Hospital-Employed Physicians Cost Medicare More, Study Says

November 16, 2017

UPDATED December 14, 2017 // The headline and text of this article have been updated to clarify that it is the physician's employer, often the hospital, that bills Medicare and predominantly benefits from the additional revenue, not the physician.

Compared with their independent peers, hospital-employed physicians cost the Medicare program more for four procedures from 2012 to 2015, according to a new report released last week by the Physicians Advocacy Institute (PAI).

The study found that Medicare paid $2.7 billion more for echocardiograms, colonoscopies, arthrocentesis, and diagnostic cardiac catheterizations performed in hospital outpatient departments (HOPDs) than it would have if those services had been performed in the offices of independent physicians. In the process, Medicare patients owed $411 million more, according to the study, which was conducted on behalf of the PAI by the consulting firm Avalere Health.

"Hospital consolidation pushes healthcare costs upward," said PAI President Robert Seligson in a news release. "The impact of hospitals owning outpatient practices places a greater financial burden on Medicare beneficiaries and taxpayers."

The study ― and it's not the first to make these points ― would seem to justify Medicare's recent efforts to level the reimbursement playing field for hospital-employed and independent physicians to avoid running up unnecessary costs.

The key to the Avalere analysis is Medicare's traditional policy of paying more for a service when it's performed in an HOPD than in a physician's office. The independent physician bills Medicare under the program's physician fee schedule (PFS) at a "nonfacility rate," meaning the site is not part of a hospital.

The employed physician who performs the same service in an HOPD bills at a considerably lower "facility rate" under Medicare's outpatient prospective payment system (OPPS). But he or she also can charge Medicare an additional facility fee, which doesn't apply to an independent physician's office. When all the numbers are crunched, the hospital-employed physician comes out ahead ― or rather, his or her employer, the actual party that bills for the service and receives the payment. How the hospital compensates the physician is another matter.

The study supplies this example. Medicare's rate for a colonoscopy ― procedure code 45380 ― in an independent physician's office in 2017 costs $413 under the PFS. Medicare pays $1090, or 164% more, when it's performed in an HOPD. Of that amount, roughly $880 represents the facility fee, according to Medicare.

What's helped motivate hospitals to hire physicians, the study said, is that their office can be classified as an HOPD, even though it may have been the one they worked out of when they were independent. Once the office qualifies as an HOPD, the Medicare rate automatically jumps up, or at least it used to. Of course, employed physicians also may perform services in an HOPD facility apart from their office.

The number of physicians employed by hospitals increased by more than 49% between 2012 and 2015. Avalere reported that when it came to the four procedures in question, employed physicians performed a higher percentage of them in an HOPD than independent physicians. For example, hospital-employed physicians performed 70% of echocardiograms in HOPDs from 2012 to 2015, compared with 24% for independent physicians.

Avalere compared what Medicare spent on the four procedures ― along with before-and-after ancillary services ― provided by hospital-employed physicians to what the program would have spent had those physicians had the same site-of-care practice patterns as their independent counterparts and billed accordingly. That math yielded the extra $2.7 billion over 3 years that the employed physicians cost the program. Of that amount, almost $2.1 billion was for echocardiograms, or 27% more per episode than if independent physicians had billed at the nonfacility rate.

Whittling Down the Difference

Aware of the enormous costs involved, Congress began to whittle down the Medicare pay differential, on the basis of location, in the Bipartisan Budget Act of 2015. Under that law, off-campus HOPDs - defined as those more than 250 yards away from a hospital or satellite facility - are no longer able to receive Medicare's HOPD rates for nonemergency service, effective January 1, 2017. However, off-campus HOPDs that were billing Medicare at HOPD rates as of November 2, 2015, can continue to do so, thanks to a grandfather clause. The effect is to give hospitals less of an incentive to acquire physician practices going forward.

In 2017, those newer off-campus HOPDs are generally entitled to only 50% of the Medicare payment that an on-campus HOPD can receive. In 2018, the Centers for Medicare & Medicaid Services will be reducing that percentage to 40%, saying that it brings the payment more in line with the fee schedule for independent physicians treating patients in their office.

Matthew Katz, a PAI board member and CEO of the Connecticut State Medical Society, told Medscape Medical News that the PAI will continue to study Medicare payments post 2015 to hospital-employed and independent physicians to determine the effects, if any, of the new reimbursement policies on hiring trends.

"We're not opposed to physicians being employed by hospitals as long as it's their choice," Katz noted. However, they're pressured to abandon independent practice by the weight of regulatory and administrative burdens that the PAI would like to see lightened, he said.

The not-for-profit PAI was created in 2006 with money from a settlement that organized medicine reached with a group of for-profit health insurers that it sued over unfair business practices. The new study is available on the group's website.

Follow Robert Lowes on Twitter @LowesRobert

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