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Hospital Site Neutrality – When the Government Mandates a Business Model

Hospital Outpatient Departments

Hospitals have been strategizing around payments for years. In fact, when Medicare makes a change, often times other payors follow. A recently issues Final Rule by the government changes the strategy that most hospitals have followed for the past 20 years and further mandates hospitals to think about a different business model.

The Rise of Outpatient Departments

Hospital Outpatient Departments (“HOPDs”) have been an interesting and unique piece of healthcare financing since the early 2000’s. In short, hospitals were able to create HOPDs which allowed the hospital to seek payment under the Outpatient Prospective Payment System (“OPPS”). Under this system, the common fee for service payment structure in outpatient settings was changed forever. It ultimately influenced the strategies and business models of hospital systems across the country.

Why did health systems start creating HOPDs paid under the OPPS? Because they received substantially more income for services. In fact, one study by RAND Health found that payments for the exact same service in HOPDs were 1.8 time more than ambulatory surgery centers and 3.6 times more than the normal office fee for service payment. What did this further spur? It spurred the concept of dedicated regional centers of excellence, consolidation of provider practices, and isolation of healthcare services to specific hospital sites.

Hospital Strategy Post-2000: Consolidate, Consolidate, Consolidate

With this payment change, hospitals across the country recognized that (a) HOPDs would allow them to receive additional income, (b) many of the revenue generating ancillary services resided in physician entities, and (c) geographically, services must be consolidated to large medical developments. Undoubtedly, the payment structure was a major incentive, but how did hospitals move towards this consolidation strategy?

First, hospitals started to build out their own HOPDs on their hospital campuses. Why? Because the government required it. To bill under the OPPS hospitals but have departments that are considered “provider based”. This definition simply means that if a department is “provider based”, it may bill under the OPPS for higher amounts. In order to be “provider based”, the government requires financial integration, public awareness that it is part of the hospital, either must be within 35 miles of the campus or on its campus.

So what does this mean? This means that most hospitals in the early 2000s recognized the need to consolidate services either to within 35 miles of a campus or physically on-campus (within 250 years from the main building). The only negatives to developing HOPDs were really centered around the need to move services and the regulatory requirements. Beyond those issues, most health systems were able to justify doing this. The negative for a community could mean that more services are removed from neighborhoods and placed into large medical campuses.

Second, hospitals started a massive consolidation of physician practices. Why? Prior to the OPPS, hospitals did not receive additional revenue from physician practices even if employed. Arguably the benefit was limited to the ability to generate referrals but from a pure billing perspective, an office visit paid $100 regardless of the location. Now though, under the OPPS that same visit could be $360. More is shared in this article regarding physician consolidation and employment. The bottom line is that in order for health systems to strategize around HOPDs, they needed control of practices, including the ancillary services.

Unfortunately, it appears the government has begun to have concerns that now the $100 visit is $360 simply due to the location in which the visit occurs and that in a 10 year period, OPPS payments have nearly doubled.

Changes to HOPD Reimbursement Starting

In the summer of 2018, the government proposed a payment cut to G0463 which accounts for more than half of all codes billed at HOPDs. In addition, the government lower payments for drugs and finally removing certain codes from inpatient only. Although there was significant push back, the government published its final rule recently.

Specifically, the government stated there would be a 2 year phase in. This will result in a payment decrease of $380 million in year 1 and more than year 2. In other words, CMS stated that “For an individual Medicare beneficiary, current Medicare payment for the clinic visit furnished in an excepted off-campus PBD is approximately $116 with $23 being the average beneficiary copayment. The policy to adjust this payment to the PFS equivalent rate would reduce the OPPS payment rate for the clinic visit to $81 with a beneficiary copayment of $16 (based on a two year phase-in), thus saving beneficiaries an average of $7 each time they visit an off-campus department in CY 2019.”

While hospitals continue to receive payment, this change does something else other than cut payments. It should make health systems across the country reconcile with their previous strategies and focus on what this type of change could do to an already fluid business model. For more information on the Final Rule please click here.