TD Maintains $19 TargetMedical Facilities Corp. (DR-T) C$13.17 CMS Changes Total Knee Replacement Policy - Preliminary Lennox Gibbs Ling Han, CFA, (Associate) Event Last night the US Centers for Medicare and Medicaid Services (CMS) published its final 2018 Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems rulings. Included was the decision to remove Total Knee Arthroplasty (TKA) from the list of procedures that can only be reimbursed when conducted on an inpatient basis. Impact: Slightly Negative Prior to last night, the perceived risk was that CMS may have gone further and authorized Ambulatory Surgery Centers (ASC) to conduct TKA procedures. However, our preliminary view is that the final ruling fell short of that concern. We nonetheless believe that there may be some competitive risk for Medical Facilities, and will assess that risk in relevant markets. What to Expect Effective January 1 2018 CMS will remove CPT 27447 - TKA from its "Inpatient Only List". However, CMS decided not to add 27447 to the "ASC covered surgical procedures" list for CY 2018, opting instead to take public "suggestions and recommendations into consideration for future rulemaking." We view this as a better-than-expected outcome for Medical Facilities, as it was widely expected that CMS would have added 27447 to the ASC covered procedures list for 2018 . Three Considerations: 1. Five of Medical Facilities' 6 facilities conduct orthopedic surgeries (including total knees). Sioux Falls (SF) has the greatest exposure, with Ortho contributing 67% of revenues in 2016. SF contributed 28.7% of Medical Facilities' revenues in H1/2017. We are assessing the competitive risk in each of Medical Facilities' markets. Meanwhile, it is worth noting that Medicare contributes ~29% of total revenues. 2. Outpatient TKAs are not new. A significant proportion of knee replacement surgeries are currently conducted in outpatient settings; particularly for younger, healthier patients. 3. The Medicare patient population is comprised of seniors, many of whom are not appropriate candidates for knee replacement surgery in an outpatient setting. Many of these patients have comorbidities and are vulnerable to post-surgical complications requiring inpatient care. This is the basis of CMS' reluctance to cover the procedure in an ASC setting, and it is a key consideration in assessing impact to Medical Facilities.