Hospitals’ Opposition to Site Neutral Payments Prove They Are More Interested in Profiting from Owning Doctors than in Lowering Health Care Costs

Introduction: All Doctors Are Equal But Hospital-Employed Doctors Are More Equal

Employed physicians now exceed those who own their practices.¹ Most are primary care physicians who are owned by hospitals. A major reason for this is that when hospitals own physician practices Medicare pays them almost double what it pays physicians who practice independently. This needs to change! The explanation for this anomaly is that in the 1990s hospitals and managed care advocates convinced Medicare and the public that costs would decrease when doctors were employees of hospitals. The cost savings would take place through vertical integration, coordination, and economies of scale. Vertical integration is a code word for hospitals ownership of doctors.

How Physician Payment Inequalities Were Developed

I also recall the promoters of managed care at that time saying that hospitals should structure themselves like General Electric which was one of the most successful and profitable corporations in America. I wondered why a corporation whose main goal is to generate profits for investors should serve as a model for hospitals which are primarily service institutions. Businesses often fail. Hospitals in general can’t fail. They are a vital necessity for society. A recent book published in 2019 describes what one critic called the “devastating disintegration” of General Electric since it peaked in the 1990s. It is a much smaller company and worth far less today than it was then.² “Devastating disintegration” aptly describes our current profit driven health care system especially as it applies to Medicare.

Virtually no one today believes that vertical integration or the hospital employment of physicians lowers health care costs. Not even the hospitals. Over the past 30 years health care costs have gone up not down especially in the hospital sector which at over 30% constitutes the largest single cost center in the entire health care economy.³ Analysts know that the real reason that hospitals own physician practices is that it increases hospital profits. They write:

“Hospitals become more profitable when they employ doctors not only because they get paid more but because buying doctors expands the hospital market share which allows hospitals to negotiate higher reimbursements from all payers including Medicare which contributes to the upward cost spiral…As hospitals successfully negotiate with payors for higher reimbursement, payors cut payments to independent doctors making it harder for the doctors to resist offers of employment.”⁴ This analysis explains why it is so difficult for independent doctors to survive in practice.

Hospitals convinced Medicare to pay hospital-owned physicians in outpatient settings at nearly twice the rate that they pay independent physicians. I know of two internists who practiced internal medicine in the same office. Both were trained at the same institution. Both were board certified. One was owned by a hospital and one practiced independently. Medicare paid the hospital-owned physician nearly double the rate of the independent physician for both an office visit and complete physical exam. There is no valid reason for this. It’s a classic example of corporate welfare.

Medicare is in crisis. The Medicare Trust Fund is expected to go bankrupt in 2024.⁵ For years the Medicare Patient Advisory Commission (MedPAC) that advises Medicare on payment issues has not swallowed the hospital line and has advised Medicare to pay physicians in off-hospital campus locations at the same rate that it pays independent non-hospital owned physicians. About two years ago the department of Health and Human Services (HHS) implemented this rule.

Hospitals Go Ballistic to be Paid at Same Level as Independent Physicians

The hospitals panicked. Medicare payments constitute about 40% of their revenue.⁶ Not only would they lose the extra government reimbursement for their offsite physicians but the lower Medicare reimbursement could cause many doctors to leave hospital employment. Even worse hospitals could lose market share and the lucrative referrals that primary care doctors make to hospital specialists and to hospital laboratory and radiology facilities.

Before Medicare could implement the new rules the American Hospital Association, the Association of American Medical Colleges and three health care organizations sued the Department of Health and Human Services (HHS). A Federal District Court ruled in favor of the hospitals. More recently a Federal Appeals Court unanimously reversed the lower court’s decision. The new Medicare rules stand. Medicare will no longer pay hospital employed physicians in outpatient settings more than it pays independent physicians.⁷ Some authorities think that it is unlikely that the U.S. Supreme Court will allow this issue to come before it, but the hospitals are gearing up to present their case to the Supreme Court.⁸

This is a major victory for physicians, patients, and American taxpayers who finance Medicare. Physician groups including the two largest specialty societies—the American College of Physicians (ACP) and the American Academy of Family Practice (AAFP)—have long supported site neutral payments.⁹ Health insurance companies, some business groups and others also support the new Medicare rule. It is also a victory for patients. As a result of the court decision they will have lower copayments and greater freedom of choice of physician.

Equal Payment Will Reduce Healthcare Costs and Insure Payment Equality

Under the new rule Medicare would pay all hospital-owned physician offices located off campus at the same rate as independent physicians. Under the new payment schedule the physician office rate for all physicians will be $39.76; beneficiary cost sharing will be $9.94 for a total of $49.70. Under previous HHS rules Hospital Outpatient Departments (HOPD) including facility fees were paid $98.70 for an office visit; beneficiary cost sharing was $24.68 for a total of $123.38.¹⁰

Initial savings for Medicare will be about $800 million per year. However, this is just the beginning. Medicare has much bigger plans for cutting costs in the future. Procedures that are now performed in hospitals will eventually be performed in outpatient settings. “Patients and Medicare pay more when the same services are delivered in hospital outpatient departments instead of independent physician practices for a wide variety of services—chemotherapy: $281 vs. $136; cardiac imaging: $2,078 vs. $655; and colonoscopy $1,383 vs. $625.”¹¹

The administration estimates that savings would be approximately $47.2 billion over ten years. The budget also proposes to eliminate payment disparities in outpatient care by applying site neutral payments for certain services performed at on-campus hospital outpatient departments which would increase savings to approximately $117.2 billion.¹²

Conclusion

Medicare has finally challenged the managed care-hospital canard that vertical integration reduces costs. It has finally said enough is enough. Only Medicare has the purchasing power to confront the hospitals and tell them we’re not going to subsidize your out-of-control costs anymore. We’re not going to pay equally well-trained doctors who perform equal work differently based on whether they are hospital-owned or not hospital-owned.

A question arises whether Medicare site neutral payments will eventually apply to on campus primary care physicians. Their work is essentially no different from primary care physicians who work in outpatient settings unless they take care of hospitalized patients (who more and more are being cared for by hospitalists.) If this should happen then there may be a significant exit of physicians from hospital employment.

That might not be such a bad thing. Physicians’ take-home pay would decrease but they would not have hospitals treat them like factory workers demanding that they see patients on an assembly line basis; they could spend more time with patients; they would not have to take their electronic health records home at night for more hours of charting; they would have more freedom; they would have less burnout. Best of all they might even enjoy practicing medicine again.