The recent 2-year bipartisan budget deal signed by President Obama and sent up by Congress brought the hammer down on hospitals so quickly that they did not see it coming. It is highly unusual for Congress to keep anything secreted from the American Hospital Association (AHA) lobby. The AHA spent $4.6 million in the first quarter of 2015 for an annual estimated expenditure of about $18 million. This does not include dollars spent by local and state hospital associations. The SVS is clearly dwarfed by these powerful interests. Our society spent less than $100,000 in that same quarter on advocating for over 4,000 members, the majority of whom are United States residents and most of whom depend solely on the SVS to look out for them.
As a result of the budget deal, Medicare will not pay most hospital-owned physician practices higher rates than those of independently owned practices. The reimbursement changes will apply to those hospital-owned physician practices acquired or opened since the date the law was signed and also located farther than 250 yards from a hospital’s main campus. It does grandfather in facilities prior to the signing that were being reimbursed with hospital outpatient department (HOPD) rates. The savings will prevent an increase in premiums for about 15 million Medicare beneficiaries. The AHA expressed its outrage while the AARP celebrated. So did independent physicians who have been protesting all along that costs were rising because of excessive payments to hospitals for essentially the same services.
Margot Sanger-Katz, in a column for “The Upshot” in the New York Times, wrote that it had been estimated that correcting this payment differential would save Medicare $30 billion over 10 years, more than Medicare could save if it raised the Medicare eligibility age to 67!1 She also pointed out that the Medicare Payment Advisory Committee (MedPAC), an independent group that advises Congress, thinks “that the pay differences should be narrowed, but only for a select set of medical services in which it’s really clear that there’s no difference between the care offered by a hospital and a physician office.”
The rush to buy physician practices is being done for many reasons but the disparate payment schedule favoring hospital-owned practices for many of the same services is one reason. The hospital brings in a lot more revenue through its hired physicians providing the same service in their offices that are now under the banner of the health system. The hospitals cite several justifications for the “surcharge” on care provided by employed physicians in hospital facilities, some of which may be valid. Regulatory requirements, sicker inpatients, increased cost due to training programs, and being required to support money-losing services such as burn care are some reasons. But, independent physicians say they provide the same or better quality care at a lower cost without resources such as legal, accounting, self-insurance against professional liability, and robust lobbying firms.
Hospitals have also contended that vertical integration by buying physician practices should lead to lower health care costs by squeezing efficiencies within the system. There have been conflicting reports on whether physician hospital integration leads to lower health care expenditures.2 The public debate has caught the attention of government regulators. In the recent case of Saint Lukes-Saltzer, the question before the Federal Trade Commission (the agency responsible for federal antitrust action) was: Did total medical expenditures increase or decrease for patients cared for by physician practices acquired by St. Luke’s? Indeed, the conclusions were that not only did overall costs not go down but evidence showed that the merger may have resulted in increased costs.
On appeal, the Ninth Circuit Court ruled that any future efficiency must be “substantial, verifiable and specific” to the merger. Ciliberto and Dranove looked at hospital prices after physician hospital affiliations in California and found no evidence of increase in prices.3 Baker and coauthors analyzed privately insured patients between 2001 and 2007 and the effect of physician hospital integration on hospital prices, admission volumes, and spending.4 They reported higher hospital prices and spending in hospitals with the tightest vertically integrated relationship with physicians. In one of the few studies of the issue, Capps and colleagues reviewed 7 years of administrative data from multiple insurers across the United States to estimate postintegration costs. From 2007 to 2013, they found that there was a 57% increase in the share of spending by physicians whose practices are owned by hospitals. In addition, this led to an increase in physician prices of 14% post integration.5 The larger the market share of inpatients by a hospital the larger the price increase. The authors estimate that about 25% of the price increases are precisely due to “exploitation of reimbursement rules” by charging the facility fees for their employed physicians. If these “surcharges” led to decreased utilization as one measure of increased efficiency and therefore reduced overall health care costs, it would be acceptable. But, Capps et al. found no such evidence and speculate that this scenario could lead to higher expenditures.