MedPAC’s Recommendation to Reduce Payments to Hospitals

The Medicare Payment Advisory Commission (MedPAC) has recommended setting the payment rate for supervision services provided in hospital outpatient departments to be the same as it is in physician’s offices.  The recommendation is to be phased in over three years and capped at no more than 2 percent for any particular hospital.   The recommendation to reduce this payment was accepted at a MedPAC meeting on January 12 and 13, 2012.

MedPAC estimates that if this policy is fully phased in, it would reduce hospitals’ overall Medicare revenue by 0.6 percent and outpatient Medicare revenue by 2.8 percent. In addition, MedPAC has recommended a 1 percent increase in the payments for inpatient and outpatient service for services provided in  fiscal year (FY) 2013.

Physician services switching to hospitals

MedPAC data suggests that the increased hospital employment of physicians has caused the billing of evaluation and management (E&M) services to shift from free-standing practices to outpatient departments (OPDs) and that this shift has been accelerating. For example, the percentage that is provided in OPDs has increased at an annual rate of 3.5 percent per year over 2004 through 2008,  9.9 percent in 2009 and by 12.9 percent in 2010. Moreover, incentives are present for this acceleration to continue.

A problem related to this shift is that the payment rates for theses identical service are typically much higher in the outpatient prospective payment system than in the physician fee schedule. For example, Medicare payment for a mid-level office visit is about 80 percent higher in the OPD environment than in a free-standing practice. Consequently, the result of services shifting from free-standing practices to OPDs is increased program spending and increased beneficiary cost sharing even though the care received by the patient may not be any different.

Costs to Hospitals

Under a phase-in, MedPAC found this policy would reduce Medicare revenue by about 0.2 percent for each year of the phase-in. Also, for most hospitals, the effect of a fully phased-in policy is relatively small, as 78 percent of hospitals would have their overall Medicare revenue reduced by less than 0.5 percent. MedPAC estimated that Medicare revenue would decline by 1.1 percent among major teaching hospitals but by 0.4 percent among other teaching hospitals and non-teaching hospitals.

The American Hospital Association (AHA) in a statement said that these cuts would jeopardize patient access to unique, vital care.  The AHA statement said cutting hospital reimbursement for evaluation and management services in hospital outpatient departments threatens patient access to care that is not otherwise available in a community.  AHA said physicians often refer patients to hospital-based clinics because hospitals are better equipped to treat patients and emergencies. These are real costs for  treating America’s  seniors – costs that would not be covered under MedPAC’s recommendations. AHA urged Congress to reject MedPAC’s recommendations regarding the changes to outpatient care reimbursement.

Payment for services as opposed to provider type

 MedPAC Chairman Glenn M. Hackbarth said, “the principle here is that, over time, Medicare needs to move towards paying the same amount for the same service regardless of the provider type. In the current siloed payment systems, we have rates that differ based on the type of provider even if they are providing the same service to the same type of patient.”

This recommendation was made in accordance with other recent developments to break through existing payment silos, like bundling payments around hospital admissions whereby there would be a single payment that would cover the services provided not just by the hospital, but also by physicians or post-acute providers. Accountable Care Organizations are another where there is a payment to an ACO for the full range of services and the organization assumes both clinical and financial responsibility.  This recommendation is in-line with these other policy developments.