Leveling the payment playing field

Independent physicians have long wondered why their hospital-owned competitors are reimbursed at higher rates for the same services. That changed in November 2015, when Congress acted to level the reimbursement playing field between independent physicians and hospital-owned practices by approving site-neutral payments.

Hospital executives argued against the change in policy, arguing that site-neutral payments will reduce patients’ access to care because hospitals need the increased billing to cover the costs of keeping hospitals open around the clock and to provide care for the uninsured and underinsured.

But supporters believe that the disparate payment system contributed, at least in part, to driving up healthcare costs and giving hospitals financial incentive to gobble up independent practices.

The question for physicians is: Will site-neutral payments help practices remain independent or-for those physicians considering a sale to a hospital-will they find the market drying up?

“For the most part, the impact of site-neutral payments will be relatively benign on the attractiveness of physician practices for hospitals,” says Bill Baker, MBA, partner in charge a national healthcare transactions for the consulting firm KPMG US. 

When hospitals consider acquiring a practice, administrators are less concerned about what a practice might add in terms of Medicare reimbursement and are more interested in the strategic value of adding a practice, how the acquisition helps the hospital address what’s happening in the market, and preparing the hospital to accept risk, Baker says.

Hospitals have sought to acquire practices that have patients they can refer inward for services such as primary care, cardiology, oncology and surgery, Baker explains.

The new rules will have some effect but it is difficult to predict how much, says Rick L. Hindmand, JD, of the law firm McDonald Hopkins. “It will vary a lot depending on the circumstances of the deal and the hospital’s objectives,” he says. “In some cases, the
higher payment may be a major factor for the hospital. In other cases, there may be more strategic reasons why the hospital would want to acquire a physician practice. Also, it will depend on what restrictions CMS puts on these deals.”

In fact, the number of practice acquisitions by hospitals seems to be increasing, says Carsten Beith, managing director of Cain Brothers, which specializes in healthcare mergers and acquisitions.

“To date, we have not seen a slowdown in the number of deals involving hospitals acquiring physician groups. In fact, we have seen the number of such deals increasing,” Beith says.

Driving up costs

Last fall, Congress passed the Bipartisan Budget Act of 2015, which included a provision to eliminate the site-of-service differential payment policy governing billing for hospital outpatient services.  The new law is in effect for any physician group that a hospital acquired after November 2, 2015.

While the differential payment policy was in place, hospitals-and some physicians-benefited from the increased outpatient billing policy. For Bannockburn, Illinois-based cardiologist Jay Alexander, MD, the former outpatient payment rules saved his practice from having to make gut-wrenching decisions to ensure its survival. Five years ago, Alexander’s 11-physician cardiology group was struggling after deep cuts in Medicare reimbursement. 

Seeking a long-term partner, the physicians shopped the practice to nearby hospitals on the North Shore of Chicago, ending up as part of the 40-plus member NorthShore University HealthSystem Medical Group Cardiology service.

After acquiring Alexander’s group in 2010, NorthShore set up the cardiologists’ practice to qualify for increased payments under Medicare’s Hospital Outpatient Prospective Payment System (HOPPS), which was allowed under the old rules. 

As a result, Alexander’s group never had to face the question of whether to cut his Medicare/Medicaid panel in half or stop seeing patients completely, or even break up the practice, he says.

While the old rules favored hospitals buying physician groups, they did little for patients and insurers except drive up costs. Darlene Etheridge of Lynchburg, Virginia, got a nasty case of sticker shock when Centra Health bought her oncologist’s practice two years ago. After beating cancer in 2007, she returned to Lynchburg Hematology & Oncology twice a year for follow-up blood tests. On a visit in May 2014, her bill for venipuncture and clinical lab testing was $78.20.  Six months later, the bill for the same blood draw and tests in the same office was $525.51. 

“I thought they made a mistake on the bill,” Etheridge says. Infuriated, she asked why the amount rose so high so fast and was told that when the hospital bought the practice, it could charge much more for the same service. She wrote to the hospital billing office and got no answer, although she learned later that her bill was referred to the hospital’s collections department.

Stories about such surprise medical bills are not uncommon and were no doubt among the issues Congress considered when it eliminated the site-of-service differential payment policy. With site-neutral payments, Congress was saying in effect that hospitals would be paid no more than what doctors are paid for the same services in doctors’ offices, says David Snow, JD, an attorney with Hall, Render, Killian, Heath & Lyman, PC, in Milwaukee. 

