Provider-Based Status: A Closer Look

The following post was adapted from an article that appears in the March 2012 issue of Dennis Barry’s Reimbursement Advisor.  

Many of the same services are covered in both physician office settings and in hospital outpatient departments, but Medicare pays differently for these services depending upon the setting. When a service is billed as a physician office service, the entire service is billed using the 1500 billing form, and Medicare pays using the rates in the physician fee schedule. For services furnished in a hospital outpatient department, the technical component is billed to Medicare on the UB billing form and paid under the ambulatory payment classification (APC) rates, and the physician component, if any, is billed using the 1500 form.

For most services furnished in a hospital outpatient department, payment for the physician component is reduced to reflect that Medicare is paying the hospital for the technical component; however, the reduction in payment on the physician’s claim is less than the amount paid to the hospital. Hence the aggregate Medicare payment for services furnished in a hospital outpatient department exceeds the amount paid for the same services furnished in a physician office setting.

In this era where Medicare payments are coming under intense pressure, the higher provider-based payments made to hospitals in comparison to payments made for the same services furnished in a physician office setting would appear to be an obvious cost-reduction target. Until very recently, however, this has not been suggested.

This past fall, however, the Medicare Payment Advisory Commission (MedPAC) staff prepared a paper recommending that Medicare payment for the technical component of hospital outpatient evaluation and management (E&M) services be reduced to the practice component payment rates under the physician fee schedule. MedPAC, itself, approved that recommendation in January. [See Transcript of January 12, 2012, MedPAC Public Meeting.]

While having different payment rates for the same service initially appears irrational, there are reasons for doing so. Hospitals have many costs that physician offices do not, including life safety code compliance, oversight functions, and reporting obligations that do not exist in physician offices. Hospitals also do not have the flexibility that physician offices have to minimize revenue lost to uncompensated care and bad debts. Hospitals can accurately point out that even with the present APC rates, they furnish Medicare outpatient services at a significant loss. The Association of American Medical Colleges and the American Hospital Association have made these points, among others, in letters defending the existing payment differential in payment to hospitals for outpatient services. [Letter from Atul Grover, AAMC Chief Public Policy Officer, to Sens. Harry Reid and Mitch McConnell (Dec. 14, 2011).

At this time, it is impossible to predict whether there will be near term changes to hospital payment for the technical component of clinic services. We do know, however, that the issue is “in play.”