By David Hogberg | June 19, 2017
Competition in the healthcare market is healthy for patients. Unfortunately, in recent years hospitals, aided by government regulation, have reduced competition by consolidating and gobbling up physician practices. “Site-neutral payments” have the potential to slow that trend.
Historically, Medicare has reimbursed hospitals for outpatient treatment at a higher payment rate than outpatient treatment performed by physicians at a physician practice. If a hospital purchased a physician practice, it would be paid the higher hospital rate for any outpatient services it provided there, not the lower rate for physicians. There is no additional cost incurred by the hospital that acquired the practice to justify higher reimbursement — they essentially just change the sign on the door.
Recently, the Centers for Medicare and Medicaid Services (CMS) has taken steps to advance site-neutral payments. Under site-neutral payments, outpatient services that are performed at a facility that is not in close proximity to a hospital would be paid the same rate regardless of who owns the facility. In short, hospitals would no longer receive a higher payment for outpatient services at any physician practices or other off-site facilities they own. Site-neutral payments are an important step in stopping the decline of competition in our healthcare system.
Despite progress, hospital outpatient departments are still receiving higher reimbursements. CMS only instituted site neutral payments for newly acquired or newly built outpatient departments. Further, Congress rolled back the site neutral payment provisions in 21st Century Cures Act passed late last year, which allows facilities under construction and National Cancer Institute (NCI) designated cancer centers to continue receiving higher payments.
For big hospitals, though, competition is a disease and the antidote is found in legislation and regulation. For almost two decades leading up to 2010, big hospitals, led by the American Hospital Association and the Federation of American Hospitals, lobbied Congress to outlaw hospitals owned by physicians. They finally succeeded with the passage of Obamacare, which prohibits any physician-owned hospitals built after 2010 from receiving Medicare or Medicaid payments. It also erected regulatory barriers that make it very difficult for physician-owned hospitals to expand.
Hospitals have benefitted from another Obamacare creation known as Accountable Care Organizations (ACOs). An ACO is a network of hospitals, physicians and other health care providers responsible for the care of a minimum of 5,000 Medicare recipients. ACOs received a capitated payment per patient from Medicare. If the ACO can keep costs under the amount of the capitated payment and meets certain quality targets, it gets to keep the savings.
However, health care organizations need about $4 million in start-up capital to launch an ACO. Obviously, larger hospitals can afford that more readily than small hospitals or physician practices. This gives incentives to smaller competitors to sell out to large hospitals. CMS finalized ACO regulations in 2012. In the five years prior, hospital mergers and acquisitions averaged 66 per year. Since then, they have averaged 95. The number of physician practices purchased by hospitals rose 86 percent over the last three years. The number of physicians employed by hospitals also increased. By 2015 it had reached 140,000, a 50 percent increase since 2012.
Patients are the ones who lose out when the competitors of large hospitals can’t expand or disappear. For example, physician-owned hospitals have lower rates of patient readmissions than do hospitals that are not physician owned. Smaller, independent primary-care practices had fewer preventable hospital admissions than the larger ones often owned by hospitals.
Patients also suffer when hospitals consolidate. Hospitals tend to be of higher quality the more competition they face. Considerable research shows that heart attack patients have lower rates of both mortality and readmission in areas with more hospitals. Studies have also found lower mortality rates for patients with pneumonia, diabetes, hip fractures, stroke, and gastrointestinal hemorrhage in areas with greater hospital competition.
When hospitals were paid a higher rate than their competitors at off-campus facilities like physician practices, hospitals had an incentive to gobble up their competitors, and competitors felt financial pressure to sell. Site-neutral payments end those incentives.
Further, providing hospitals with higher reimbursements increases costs to patients in the form of larger co-pays as well as higher costs to payers, employers, Medicare, and American taxpayers.
Much remains to be done to increase competition in health care markets, including repealing various portions of Obamacare. Site-neutral payments are an important first step. Undoubtedly, the hospital lobby will pressure Congress to weaken or roll back site-neutral payments. Members of Congress should resist that pressure. The health of patients depends on it.