Disparities in payment across sites encourage consolidation

In their paper, “Hospital‐Physician Integration and Medicare's Site‐Based Outpatient Payments” Post et al ¹ ask whether the gap in payment that arises when a service is billed by a hospital outpatient department versus when it is billed as a physician office‐based service encourages hospitals to buy physician practices. This gap in payment arises because, in Medicare, payment is tied to fee schedules and fee schedules are tied to the site of care. Specifically, an outpatient service provided by a hospital‐based facility can be billed under the Outpatient Prospective Payment System (OPPS), while services billed by an independent physician office are billed under the Physician Fee Schedule (PFS). In many cases, the services are identical and all that varies is the site of care (in particular, the ownership of the site of care).

When billed by a physician office under the PFS, there is a single payment that includes components for physician work effort and office expenses. When billed through a hospital using the OPPS, there are two payments: a professional component, with a reduced payment for the office expenses, and a facility component that covers the facility services. The payment disparity arises because the facility portion of the payment generally exceeds the reduction in the office expense component of the professional payment. As Post et al point out, the gap in total payment can be quite large. On average, revenue for services billed in physician offices would have been 80% higher had they been billed by a hospital. The magnitude of the gap varies across physician practices based on the set of services each practice provides.

These payment rules create an arbitrage opportunity. Hospital‐based billing increases total payments, and the additional payments can be allocated, explicitly or implicitly, between hospitals and physicians. As a result, there is an incentive for hospitals to buy, and physicians to sell, physician practices.

Post et al find that this arbitrage opportunity has indeed led to greater integration between hospitals and physician practices. Physicians providing services with a larger pay differential (at the 75th percentile) were 0.20 percentage points more likely to be acquired by a hospital than those billing services with a smaller payment gap (at the 25th percentile). The effect is not huge, but it is meaningful and statistically significant.

Concern about the payment differential is not new. In 2015, MedPAC recommended site neutral payments, and in the same year the Bipartisan Budget Act imposed site neutral payment for new acquisitions (existing facilities were grandfathered). ² CMS has attempted to extend site neutral payment, but there are ongoing legal challenges.

Much of the site neutral debate has centered on how much money could be saved whether the higher OPPS payments were reduced to the PFS rate. The Department of Health and Human Services previously estimated savings would be about $11 Billion over 10 years. ³ This study illustrates that the deleterious consequences of site‐based payment disparities extend beyond simply higher payment, as they create broader market distortions. The impact of these distortions is concentrated in the commercial market where integration between hospitals and physicians has been shown to lead to higher prices. ⁴ , ⁵

The paper by Post et al highlights challenges with government administrated prices. While the disparity in payment across sites has been identified as a problem for years, solutions have been slow to develop and have been incomplete. Moreover, this is but one example of inefficiencies in government‐administered pricing. For example, similar site neutral issues arise with payment for long‐term care hospitals. ⁶ But payment problems are broader than just site neutral concerns. Payments for hospice do not adequately recognize the differences in costs over the course of the episode. Other concerns have been raised about the accuracy of fees for physician services ⁷ and in the ability of fee schedules to adjust as the costs to deliver services fall. ⁸ Government payments for laboratory tests, durable medical equipment, and graduate medical education have all been criticized as inefficient. The current Merit Based Incentive Payments System in Medicare adds considerable administrative burden with little evidence that it meaningfully improves quality. ⁹

Many of the payment problems reflect the FFS system, with the need for hundreds (if not thousands) of prices. Yet, other payment models are not immune to these problems and in fact many are built on a FFS chassis. However, the broader incentives in episode or population‐based payment can ameliorate the problems because high spending associated with billing under the OPPS will reduce shared saving (or possibly generate shared losses).

Critiques of government‐administered fees must be weighed against problems with market‐based fee setting. While markets may be more nimble and less subject to political distortion than government administrated prices, failures of competition result in prices that well exceed those in government programs. When comparing national averages, commercial payments for inpatient and outpatient services were more than double those paid by Medicare in 2017. ¹⁰ In the extreme, problems such as out of network surprise bills can be unreasonably excessive. ¹¹ In fact, as the study by Post et al illustrates, imperfections in government‐administered pricing systems can, by impeding competition, exacerbate problems in commercial markets. Essentially, both government‐administered and market‐based prices are flawed.

There are several policy responses that can address the problem of site‐based disparities in payment. First, payments for some hospital‐based services should be lowered. In some cases, they may not match the PFS rate because patients receiving care at HOPDs may be more costly to care for than patients getting the same service in an office setting, and care in an HOPD setting may be defined slightly differently, ¹² but there is still room for reductions in some fees.

If there is concern that this will excessively reduce hospital revenue, then the base rate for inpatient services can be increased or the price of any underpriced services could be raised (though neither action would be required). The goal should be to get relative prices as accurate as possible because relative prices drive resource allocation decisions. ¹³ If prices in a sector are too low, causing insufficient access or quality, adjustments should be made in a way to minimize distorting incentives. Because of potential compensating fee adjustments (eg, having to replace some of the revenue hospitals lose), the savings from imposing site neutral payments may be lower than implied by simple elimination of the payment differential.

Second, because site‐based payment differentials are only one factor contributing to consolidations, it is important that antitrust policies be enforced, and other procompetitive policies introduced. ¹⁴ It is unlikely that those policies will be sufficient, and direct price regulation may be needed to counter the consequences of consolidation.

Implementation of any of the policies outlined above will be challenging. Sometimes disagreements about specifics can derail action even when there is reasonable consensus about the problem and the need for action. Part of the problem is that any action (such as eliminating site‐based payment disparities) may be problematic if done alone, but some compensating action (such as raising inpatient base rates) could ameliorate the concern, creating a combined policy that improves upon the status quo. Yet, combining both actions may be a challenge because it is unclear how much base rates should rise. A starting point could be to adopt a budget neutral site neutral payment policy and worry about capturing program savings later. As Post et al point out, there will likely be benefits in the commercial market even if Medicare does not save money.

Given these challenges, this is an issue that is unlikely to be resolved quickly, and even if it is, imperfections in our payment systems, some significant, will remain. Papers such as this help quantify the consequences of those payment features. Over time, that will undoubtedly help spur improvements.

CONFLICTS OF INTEREST

There are no conflicts of interest or disclosures to report.

Chernew ME. Disparities in payment across sites encourage consolidation. Health Serv Res. 2021;56:5–6. 10.1111/1475-6773.13612