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Medicaid Programs Should Take Notice as Services Gravitate to Outpatient Settings

Medicaid Payment Perspectives

 Medicaid Payment Perspectives helps Medicaid programs and other payers improve the methods used to purchase care and services for their beneficiaries. It’s published by the Payment Method Development team at Conduent.

Inpatient services are declining as outpatient services continue to grow. Over the past decade, this national trend has manifested across many types of payers and providers. However, it’s difficult to determine a definitive explanation for the shift; it is likely the result of a variety of factors.

Some say that this is due to procedures traditionally performed in inpatient settings are now happening in outpatient settings. According to the February 2018 issue of American Health & Drug Benefits, “In recent years, a rapid increase has taken place in select outpatient medical services, including surgical and intervention procedures being performed in the outpatient setting, as hospitalized inpatient visits have fallen.” This is a strategy to grow revenue, “fueled in part by value-based payment models and technology advancements.” Essentially, providers have a financial incentive to perform services in outpatient settings instead of inpatient settings and have the technological means to do so.

While this may be true, it only partially explains the trend. The Medicare Payment Advisory Commission (MedPAC) indicates the rise in outpatient services and payments are due to a 20 percent increase in payments for Part B drugs and an increase in physician services being billed as hospital outpatient services. On the inpatient side, the decline in stays is mostly for respiratory, circulatory and digestive cases.

MedPAC found that from 2006 to 2016, inpatient Medicare fee-for-service (FFS) visits per beneficiary declined 21.8 percent, while outpatient visits per beneficiary increased 49 percent. At the same time, inpatient payments per beneficiary declined by 0.5 percent per year, while outpatient payments per beneficiary increased 7.8 percent per year.

This trend among the Medicare population raises serious questions for state Medicaid programs. First, are Medicaid programs experiencing a similar transition? If so:

  • What’s driving the trend?
  • Does this these trend reflect a shift toward lower acuity care?
  • Are inpatient stays being pushed into observation visits or other high acuity outpatient settings to improve inpatient quality/readmission metrics?
  • Is there a trend toward lower payment overall?
  • How are outpatient visits changing?

The Payment Method Development Team at Conduent recently completed a study of this trend for one state Medicaid program. We found that a similar pattern does indeed exist in its FFS and managed care organization (MCO) populations, although the number of outpatient visits did not increase as substantially. Our analysis looked at changes in the number of adult (over 21) inpatient/outpatient hospital claims and allowed amount (the calculated payment amount prior to deductions for third-party liability, co-pay or cost share) over a four-year period.

Our analysis found that outpatient claims per 1,000 member months for all payer types increased slightly over time – about 3 percent over four years. Inpatient claims volume decreased markedly over the same time period, with consistent declines until the number of claims in the fourth year of the analysis was 20 percent lower than the first year. The decline in inpatient stays over time is larger than MedPAC’s Medicare estimate (21.8 percent over 10 years). The increase in outpatient stays over time is much smaller than was seen in the Medicare population.

Note that, although there were no rate increases for inpatient visits over the four years, outpatient rates did increase. This explains some, but not all, of the relatively sharp increase in allowed amount. Both inpatient and outpatient services are paid using prospective payment systems. Our analysis also looked only at outpatient hospital claims and did not include ambulatory surgical centers.

The allowed amount for outpatient visits per member month increased over time significantly more than the number of stays: 28 percent versus 3 percent. The increase was consistent across payers. In contrast, the decrease in the allowed amount per member month for inpatient stays was similar in magnitude to the decrease in the number of inpatient stays: -18 percent versus -20 percent. For all payers, the allowed amount for outpatient visits increased steadily. The allowed amount for inpatient stays for all payers also decreased over time, though less sharply than the increase in the outpatient allowed amount.













The combined total of outpatient and inpatient allowed amounts per member month was approximately steady, with a 2 percent decrease over four years. This indicated that the increase in the outpatient allowed amount is keeping pace with the decrease in the inpatient allowed amount.

We broke down the analysis of outpatient claims further using Reason for Visit Categories based on a combination of diagnosis, procedure codes and revenue codes. This classification system, developed by the Payment Method Development team, assigns outpatient claims to 1 of 14 categories in a hierarchical manner.

We looked at outpatient observation visits, thinking that they might be replacing reduced inpatient stays. However, the data showed that the frequency of outpatient observation visits actually decreased over four years. We also looked at whether inpatient surgical procedures were transitioning to outpatient procedures. While there was a slight increase in outpatient day procedures, the overall increase was not large enough to explain the increase in the outpatient allowed amount over time.

Next, we considered if the service mix trended toward more expensive services. However, we concluded that there is no consistent relationship between the allowed amount per service and the growth in services. The largest growth was in Trauma Care, Outpatient Mental Health, Other Services and Clinic. Radiation Therapy was the most expensive category and showed modest growth (about 20 percent) across all payers. Trauma is expensive, but relatively low-volume. The largest categories, ER and Lab, showed little to no growth.

Was there an increase in the allowed amount per visit? Multiple categories saw substantial increases in the allowed amount per visit. The largest category by volume, ER, increased the allowed amount per visit by about 40 percent for all payers. The second largest category by volume, Lab, increased substantially across all payers as well. Together, ER and Lab accounted for approximately 60 percent of adult visits.

Overall, we concluded that, compared to Medicare, this Medicaid program has seen similar decreases in inpatient stays, but significantly less growth in outpatient services:

  • There does not seem to be a consistent shift of inpatient stays to observation visits.
  • The allowed amount for outpatient services has increased much more sharply than the growth in services.
  • The increase in the allowed amount for outpatient services is largely driven by increases in the allowed amount per visit, particularly for the largest visit categories, ER and Lab.

We also identified two areas for future analysis:

  • Trends in Ambulatory Surgical Centers: Are volume and allowed increasing as inpatient surgeries are decreasing?
  • Professional services: Are inpatient stays being reduced due to more and better ambulatory care services?

The experience of Medicaid programs across the nation may vary; but all indicators point to a distinct trend of outpatient growth and inpatient decline. In this particular state, the decline on the inpatient side mirrors the movement seen in Medicare. The outpatient side saw relatively modest growth in the number of visits, but large growth in the allowed amount; this suggests that outpatient services, on average were more expensive and likely more complex than they had been. So it’s possible that at least some services that may have once been performed in inpatient settings were instead performed in outpatient settings, although further analysis is necessary. Again, how this trend manifests itself in a given state may vary, but it’s a national trend seen across a variety of payers.

The transition towards outpatient services will affect patients, providers and payers. For Medicaid programs, it affects budgets, beneficiary access, quality programs, and inpatient/outpatient payment methods and rate setting.

For more information about this topic or to find out how the Payment Method Development team at Conduent can help your state address this challenge, contact Andrew Townsend at or visit