On February 21, 2020, professional services firm Deloitte published a report analyzing the financial data of Medicare-certified hospitals between 2011 and 2018.¹ During this timeframe, hospital outpatient revenue grew at a compounded annual rate of 9%, to 48% of total hospital revenue, while inpatient care saw its revenue grow at a compounded rate of 6%.²  These numbers seem to correlate with the rise in utilization of non-traditional sites of service such as ambulatory surgery centers (ASCs), urgent care clinics, primary care clinics, retail clinics, and telehealth.³ These outpatient revenue trends significantly impact the operations of hospital and other healthcare organizations, and with payors seeking to move healthcare reimbursement toward value-based models, these trends are expected continue, or even accelerate.

With outpatient revenue at approximately 95% of inpatient revenue,⁴ healthcare entity reliance on revenue from inpatient care (which used to be the most profitable) has been necessarily declining.⁵ In fact, the significant shift toward outpatient care has been building for the last three decades.⁶ The American Hospital Association’s (AHA) 2018 Trend Watch Review of inpatient and outpatient data between 1995 through 2016 indicated the following trends:⁷

In addition to these volume changes, a 2018 study conducted by Deloitte’s Center for Health Solutions found that gross hospital outpatient revenue grew by 45% between 2005 and 2015, from $1,352 per visit to $1,962.⁸

As noted in the Deloitte report, the main catalysts for this growth in outpatient care have been reimbursement drivers, technological advancements, and patient preference.⁹ The shift from volume-based to value-based reimbursement has strongly incentivized the provision of care in outpatient settings. In 2013, the Centers for Medicare & Medicaid Services (CMS) established the Two-Midnight Rule, wherein hospital admissions are only billed as an inpatient stay if it spans two (or more) midnights; otherwise, the “observation stay” will be billed as an outpatient visit.¹⁰ Additionally, propelled in large part by the Patient Protection and Affordable Care Act (ACA), both private and public payors have begun linking provider reimbursement to cost containment and quality metrics.¹¹ Payment arrangements such as shared savings, bundled payments, and capitation,¹² seek to improve care coordination and healthcare delivery efficiency.¹³ This push to reduce costs has spurred hospitals, health systems, and providers to provide a greater number of services in the lower-cost outpatient setting. For hospitals and health systems, this shift to the outpatient setting may be achieved through physician practice acquisition;¹⁴ such vertical integration can support the hospital’s market position by allowing for a more fully integrated network, and the physicians can then be reimbursed at higher rates if they bill as a hospital-based outpatient department¹⁵ (in contrast to a freestanding physician practice or an ASC). This shift to value-based reimbursement is significantly changing the focus of healthcare delivery and access.

Additionally, a number of significant technological advancements over the past decade have allowed for this shift to the outpatient setting. Clinical advancements, such as minimally invasive surgery, have allowed procedures that could previously only be done in the hospital to be rendered in outpatient settings, such as ASCs, with shorter recovery times. Further, investment in virtual services, such as telehealth, is expected to further move patients from the inpatient to outpatient setting.¹⁶ The benefits associated with telehealth include increasing patient access to care (as patients would not necessarily have to leave their home to obtain medical advice), satisfying the demand of patients who prefer the convenience of web-based engagement, enhanced population health management, and the prevention of (more costly) emergency room and inpatient visits.¹⁷ Telehealth’s potential has been well exhibited during the COVID-19 pandemic, as the technology has helped to prevent further spread of the virus by keeping people at home and hospitals from becoming overwhelmed.¹⁸

Many hospitals and healthcare systems have also significantly invested in outpatient, non-hospital care settings in response to demand from patients, who prefer outpatient settings because of their convenience and lower cost.¹⁹ Outpatient facilities, such as ASCs, imaging centers, and urgent care clinics, are typically located closer to patients’ homes, and are easier to quickly enter and exit, in contrast to obtaining care at a large hospital campus. Additionally, outpatient providers can perform the procedures at a much lower cost to the payor and patient, due to the reduced overhead and services offered. In an inpatient setting, more staff (with a wider specialty range), services, and equipment drive up costs that are then pushed on to the patient, unlike in an outpatient setting, where minimally invasive surgical procedures and other simpler tasks are cheaper and far more convenient for the patient, thus fueling demand for outpatient growth.²⁰

With hospital admissions increasing less than 1%, and outpatient visits increasing 1.2%, year-over-year,²¹ it is likely that outpatient care will continue to become a greater part of hospital revenue going forward.²² In the short term, current healthcare trends may be accelerated by the COVID-19 pandemic, which pushed a significant amount of patient care to the outpatient setting and paved the way for an expanded provision of virtual health services.²³ The extent to which this shift is accelerated may largely depend on whether CMS extends its various regulatory waivers and relaxations post-pandemic.