Location agnostic billing

Congress and the President actually solved a real problem in American health care this week.  The recent two year budget bill has a $9 billion dollar savings from Medicare that is being driven by how Medicare pays charges at doctors’ offices that were bought out by hospital chains.  The National Journal has more:

will change the rate at which Medicare reimburses doctors’ offices that have been bought by hospitals. Previously, services at these offices would to be reimbursed at the rates paid to hospitals. Currently, hospitals are reimbursed at higher rates than physician’s offices because, the argument goes, of the additional expenses, such as being open 24 hours a day and maintaining standby capacity.

But under the new deal, these hospital-owned doctors’ offices will be reimbursed at the same rate as oth­er doc­tors’ of­fices for their ser­vices.

That is a big deal although the way the deal is structured, it grandfathers current hospital owned provider practices under the higher billing scheme.  Location agnostic billing only applies to offices that are bought out in the future.  This is a massive asset enhancement for hospitals that already own provider offices as they can sell stakes in their offices now at a much higher price.  It will also pressure the asset value of current independent offices as the demand to buy out small practices will somewhat recede as some practices are only bought out for the Medicare billing hack.  Even with that, this is a good size policy win.

And that is what this was, a hack, an exploit on the system:

The aggregate average cost of a service includes salaries, supplies, depreciation, rent, capital investment, return on investment, training costs and a small fudge factor.  Determining all of those variables is a level of expertise that I don’t have and it is a source of continual fighting.  The Center for Medicare and Medicaid Services (CMS) has long recognized that running a hospital and running an actual outpatient clinic is expensive as the fixed costs are high.  CMS has always allowed a facility fee to be charged to help cover those fixed costs of maintaining a radiology lab, of keeping a specialist on call, of having a crash cart available and of the thousand other things that a hospital or a full scale outpatient clinic will have that a typical doctor’s office won’t.

The problem is the hospital owned groups are the ones who designate which locations are typical doctor offices that they own and thus get paid the base rate without facility fees, and which locations are hospital based clinics that get paid an enhanced rate and facility fees.  Hospitals have every incentive to designate every location that they own as either hospital based facilities or outpatient clinics.  This can mean a doctor’s office that has always been as 123 Main Street which is thirteen miles from the hospital can be considered for billing purposes, part of the hospital.

There are a few important policy chunks in this change.  The first is it is a direct cost savings for the federal government where there is minimal to no value being lost.  Medicare patients will be happily indifferent.  This is a net win even in a zero interest rate environment where deficits don’t matter and should be encouraged, as they should be spent on things that actually provide value instead of better hookers and more blow.

Secondly, there are two interesting little system wide cost savings measures.  The first is a direct reduction in system health expenditures.  Most private insurance contracts (on and off Exchange, and group insurance) with providers are based on Medicare plus something.  When Medicare accepted a conversion of an office from an office to a hospital owned facility, and started to pay a higher rate, the hospital would change their billing practices for all of their other insurance carriers to reflect the conversion as well.  So instead of paying $83.72 for a simple visit, insurers would now be paying $212.12 for that same service performed by the same doc at the same location with the same fish in the fish tank in the waiting room.  Eliminating the conversion fee bump will directly reduce payments.

Somewhat more subtly, this policy change reduces the marginal incentive for hospitals to buy out physician groups.  Right now the major incentives for hospitals to buy out providers are prestige, referral patterns and the pay bump.  Once this policy goes into effect, prestige and referral patterns are the major incentives for hospitals to buy provider groups.  Less consolidation means more competition, lower prices and lower utilization.  Reducing the HHI index of provider concentration should increase consumer surplus through either higher quality or lower prices for the same quality.  This is a pro-competitive and anti-hookers and blow policy change.