As infantile as this may sound, our government has finally realized that if you pay more, it actually costs more. That is, in essence, the realization that lies at the center of our government’s AHA moment.

To best understand the issue, the AHA moment and the future consequences, the historical background is important.

As a general rule, Medicare sets various rates of compensation for doctors and hospitals. In many or even most instances, private insurance companies’ contracts with medical providers and their reimbursement is based on a multiple of Medicare reimbursement.

Therefore, Medicare reimbursement, to a large extent, drives a significant portion of global (not private pay) reimbursement for physician, clinical, home and hospital-based medical care.

Furthermore, it is patently obvious that with regard to surgery, hospitals have a higher cost structure than surgical centers, and emergency rooms have a higher cost structure than urgent care centers or independent medical practices. While the degree, the cause of the differences or the attendant reasons may be subject to debate, it is clear that the cost of the operational overhead varies dramatically. Accordingly, Medicare and private insurers pay hospitals more for surgery than they pay surgery centers. Similarly, Medicare pays hospitals more for various treatments than it pays independent practices.

What amazes me is that there was apparently no real recognition that if you pay hospitals more money for the same service, the aggregate cost of healthcare increases as well.

The following chart gives a few examples of the differing reimbursements rates for doctor offices vs. off campus hospital owned practices.

GENERAL SURGERY 49560 Repair initial incisional or ventral hernia; reducible $742.00 $2,429.00
CARDIO-VASCULAR 36560 Insertion of tunneled centrally inserted central venous access device, with subcutaneous port; younger than 5 years of age $1,344.83 $2,123.47
36571 Insertion of peripherally inserted central venous access device, with subcutaneous port; age 5 years or older $1,319.64 $1,768.17
36593 Declotting by thrombolytic agent of implanted vascular access device or catheter $29.95 $161.31
19380 Revision of reconstructed breast $797.06 $3,586.79
19366 Breast reconstruction with other technique $1,449.03 $2,655.57

In addition, particularly with specialists, when a patient goes to an independent medical practice and has certain tests performed, those treatment codes incorporate the fact that the treatment occurred in the doctor’s office, so that the doctor receives one payment for treating the patient and administering the test or performing the procedure.

Hospitals, however, have traditionally been entitled to what is referred to as a “double-dip” because the doctor is allowed to bill for the procedure and the hospital is able to bill for the use of the facility. As such, the total reimbursement dramatically increases. It is not uncommon for the difference to be 100% or more. Once again, it is amazing that in this day and age in which the rising cost of healthcare seems to be in the forefront of the news, it apparently took a very long time to realize that if you pay more for the same medical treatment/procedure, the aggregate cost actually goes up.

As a result of this disparity, many hospitals embarked on purchasing and/or absorbing numerous specialty medical practices.

A recent survey by The American College of Cardiology found that between 2007 and 2012, the number of cardiologists working for hospitals more than tripled while the percentage working in private practice fell from 59% to 36%.

I recently had a discussion with a partner in a suburban cardiology group comprised of nine cardiologists who told me that his practice was bought by a hospital and that the doctors are now paid directly by that hospital. The hospital they work for is based in a large city approximately 30 miles away. It was obvious that the value to the hospital was the fact that the cardiology practice directed many procedures to the hospital, but the reality is that the aggregate revenue/cost of the treatments performed at the satellite location increased as well.

In another case, a client recounted that her child was treated by a pediatric cardiologist who joined up with the hospital. Looking at her EOB (explanation of benefits setting forth how much her insurance paid), going to the same doctor, at the same office, for the same procedure yielded reimbursement that was significantly more than double of what the doctor had been previously reimbursed.

This seemingly simple idea that when you pay more your costs increase has apparently finally hit home as evidenced in the Federal government’s proposed 2016 budget.

The new budget seeks to “encourage efficient care by improving incentives to provide care in the most appropriate ambulatory setting: the budget proposes to improve incentives to provide ambulatory care in the most appropriate clinical setting. Evidence suggests that in recent years, billing of many ambulatory services has been shifting from physicians’ offices to the usually higher paid hospital outpatient department setting, increasing Medicare spending and beneficiary cost-sharing.”

At this juncture the Federal government only seeks to equalize reimbursement for off-campus hospital/medical practices with independent physician practices.

What is driving this move is both the government’s cost as well as trying to address the ever rising co-pay contributions by the patients.

The White House has apparently calculated that this move will yield a larger economic benefit to the government than raising Medicare eligibility from 65 to 67. This calculation underscores the degree of enhanced reimbursement paid to off-campus hospital medical practices

It is not certain whether the hospitals will be able to justify the disparity in payment and thereby fend off this proposal, or that the votes of the many people suffering from increased co-pays as well as the general need to address the cost of healthcare will allow it to pass in the budget. Your guess is as good as mine.

A number of questions come to mind:

  1. Even if this adjustment does not occur in the 2016 budget, how long will it take until this concept/need gains traction, and in fact occurs?
  2. If off-campus medical practices are not afforded enhanced reimbursement, will the hospitals seek to move those practices on campus, or will they be rendered unable to renew the contracts they have with these practices?
  3. If at some point in the future hospitals are no longer able to renew the contracts because they are not receiving the reimbursement that was the basis of the initial acquisition of the medical practices, what will happen to the doctors? Specifically, are these medical practices that have become accustomed to working in a more “corporate” environment and were able to step away from the ministerial/operational/entrepreneurial aspects of their practices, be forced to go back to square one, and considering the regulatory overlay that has occurred in the last few years, will they be able to make the transition?
  4. At some point, will the government incentivize urgent care and surgical centers by raising their reimbursement and incentivizing them to the extent that this lower overhead model draws down the number of hospital admissions and thereby, the aggregate cost of healthcare?
  5. If number 4 (above) occurs, how will hospitals deal with the lower revenue obtained because patients and revenue were diverted to urgent care and surgical care centers? Ultimately, we need hospitals, and in order for them to operate, they must be able to cover their costs. We cannot afford to lose our hospitals, and therefore, will the cost/reimbursement of the remaining treatments/procedures that do occur at the remaining hospitals be increased to offset the lost revenue? If that is the case, how much money will we ultimately save?

I believe that the future is uncertain, but it is reasonably certain that individual moves do not happen in a vacuum. Effectively, every action has a reaction and both the future of healthcare and the consequences of the various initiatives seem far from certain or even predictable.

What do you think?