“Site-Neutral” Medicare Payments: A Good Idea from President Obama’s Budget
Imagine that there are two providers of the same service. Their quality and timeliness are comparable. However, one provider charges significantly more than the other. In a normally functioning market, you would expect that the more expensive provider would have to significantly change its cost structure to stay in business.
What if the more expensive provider argued that it had higher overhead, and therefore needed and deserved to be paid more? He would be laughed out of the marketplace. Yet, this is exactly what happens in Medicare. Because of different fee schedules, doctors in independent practice are paid less for the same procedure than hospital-based outpatient facilities. Unsurprisingly, this has resulted in hospitals buying up physician practices, in order to profit from this arbitrage:
For example, Medicare pays more than twice as much for a level II echocardiogram in an outpatient facility ($453) as it does in a freestanding physician office ($189). This payment difference creates a financial incentive for hospitals to purchase freestanding physicians’ offices and convert them to HOPDs without changing their location or patient mix. For example, from 2010 to 2012, echocardiograms provided in HOPDs increased 33 percent, while those in physician offices declined 10 percent. (Medicare Payment Advisory Commission, March 2014, p. 53)
The Medicare Payment Advisory Commission (MedPAC) has argued that the fees should be “site neutral” for many procedures. President Obama’s budget proposes to phase this in starting in 2017, and estimates savings of $29.5 billion over ten years (p. 65).
Hospitals argue that they have higher overhead due to a higher regulatory burden and the need to maintain emergency departments. I am not sure I buy either of those arguments. While both hospitals and physicians are highly regulated, hospitals have large bureaucracies to manage regulatory compliance. Further, there is a strong case that emergency departments are often profit centers.
Congress should be eager to accept this proposal from President Obama. Republicans especially, mischaracterized as the “party of no,” would change their image on health care dramatically if they supported a bill imposing site-neutral payments for Medicare.
(For more on site-neutral payments, see also an excellent blog post by Margot Sanger-Katz.)
Ohhh the hospital lobby is not going to like this.
This one should be a no brainer.
Hospitals’ argument that their costs are higher is really an issue of how indirect costs are allocated across its departments and facilities. If a physician practice or facility is suddenly sold to a hospital, its costs to run its practice don’t suddenly increase in terms of direct costs. They only increase to the extent that the hospital chooses to allocate some of its overhead to the newly owned practice.
By the same token, if a patient shows up at the emergency room and is sent down the hall to the radiology department to get an MRI, the revenue is probably credited to the radiology department and not the ED. For many hospitals, upward of 50% of inpatient admissions come through the ED. The hospital probably wouldn’t be able to sustain its business model without the ED yet it claims the ED is a money loser!
High hospital costs relate primarily to running an inpatient facility that needs to be staffed around the clock. That includes the need for housekeeping and foodservice people to support the inpatients. Outpatient departments generally don’t operate around the clock and don’t need the support services to anywhere near the same extent. Hospital economics are also heavily influenced by both their average occupancy rate as hospitals area high fixed cost business and their payer mix. A poor payer mix including significant uncompensated care doesn’t raise costs; it shrinks revenue. There is a difference.
CMS really needs to get away from reimbursing providers, especially hospitals, for costs and moving toward paying for value instead. If non-hospital owned facilities can safely provide imaging or echos or whatever for a lower cost, hospitals should not be paid more just because their costs are higher even if they really are higher. Maybe they should be paid more for those services that can only be done safely in a hospital setting.
Thank you. I specialize in “no brainers”. And so should Congress!
Why Congress would pay more for a service in one hospital, compared to another hospital or a clinic is beyond me. The same is also true of private insurance. Why does Blue Cross, for example, pay more for an MRI in one place than another? It really doesn’t make any sense. If I were King of the Health Insurance World I’d establish a price and tell enrollees where to go to get that price. Cost-sharing would be based on how much you spent compared to the reference price. Go to Hospital A, cost-sharing is $0. Hospital B, cost-sharing is $50. Go to Fancy Hospital C, you owe $250.
We are inching our way toward reference pricing as Devon describes it. In MN right now, an insurance plan that includes the Mayo Clinic costs at least 15% more than other more narrow plans.
Reference pricing would spread a lot faster if we had firmer cost disclosure laws. Hospitals should be forced to actually give out binding estimates for outpatient procedures. I think that a few insurers are starting to require this.
If hospitals are prevented from price gouging on discretionary care, they will try and load even more costs onto trauma and emergency care. I think the only way to stop that is some form of price ceiling — i.e., neither the insurer nor the patient has to pay a bill that is above
150% of Medicare rates or some similar metric. Or there could be binding arbitration, with the patient being provided an arbitrator at government expense.
That will be one tough law to pass. If it does pass, many hospitals will have to cut costs and let people go. Not pretty, but this sector has enjoyed above average wages and profits for about 30 years.
Bob,
As I think you know, I’m a big fan of both reference pricing and binding estimates of out-of-pocket costs for procedures that can be scheduled in advance. I would also like to see as much care as possible that can be safely delivered outside of a hospital setting driven away from hospitals. To do that, we need to eliminate certificate of need (CON) laws where they exist. If ambulatory surgical centers, independent imaging centers and the like can deliver good care for 30%-50% less than a hospital can because their costs are lower, they should get as much of that business as possible. I don’t think the build it and they will come mentality behind most of the CON laws is a valid thesis especially when it comes to invasive procedures like surgeries.
If 30%-50% of hospital beds eventually disappear as a result, I wouldn’t mind paying the remaining hospitals 15%-20% more than they are paid now for care that only they can do including trauma care. There do need to be limitations, though, on how much the uninsured can be charged relative to what private insurers and Medicare pay for care that must be delivered under emergency conditions.
Finally, to the extent that hospital A offers amenities that make it the equivalent of a five star hotel while hospital B offers care that’s just as good but is only the equivalent of a three star hotel, patients and families who want the superior amenities should pay the incremental cost out-of-pocket.
Hospitals do have higher costs for the outpatient services they provide because they choose to. They hire more staff and purchase more toys than a non-hospital provider would to provide the same quality of service. They often become the only provider of particular types of services because they aggressively pursue market share for lucrative services and drive others out of business – all the while supported by taxpayer subsidies.
Thank you. One thing we don”t mention enough is that non-profit hospitals also benefit from a low cost of capital versus their competitors, but being able to issue mnon-taxable bonds.