Understanding the Costs Associated With Surgical Care Delivery in the Medicare Population

Deborah R. Kaye, MD, MSc; Amy N. Luckenbaugh, MD; Mary Oerline, MSc; Brent K. Hollenbeck, MD, MPH; Lindsey A. Herrel, MD, MSc; Justin B. Dimick, MD, MPH; John M. Hollingsworth, MD, MSc


Annals of Surgery. 2020;271(1):23-28. 

In This Article

Abstract and Introduction


Background: Surgical care has been largely untargeted by Medicare payment reforms because episode costs associated with its delivery are not currently well understood.

Objective: To quantify the costs of inpatient and outpatient surgery in the Medicare population.

Methods: We analyzed claims data from a 20% national sample of Medicare beneficiaries (2008–2014). For a given study year, we identified all inpatient and outpatient procedures and constructed claims windows around them to define surgical episodes. After summing payments for services rendered during each episode, we totaled all inpatient and outpatient episode payments by surgical specialty. For inpatient episodes, we determined component payments related to the index hospitalization, readmissions, physician services, and postacute care. For outpatient episodes, we differentiated by the site of care (hospital outpatient department versus physician office versus ambulatory surgery center). We used linear regression to evaluate temporal trends in inpatient and outpatient surgical spending. Finally, we estimated the contribution of surgical care to overall Medicare expenditures.

Results: Total Medicare payments for surgical care are substantial, representing 51% of Program spending in 2014. They declined modestly over the study period, from $133.1 billion in 2008 to $124.9 billion in 2014 (−6.2%, P = 0.085 for the temporal trend). While spending on inpatient surgery contributed the most to total surgical payments (69.4% in 2014), it declined over the study period, driven by decreases in index hospitalization (−16.7%, P = 0.002) and readmissions payments (−27.0%, P = 0.003). In contrast, spending on outpatient surgery increased by $8.5 billion (28.7%, P < 0.001). This increase was realized across all sites of care (hospital outpatient department: 36.6%, P < 0.001; physician office: 22.1%, P < 0.001; ambulatory surgery center: 36.6%, P < 0.001). Ophthalmology and hand surgery witnessed the greatest growth in surgical spending over the study period.

Conclusions and Relevance: Surgical care accounts for half of all Medicare spending. Our findings not only highlight the magnitude of spending on surgery, but also the areas of greatest growth, which could be targeted by future payment reforms.


Medicare spending is projected to grow at an average rate of 7.4% per year over the next decade.[1] Because this growth rate threatens the Program's solvency, a number of payment and delivery system reforms have been launched, most notably advanced payment models [eg, payment bundling, accountable care organizations (ACOs)], and the patient-centered medical home. These programs are designed to reduce healthcare costs and improve (or at least maintain) quality. The collective focus of these reforms is on enhanced primary care for beneficiaries with multiple comorbid conditions. While such a focus is no doubt important, it turns a blind eye toward surgical care, which is not only a major source of morbidity and mortality among older adults, but also a large driver of healthcare resource consumption.

One possible reason is that the cost of surgical care is currently poorly understood. Older estimates suggest that inpatient surgical care represents nearly 50% of hospital expenditures and 30% of overall healthcare costs.[2,3] However, these estimates reflect only the care delivered during the initial hospitalization, and they fail to capture payments for expensive and common services that occur after discharge like those related to readmissions and postacute care. Moreover, these estimates completely miss outpatient surgical episodes, encounters for which have risen rapidly over the last 20 years.[4,5] With the average American undergoing 9 procedures during their lifetime,[6] an accurate accounting of the costs of surgical care is needed.

In this context, we analyzed a nationally representative sample of Medicare data. After identifying beneficiaries who received surgical or procedural services, we measured payments made on their behalf during their inpatient and outpatient episodes of care. We then calculated total episode expenditures and assessed temporal trends in overall surgical spending. Finally, we examined spending patterns as they related to outpatient status, site of care, and surgeon specialty. Findings from our study serve to inform policymakers and clinician leaders on where they are likely to find opportunities for reducing the costs of surgical care.