Pricing Arbitrage Survives Budget Bill

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A new federal budget bill just closed the door on the Medicare arbitrage for outpatient businesses purchased by hospitals. However, research shows commercial reimbursement is still much higher for hospital-owned outpatient services.

The U.S. House of Representatives and U.S. Senate passed the Bipartisan Budget Act of 2015 on October 28th and 30th, respectively. President Obama signed the bill into law on the following Monday on November 2, 2015.

The new law excludes off-campus hospital outpatient departments that first bill for services on or after November 2, 2015 from hospital Medicare reimbursement.  “Off-campus” is defined as a physical location found more than 250 yards from the main hospital campus building or a remote location of the hospital.

This provision of the law was enacted the day it was signed.  Therefore, an off-campus hospital surgery department that bills for service on or after November 2, 2015 will only receive Medicare hospital reimbursement through December 31, 2016.  The payment changes are scheduled to go into effect on January 1, 2017.  The new law does not specifically identify the new reimbursement system, but it will probably be the ASC fee schedule for outpatient surgery departments and elements of the Medicare physician fee schedule for other services.

This new law stems the Medicare reimbursement increase realized when hospitals buy and absorb ASCs, imaging centers, physician practices, and nuclear cardiac imaging businesses.  For example, the Medicare ASC fee schedule is set at 56% of Medicare hospital fees schedule.  A hospital that bought and absorbed an ASC prior to November 2nd would realize a 78.6% increase in Medicare reimbursement by converting the ASC to a hospital department.

However, even if the Medicare differential is neutralized, two studies have shown that hospitals’ commercial reimbursement is still negotiated at a substantial premium.

All Things Not Being Equal (Strategic Financial Planning 2009)

HFMA published a study of the reimbursement rates realized by 12 ASC joint ventures with and without health system partners in 2009.  The ASC joint ventures received higher commercial reimbursement when they had a health system partner.

SFP 2009

HSC Research Brief No. 16 

The second research study of market pricing power for hospital outpatient and physician services was published by the Center for Studying Health System Change.  This study analyzed variations in outpatient services reimbursement in over a half dozen U.S. cities and compare the results as a percentage of Medicare rates.

Table 1 below analyzes hospital prices as a percentage of Medicare, while Table 3 summarizes physician prices as a percentage of Medicare. Across markets, hospitals negotiate outpatient service markups of 234% to 456% of Medicare at the 75th percentile, while physician-owned businesses only negotiate markups of 89% to 240% of Medicare at the same percentile.

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physician markups

Both of these studies demonstrate that hospitals and heath systems are leveraging their market power to negotiate higher commercial reimbursement rates for outpatient services than comparable physician-owned businesses.