Proposed site-neutral payment policy sets the stage for battle royale between CMS, hospitals

As the CMS charts a path to level pay for outpatient services, it’s also leading toward a head-to-head battle with powerful hospital lobbying groups as some providers win and lose with site-neutral payments.

If the agency’s 2019 proposal to pay the same rate for services delivered at off-campus hospital outpatient departments and independent doctors’ offices is finalized, the CMS said it would save Medicare $610 million and patients about $150 million via lower co-payments. That represents about 1% of the around $75 billion hospitals receive a year from the CMS for outpatient services.

But hospitals argue that their higher reimbursement rates are needed to pay for expensive overhead costs. Without that payment flow, they contend, many hospitals would likely close as their margins thin. Providers also changed their business strategies with the current rate system in mind.

This is a continuation of the CMS’ aim to reduce payment disparities for virtually identical procedures, said Fred Bentley, a vice president at Avalere Health.

Hospital executives have seen this coming, but that doesn’t mean they won’t put up a big fight, he said.

“There has been a recognition that this disparity was not justified and that it was a matter of time until this gap would be addressed,” Bentley said. “The CMS is starting to come to terms with the task at hand in terms of keeping Medicare solvent. Admittedly, they are going against a powerful lobby.”

The CMS estimates that it was paying $75 to $85 more for the same services in hospital outpatient settings versus physician offices. Patients footed about 20% of that.

“This has a very real human impact, and it is part of the story,” said Dr. Farzad Mostashari, CEO and founder of Aledade, which helps establish physician-led ACOs. “The phenomenon of surprise billing doesn’t conform with reasonable consumer expectations.”

The CMS outlined some winners and losers among health systems if the rule is finalized. Cleveland Clinic would take the biggest hit, losing $22 million of reimbursement for outpatient services from 2018 to 2019. Mayo Clinic would receive $11.3 million less, Eisenhower Medical Center would take an $8 million hit and the University of Michigan Health System, the University of Wisconsin Hospitals & Clinics Authority and the University of Virginia Medical Center would each receive about $7 million less.

On the other hand, Cedars-Sinai Medical Center stands to receive $7.7 million more from the CMS under the proposed rule. Hartford Hospital would get a $7.6 million bump, Ronald Reagan UCLA Medical Center would receive $6.6 million more, and St. Francis Hospital and Medical Center and Lehigh Valley Hospital would each receive about an additional $4.5 million.

Large physician groups also stand to benefit if they are reimbursed at the same level as hospital-employed physicians, Bentley said.

The agency also proposes freezing higher payments for “grandfathered” outpatient sites. In 2016, the CMS passed a site-neutral rule that paid hospital off-campus facilities less than hospital-based outpatient departments if they started billing Medicare after Nov. 2, 2015.

Health systems responded by hiring physicians and placing them in the grandfathered facilities to capture higher reimbursement. Now, the CMS aims to limit how off-campus facilities that were billing Medicare before November 2015 can expand their clinical services.

“There are issues about whether Medicare inpatient payment rates are just getting to be too low with the years of subtractions,” said Paul Ginsburg, director of the Center for Health Policy at the Brookings Institution and director of public policy at the USC Schaeffer Center for Health Policy and Economics. “I am not saying hospitals are OK, but I think they would be much better off to pay hospitals appropriate amounts and avoid this real impediment to a competitive physician market.”

The CMS pays more for the same type of service delivered in a hospital outpatient department setting versus a physician’s office. The agency has been looking to change this dynamic for years, in part because clinic visits are the most common service billed under the outpatient pay rule.

The different payment rates were initially set to account for hospital’s higher overhead costs, since they must maintain emergency services and invest in unique, expensive equipment.

Yet, over time, that premise became distorted, critics of the payment disparities argued. Health systems bought more physicians and physician groups to take advantage of the higher reimbursement rates, which were still doled out even if the hospital-owned clinic didn’t look or operate any differently than a community-based doctor’s office.

“When hospitals started hiring all kinds of physicians who typically practiced in the community, and often did not move their office, it’s clear that that rationale did not apply,” Ginsburg said.

Outpatient care has come a long way since the site-of-service rules were implemented, said Martin Gaynor, professor of economics and health policy at Carnegie Mellon University.

“Even with hospitals’ overhead costs, if they can’t do the same care as cheaply as a physician office, why should patients and the American taxpayers pay more than they need to?” Gaynor asked.

