t be receiving a lot of care in the 90-day period.

These low-cost patients tend to drive the financial success of the bundled payment program for participants. Even with the most aggressive cost-reducing measures made to reduce expenditures on the few patients who are high-cost outliers, without the large volume of low-cost patients to balance these, the chances of receiving a reconciliation payment at the end of the measurement period vanishes and the risk of owing CMS money is heightened.

The eligibility for the three-day SNF waiver will be lost for some patients.

CMS allows BPCI participants to receive a waiver of the rule requiring three inpatient days to qualify for Part A coverage of a skilled nursing facility (SNF) stay after hospitalization. The CJR program waived that requirement starting in the second year of the program, with certain caveats. But in all cases, the patient must be part of the bundled payment cohort with an inpatient admission billed to DRG 469 or 470 to qualify for this waiver. This will not be a problem if the patient is anticipated to require a SNF visit prior to surgery and is admitted as inpatient preoperatively. (Please see my article describing the CMS guidance for determining the correct admission status at watch my on-demand webcast at

On the other hand, if the need for a SNF is not anticipated and the patient’s surgery is performed as an outpatient procedure, but the patient develops complications or a delayed recovery and is subsequently admitted as an inpatient, there is a possibility that the admission will not fall into DRG 469 or 470. According to my coding colleagues, if a knee replacement surgery is performed as outpatient and the patient subsequently is admitted as an inpatient, the principal diagnosis may or may not be osteoarthritis of the knee. The assignment of the principal diagnosis depends on the physician documentation of the reason for inpatient admission, whether that for continuing care, a complication of the surgery, or a condition unrelated to the surgery. For example, if a patient developed a COPD exacerbation after his outpatient knee replacement and this led to inpatient admission, the assigned DRG would not be 469-470. That means that even though this patient underwent joint replacement surgery at a BPCI/CJR-participating hospital, this patient would not be included in BPCI/CJR and would need three inpatient days after admission in order to receive care at a SNF under Part A.

Because the assignment of the DRG does not happen until after discharge, this can create a financial disaster. Picture that patient with the COPD exacerbation who gets admitted as inpatient on the first day post-op due to the exacerbation, receives treatment, and then warrants transfer to a SNF for rehabilitation on the third day. If the physician, case manager, and SNF assume that the surgery and inpatient admission qualified the patient for the three-day waiver, they would arrange transfer of the patient to the SNF on the third day post-op, after only two inpatient days. But since this admission will not fall into DRG 469-470, the CMS common working file will not find a qualifying three-day inpatient admission to match to the claim from the SNF, and the SNF claim will be rejected. At that point, the SNF likely would come back to the hospital and demand the hospital pay the SNF stay. as the hospital misrepresented their patient’s qualifications for Part A coverage.

On the other hand, if the reason for inpatient admission is related to the surgery and is not a complication, such as uncontrolled pain continuing to require intravenous medication, then my coding colleagues tell me that the primary will remain osteoarthritis of the knee and the admission will fall into DRG 469-470. In that case, even though the patient was admitted as inpatient after the surgery, the coding would be the same, as if they were admitted preoperatively.

Not All Bad News

 There may be some positives to this shift of patients from inpatient to outpatient for hospitals. Although the majority of patients tolerate knee replacement surgery and have uneventful recoveries, bad things can happen. If a patient has their surgery as outpatient and is discharged, but then develops a complication that requires hospitalization, that second hospital stay will no longer be a readmission since there was no first admission. That means no readmission penalty and no effect on the hospital’s quality ratings. Likewise, if the surgery is performed as outpatient and the patient requires inpatient admission during the hospital stay due to a condition on the hospital-acquired condition (HAC) list, such as catheter-related urinary tract infection or a fall, that condition would be considered present on admission (the point at which the admission order is written), so it would not be a HAC and likewise would not affect their quality scores.

As noted, the patient whose admission was warranted due to a complication would fall into a different DRG and result in a different payment to the hospital. And in some cases, that payment is significantly higher than the DRG payment for the surgery. To illustrate this, I will use a suburban 250-bed community hospital in the Chicago area as an example and also stress that these numbers and DRG assignments are for illustrative purposes only and that post-acute transfer payment rules may apply. That hospital receives $13,320 for DRG 470 for inpatient surgery. For outpatient surgery, it receives $10,320. If the patient has outpatient surgery and is admitted as inpatient due to a heart failure exacerbation, the DRG would change to 982 with a payment of $16,036. If the admission was due to a complication of the surgery, such as post-operative delirium, the DRG would be 876 with a payment of $22,520. If the admission was due to post-operative fever, DRG 853 would apply, with a payment of $32,754. So the hospital would not only get a much higher DRG payment, but the complex, costly patient would not be part of its bundle and would not offset any of its hard-earned gains. 

What’s the Bottom Line?

 Hospitals in any of the BPCI models that are participating with total joint replacement as a clinical episode need to watch their data and their knee replacement patients carefully. If a significant number of surgeries are shifting to outpatient, the 90-day costs of those patients who are admitted as inpatients must be carefully monitored. CMS stated in the Outpatient Prospective Payment System (OPPS) Final Rule that it will be monitoring “the overall volume and complexity of TKA cases performed in the hospital outpatient department to determine whether any future refinements to these models are warranted.” Hospitals would be wise to not wait for CMS to tell them they are losing money and keep on top of their own data.

Since BPCI and CJR both encompass both knee and hip replacement, and hip replacement remains inpatient-only, the number of each type of surgery being performed may also influence the decision to continue to participate in the program. A hospital that does a lot of total knee replacements on relatively healthy Medicare recipients may see a larger loss of their “profitable” patients from the program, leaving them with costly patients, which will lead to a net loss after reconciliation.

Those hospitals utilizing the three-day SNF waiver must be clear that the patients being transferred to SNFs under the waiver are actually eligible for it, having been admitted as inpatient preoperatively or by having their admission be driven by a diagnosis that still results in DRG 469 or 470 being assigned to the claim.

Finally, it is widely felt that CMS will start allowing all joint replacement surgery to be done in ambulatory surgery centers starting in 2019. It is unclear what will happen to the bundled payment programs for joint replacement if that happens, but the potential for receiving any shared savings would vanish if the only patients left having inpatient surgery were the chronically ill, high-acuity, high-cost patients. CMS may choose to add outpatient total joint replacement to the BPCI-Advanced program it initiated in early 2018, leaving the programs intact but adjusting the target prices, or dissolve the program completely.

Once again, hospitals should familiarize themselves with the deadlines and requirements for withdrawal, and not wait for CMS to act if the numbers start going the wrong way.          


To view the Total Knee Replacement Webcast click here!


Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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