Magazine Article | July 31, 2014

Obama Administration: Driving Provider Consolidation And Increased Costs

Source: Life Science Leader

By John McManus, president and founder, The McManus Group

The increasing consolidation of healthcare providers has undeniable, deleterious consequences for consumers; yet what is the Obama Administration doing about it? Making things worse.

A New England Journal of Medicine study by Kocher and Sahni asserted that “U.S. hospitals have responded to implementation of healthcare reform by accelerating hiring of physicians. More than half of practicing U.S. physicians are now employed by hospitals or integrated systems, a trend that is fueled by the intended creation of accountable care organizations.”

Hospitals that acquire physician practices argue that it helps them coordinate care and control costs. But why are hospitals often acquiring physician practices for a price that is far in excess of what they can possibly bill? It seems irrational.

They do so to capture the referrals for all types of services. Kocher and Sahni state that, “To break even, newly hired primary care physicians (PCP) must generate at least 30 percent more visits, and specialists 25 percent more than they do at the outset. Hospitals are willing to take a loss employing PCPs in order to influence the flow of referrals to specialists who use their facilities.”

A May 2014 Health Affairs study also found that when hospitals buy physician practices, the result is higher hospital prices and increased spending. The study performed by Stanford University researchers examined 2.1 million hospital claims and validates insurance companies’ and economists’ contentions that the main motivation is negotiating higher prices and capturing referrals.

Researchers at the Center for Studying Health System Change examined nearly 600,000 private insurance claims and found that average hospital outpatient department prices for common imaging, colonoscopy, and laboratory services are double the price for identical services provided in physician offices or other community settings. For example, the average price of a colonoscopy in a hospital was $1,383 compared to $625 in a community setting (e.g., ambulatory surgery center). Similarly, physical therapy prices were 41 percent to 64 percent higher in hospitals than in community settings.

Federal Trade Commission has only sporadically engaged in such mergers and acquisitions. For example, it blocked a proposed merger in Idaho that would have given Boise-based St. Luke’s Health system 80 percent of the physicians in Nampa, Idaho.

The Medicare Payment Advisory Commission has recommended that Medicare pay hospital-employed physicians for routine evaluation and management visits at the same rate as physician offices. Such a policy would reduce hospital reimbursement for those services by more than 56 percent and save more than $10 billion over 10 years. Congress has not acted on that recommendation, nor has the administration endorsed it.

Indeed, increasing payment disparities between the physician offices and hospitals for identical services appears to be a deliberate public policy of this administration and has made it quite difficult for physician practices to remain economically viable. Payment cuts to cardiology for services often provided in the office more than tripled the number of cardiologists employed by hospitals between 2007 and 2012. Now the Center for Medicare and Medicaid Services proposes eliminating reimbursement for the “radiation treatment vault,” which protects healthcare professionals, caregivers, and others from such radiation and is integrally tied to the linear accelerator itself. If this proposal is finalized, payments to physician-led, community-based centers would be cut by more than 10 percent but leave hospitals untouched.

"A May 2014 Health Affairs study also found that when hospitals buy physician practices, the result is higher hospital prices and increased spending."

It should be no surprise that such policies have discouraged many physicians from continuing to operate free-standing practices. A recent study by Merritt Hawkins found a substantial shift toward the employed physician model with more than 90 percent of new physician job openings at hospitals and other facilities and just 10 percent in independent practice settings.

Obama Proposal On Self-Referral Unfounded And Drives Care To Hospitals
Despite these alarming trends and cost implications to the healthcare system, the Obama Administration offered a proposal that would make it illegal for integrated physician practices to provide “ancillary services,” such as advanced imaging, radiation therapy, anatomical pathology, and physical therapy. The President’s Budget proposed to eliminate the so-called “in-office ancillary services exception” (IOASE) provision that allows integrated physician practices to incorporate these services.

The administration argues that the IOASE provision has encouraged overutilization because physicians will consume more resources when they refer services to their own practices. A series of Government Accountability Office (GAO) reports supports that narrative … at first glance.

But a deeper dive into the data offered by the GAO and analysis of all of Medicare claims since 2007 contradicts the assertion that physician-led care has resulted in overutilization.

  • Advanced Imaging: Utilization of advanced imaging, which has drawn the most focus of self-referral opponents, has actually declined in the physician office recently. Medicare spending for CT and MRI services dropped from $4.1 billion in 2007 to $3.7 billion in 2012 and, at the time of the research, was headed toward $3.5 billion in 2013.
  • More than three-quarters of these services are provided in the more expensive hospital setting.
  • Radiation Therapy: In its report on radiation therapy, the GAO observed that although utilization of IMRT (intensity modulated radiation therapy) services for prostate cancer increased by self-referring groups, it was offset by decreases within hospitals and non-self-referring groups. “Overall utilization of prostate cancer-related IMRT services, therefore, remained relatively flat across these settings,” the report said.
  • Physical Therapy: the GAO found that “from 2004 to 2010, non-self-referred physical therapy (PT) services increased at a faster rate than self-referred PT services. During this period, the number of self-referred PT services per 1,000 Medicare fee-for-service beneficiaries was generally flat, while non-self-referred PT services grew by about 41 percent.”

If physician practices are prohibited from offering these services through legislative fiat — as the Obama Administration proposes — this care will be forced into the more expensive and less convenient hospital setting.

This radical proposal has sparked alarm and outrage among physicians. A coalition of more than 30 specialty physician groups and the American Medical Association, representing hundreds of thousands of physicians, wrote Congress to object to this proposal, stating that it would undermine the viability of the independent physician practice model and “result in the further centralizing of care around a few dominant hospital systems, which will undermine competition, and in turn, raise costs to the entire healthcare system over the long term.”

Most Republicans have been unwilling to dictate how physicians should structure their practices or where care should be delivered. But the proposal has drawn interest from some Democrats who view it as appropriate to helping finance a longterm solution to pending Medicare physician cuts and other priorities.

While hospitals have not actively lobbied for the proposal, they certainly prefer it over further hospital cuts, such as site-of-service payment neutrality. That makes it a viable threat and just one more catalyst to further consolidation, which will only raise costs to consumers.

It is time to step back and take a longer view of healthcare policy. Where should most elective health care take place, in the hospital or community setting? And what policies should be pursued to reverse the current trend?