Additional facility fees are paid for a wide range of physician services that do not draw on specialized hospital overhead and are commonly provided outside of hospitals, Ginsburg, Gaynor and Mostashari pointed out in a 2017 white paper. As hospitals bought more physicians, they could also negotiate higher rates with payers.

Higher payment rates give hospitals an extra cushion to pay physicians more, which accelerates the decline of the independent practice and reduces competition, according to the paper.

Medicare’s payments shot up while beneficiaries received surprise bills for separate hospital fees.

Also, hospital-owned practices have incentives to refer patients within their network, even if it isn’t the most effective option, ultimately harming competition, Ginsburg said.

“It also undermines some of the efforts to get physician-led alternative payment arrangements such as accountable care organizations or bundled payments if there are so few independent physicians left in the market,” he said.

Also, if a hospital-owned outpatient department has inflated costs, that could hurt them on value-based arrangements like ACOs, bundled payments, reference pricing and narrow-network plans, Mostashari said.

“I am sure the hospitals will not see this as a great gift, but I would argue that as they are truly thinking of embracing the future, this will be a short-term hit that will yield long-term benefits,” he said.

The CMS also wants to expand last year’s cuts to 340B drug discounts given to outpatient facilities that care for a disproportionate share of low-income patients. If that proposal is finalized, the CMS estimates that Medicare and its beneficiaries would save approximately $48.5 million.

With the changes to outpatient payment rules and 340B, it could make physician practices a less attractive acquisition target. But there are still incentives to those deals, said Matt Fiedler, a fellow at the USC-Brookings Schaeffer Initiative on Health Policy.

“This is a useful step in the right direction,” he said. “But I think this proposal is only getting at a portion of the broader site-of-service payment differential problems. There are many other on-campus outpatient departments that are very similar to physician offices.”

The proposed rule didn’t address payment discrepancies related to on-campus outpatient facilities, ambulatory surgery centers, or non-clinic visits at pre-existing off-campus facilities.

The CMS indicated in its comments section that it could be interested in expanding the site-neutral policy.

“There are reasons to believe that hospital ownership of a physician practice is a less efficient way of organizing care than through independent practices,” Fiedler said. “I don’t think we should view an aggressive site-neutral payment plan as a silver bullet to consolidation, but it’s not going to hurt.”

Many rural hospitals and academic medical centers have survived through higher payment rates, experts argue.

Outside of facility fees, rural providers have reaped significant revenue through laboratory services, a practice that has drawn lawsuits and congressional inquiry.

Rural hospitals can bill Medicare for lab tests performed on patients from other facilities and by outside labs. This has helped them stay afloat because insurers pay rural hospitals much more for the tests than they would for large labs like Quest Diagnostics or LabCorp.

“It does raise the question—if there are more direct or rational ways to subsidize rural facilities or others getting hammered by this rule as opposed to using the disparity in payment models as an indirect way to subsidize health systems,” Bentley asked.

America’s Essential Hospitals, which represents safety-net providers, said the “draconian” cuts would limit healthcare access for millions of Americans.

“The CMS frames its proposals as empowering patients and providing more affordable choices and options,” Dr. Bruce Siegel, president and CEO of the trade group, said in a statement. “But we believe these proposals only would create roadblocks to care in communities across the country—communities that already struggle with care shortages and severe economic and social challenges.”

The additional cuts to 340B payments coupled with the site-neutral payment proposal would drain already stretched providers, Siegel said.

Premier, the group purchasing and consulting organization, shared America’s Essential Hospitals’ concern, arguing that provider-based outpatient services support an overall reduction in healthcare spending and improve care coordination and quality.

“The CMS’ proposal fails to recognize the substantial differences between physician practices and provider-based outpatient clinics that translate into higher overhead expenses for provider-based outpatient clinics,” Blair Childs, senior vice president of public affairs for Premier, said in a statement.

Hospitals adapted their operations based on the expectation they would receive higher reimbursement rates, and abruptly changing that dynamic isn’t fair, said Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum.

The CMS indicated that its legal argument lies in Section 4523 of the Balanced Budget Act of 1997, requiring a limit on unnecessary increases in the volume of covered outpatient services.

Considering the significant increase in outpatient versus inpatient costs, it may have a case, Mostashari said.

The Trump administration also proposed another change that didn’t sit well with providers—that they must share patient information when they are discharged as a condition to participate in Medicare.

Mostashari gave credit to the current administration for taking site-neutral payment, and other controversial measures, head on.

“The conventional wisdom is that the hospital lobby is too powerful, but this administration may turn that on its head,” he said.

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