The law says hospitals must bill what physicians bill for outpatient services (except emergency care) when delivering services in off-campus settings, meaning any office or facility 250 yards from the main campus. Last year, the Obama administration estimated that the policy change would save Medicare $30 billion over 10 years.

Alexander’s group was among those that benefited from the old rules. In 2009, Alexander’s practice saw its Medicare payments decline sharply after the Centers for Medicare & Medicaid Services (CMS) decided outpatient cardiology services were overpaid because practice costs decreased.

“I don’t know how that could be, but based on that data, Medicare reduced payment for cardiology services dramatically under the physician fee schedule,” he adds. 

After Medicare payments dropped, many cardiologists struggled to cover expenses, he says. “And, the reductions made it difficult to stay in the cottage industry of private practice. Hence cardiologists began pursuing the idea that they might integrate their practices into hospitals and health systems.”  

At the same time, hospitals and health systems decided to acquire cardiology services based on what they could bill under HOPPS and Medicare’s Physician Fee Schedule. 

“Therefore, in cardiology, there was an arrow pointing toward integration from the physician side and an arrow pointing toward integration from the hospital side,” Alexander says. “Hence there was a big drive for cardiology practices to integrate into vertical health systems.”

Administrators argue that hospital payments should reflect the higher operating costs required to keep hospitals running 24/7 and to serve all patients insured or not. 

“You can’t expect hospital level care if you’re only paying physician office amounts,” says Erik Rasmussen, vice president of legislative affairs for the American Hospital Association. Hospital patients tend be sicker, poorer, and harder to serve than those physicians see, he says. “Hospitals have to take all comers regardless of ability to pay, including those on Medicaid and the uninsured.” Site-neutral payments will mean those marginalized members of society will have less access to care, he adds.

Puzzling public policy

Some health policy experts and physician groups disagree. Internist Steve Schroeder, MD, a professor of health and healthcare at the University of California–San Francisco, applauds the adoption of site-neutral payments. In 2013, Schroeder chaired a committee for the Society of General Internal Medicine that wrote the “Report of the National Commission on Physician Payment Reform.”  The report included 12 payment-reform recommendations, including one to eliminate the site-of-service payment differential.

Schroeder notes that hospitals and physicians both have seen revenues decline, particularly primary care providers, and specialists in cardiology and gastroenterology who use new and expensive technologies. After seeing reimbursements drop, hospitals and physicians did what they could to increase income by using Medicare’s payment rule to their advantage. 

“It’s not that physicians are going broke, but when they see-and when hospitals see-an avenue to increase revenue that’s cut off, they may view it as bad news,” says Schroeder who practiced internal medicine in academic settings for 45 years.

Wanda D. Filer, MD, MBA, president of the American Academy of Family Physicians (AAFP), says the argument behind paying more based on the site of service is unsupportable. AAFP is a member of the Alliance for Site Neutral Payment Reform, along with the American College of Physicians, the U.S. Oncology Network, and America’s Health Insurance Plans and the Blue Cross and Blue Shield Association, among others. 

“Expecting to be paid more after an acquisition for a service that was at a lower price point yesterday doesn’t makes sense from a public policy perspective,” says Filer, a family physician in York, Pennsylvania.  

Filer disagrees with Rasmussen on the patient-access issue. Primary care physicians in independent practice often treat low-income patients, and they can’t raise money from donors the way hospitals can.

Costly change for hospitals

The new rule is bad news for hospitals planning to acquire physician practices. Hospitals building new facilities to accommodate acquired physician practices and planning to bill under the old rates likely will suffer the most, say Snow and Rasmussen. The American Hospital Association is working with Congressional leaders, including Sen. Rob Portman (R-Ohio), to revise the rules.

“Senator Portman believes these hospitals should not be penalized because Congress changed the rules in the middle of the game, and we will examine both legislative and regulatory options to preserve these locations for patients to maintain access to quality care,” says Kevin Smith, Portman’s spokesman.

Any hospital that billed Medicare under the HOPPS before November 2 can continue to charge the higher rates, says attorney Snow. Starting January 1, 2017, outpatient care in off-campus locations will likely be paid under the Medicare Physician Fee Schedule or the ambulatory surgery center payment system, both of which are generally lower than payment under HOPPS. 

Between now and next January, CMS is requiring physicians and hospitals to indicate the place of service in billing codes. “Presumably,” CMS will use that information to make a determination for what to pay in future years,” Snow says.