Pull on Physicians: Feds call on health care payment reform

When it comes to health care’s vertical consolidation, less means more.

As the number of hospital and physician practice consolidations increase, so have expenditures for Medicare patients. The term vertical consolidation refers to the financial arrangement between an acquiring hospital and a physician practice’s staff who become salaried hospital employees. These mergers are on the rise.

Between 2007 and 2013, the number of vertically consolidated hospitals increased to about 1,700 from roughly 1,400, while the number of vertically consolidated physicians nearly doubled to about 182,000, according to a December report from the U.S. Government Accountability Office.

As the health care network shrinks, taxpayers, business owners and hospitals stand to lose money in the process.

Defining the problem
How do consolidations affect Medicare costs? After hospitals and physicians join forces, services performed in physician offices, such as office visits for evaluation or management of care, can be classified as performed in hospital outpatient departments. Medicare typically pays providers at a higher rate when the same service is performed in outpatient care departments instead of a physician’s office. For example, in 2013, the total Medicare payment rate for a mid-level evaluation-and-management office visit was $51 higher for an established patient when at a hospital instead of a physician’s office.

That means taxpayers generally are paying more for the same services, and local insurance agent John Akers said it puts pressure on premiums.

“No question, consolidation across the industry, whether it’s Medicare or commercial insurance for businesses, does have an impact,” said Akers, a partner with Ollis/Akers/Arney who leads the insurance firm’s benefits department. “With Medicare, the way the matrix is put together, there is a higher reimbursement for physicians working within a health care system as opposed to independent. And on the commercial side, that impacts rates because bigger clusters of medical professionals or health systems have more clout when they’re at the negotiating table.

“When they are negotiating with Blue Cross or United or any other health carrier, they typically are able to get a higher reimbursement. Ultimately, what that means is higher premiums on insurance policies.”

According to the report, Medicare expenditures for hospital outpatient services rose to $36.3 billion in 2013 from $22.4 billion in 2007, or about 8.3 percent annually. In comparison, gross domestic product in the U.S. grew by an average annual rate of 2.4 percent, and total Medicare Part B spending increased by an average annual rate of 5.8 percent during the same period.

The potential fix
The GAO recommends Washington, D.C., lawmakers direct the secretary of the Department of Health and Human Services to equalize payment rates for evaluation-and-management office visits for physician offices and outpatient departments.

Akers said rates generally have not climbed as high for Medicare patients as they have for commercial clients, but conversations with clients about the reasons for rising costs are common.  

“It’s very challenging as a business owner and as a person out there talking to business owners about their health insurance,” he said. “The cost of health insurance is going up at a much faster clip than inflation, so employers are struggling to provide the same level of benefits, or close, as they have in the past.”

While lowering a hospital’s Medicare reimbursement rates on outpatient care would balance the scale, it also would impact a hospital’s bottom line.

“They generally pay their nurses more than doctors typically do. Their facilities tend to cost more than doctor’s private offices typically do,” said Richard Royer, CEO of Columbia-based health care consultancy Primaris. “So, they would definitely have a pressure point with this and have to make some pretty significant adjustments, I’d imagine.”

Royer, whose firm has worked for both CoxHealth and Mercy Springfield Communities in the past, said he wasn’t surprised by the GAO’s findings.

“The hospital-doctor combo is always going to be higher,” he said. “So, it’s true, with more and more doctors being employed by hospitals … the prices will be higher because hospitals have a different overhead structure.”

Royer said Congress is aware of the issue, and he believes Medicare reimbursements will be adjusted down for hospitals in the coming years.

James Cosgrove, director for the GAO’s health care group, said as part of the bipartisan Budget Act of 2015, new physicians brought on to hospital systems would be paid the same by the Centers for Medicare and Medicaid Services, but existing doctors with practices affiliated with a hospital were grandfathered in.

Will there be a fix to come? Cosgrove said he didn’t know, but it’s hard to justify increased costs for the same services.

“There’s really no reason Medicare should be paying more in one setting than another,” he said, adding beneficiaries also often have to pay more for the same services after consolidations.

“They are cognizant of the fact that they are paying more today than yesterday and nothing has really changed in terms of patient care. They tend to notice those things over time and take corrective action,” he said.  

The local impact
Mercy Clinic, which has about 560 physicians across 70 locations throughout the Mercy Springfield Communities footprint, has brought on physicians practices over time as part of its aim to provide integrated patient care.

“Mercy has made a commitment to make integrated medicine the model for being able to provide the highest-quality, most cost-effective care,” said Chief Operating Officer Stuart Stangeland. “We simply believe by having physicians engaged directly with the organization, that’s the way we can provide the best care.”

In Springfield, the Mercy system has been an accountable care organization for about two years. Should reimbursement rates lower for physician practices, Stangeland said he doesn’t believe it would impact Mercy’s ability to provide patient care.

“Our first-year results with our ACO put us in the highest 5 percent of quality and lowest 10 percent of costs,” he said. “So our costs per beneficiary in our Springfield ACO is about 15 percent less than the average Medicare fee-per-service patient across the country.”

However, Medicare costs at Mercy generally are lower than average.

“We were one of the original 10 clinics in the country that participated in what was then called, with CMS, the Physician Group Demonstration Project,” Stangeland said. “And it was really the learning lab, if you will, or precursor to what are now accountable care organizations.”

Royer believes each system would have to examine cost structures of its outpatient clinics and determine if it could meet a lower threshold.

“There’s no doubt the action Medicare would take would be to lower the hospital price because they’re not going to raise the physician price,” he said. “I’m 99 percent sure on that one.”

Akers stopped short of recommending equal pay for physicians whether they are affiliated with a hospital or not, but said the issue definitely deserves further scrutiny.

“At a minimum, I think a study is warranted to determine why you would pay more to a hospital than an independent and if that reimbursement differential, whatever it is, is justified,” he said.