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Big Gap Between Physician Payments for Offices vs Hospitals: Study

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Medicare payments for physician services were, on average, $114,000 per doctor per year higher when billed by a hospital than when billed by an independent physician practice, found a study of Medicare claims data from 2010-2016 in Health Services Research .

According to the study by Brady Post, PhD, Edward C. Norton, PhD, and colleagues, Medicare revenue for outpatient services billed by physician offices would have been 80% higher if they had been billed by a hospital outpatient department (HOPD). The average bundle of Medicare services performed annually by “unintegrated” physicians (ie, those not employed directly or indirectly by a hospital) was worth $141,000 if billed by an office and $240,000 if billed by an HOPD.

The payment differential between HOPDs and private medical offices varied markedly by specialty. The payment gap was $63,000 for primary care physicians, $178,000 for medical specialists, and $150,000 for surgeons.

Moreover, the study found, the differential grew over time. From 2010-2016, the average ratio between HOPD and private practice payments grew from 1.8 to 1.99, or from 80% higher to 99% higher.

The main reason for these large payment differences: Medicare pays HOPDs both a physician fee and a facility fee for each service, whereas private practices receive only physician fees. Although the professional fees are a bit lower in HOPDs, the facility fees more than make up for the difference, and the total payments to hospitals are reflected in higher physician salaries and bonuses.

The Centers for Medicare & Medicaid Services (CMS) has been trying to correct this imbalance for years with site-neutral payment policies. In 2015, the Bipartisan Budget Act authorized CMS to impose site-neutral payments but grandfathered existing HOPDs. Later CMS rulemaking expanded the equal payments to other HOPDs, but the American Hospital Association sued to overturn this regulation. The courts have yet to decide the outcome.

Effect on Consolidation

According to the Medicare Payment Advisory Commission (MedPAC), the significant differential between Medicare payments to HOPDs and independent offices has encouraged hospitals and health systems to acquire physician practices. But this study noted that good research on this point has been lacking up to now.

The researchers said they found little evidence of a direct relationship between the HOPD-office payment ratio and integration with hospitals in particular specialties. Nevertheless, they said, “Across all specialties, a 25th to 75th percentile increase in the hospital-office ratio was associated with a 0.20 percentage point increase in the probability of integrating with a hospital (95% CI, 0.10 – 0.30). The effect of the hospital-office ratio varied by specialty.”

In an accompanying commentary, Michael Chernew, PhD, Harvard Medical School, Boston, Massachusetts, affirmed that the study had found that the ability of hospitals and employed physicians to earn more from Medicare had resulted in a greater amount of integration. “Physicians providing services with a larger pay differential (at the 75th percentile) were 0.20 percentage points more likely to be acquired by a hospital than those billing services with a smaller payment gap (at the 25th percentile).”

Many Factors at Play

The paper’s authors, however, pointed out that the Medicare payment differential is only one of many factors that have contributed to the huge increase in hospital employment of physicians over the past decade. For example, they found that high levels of hospital market concentration and rural geography were associated with a higher probability of a physician going to work for a hospital.

Other studies, they noted, have established that some health systems use physician integration as a bargaining chip with commercial health plans. Also, some physicians may find that independent practice is less viable than it used to be for a variety of reasons. It has also been suggested that many younger physicians prefer hospital employment to private practice because they crave economic security and work–life balance, the authors said.

It’s been estimated that site-neutral payments could save CMS $11 billion over 10 years, Chernew noted. But this paper, he said, illustrates that the payment disparities can also create “broader market distortions,” because consolidation of hospitals and physicians has been shown to lead to higher prices overall.

The study authors agreed. “These results cohere with recent work that has found much of the increase in US healthcare costs is attributable to rising prices or changes in service intensity (such as the migration of services to an HOPD),” they said. “Integration [between hospitals and doctors] appears to threaten the affordability of care with minimal gains in quality.”

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