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GAO Analyzes Connection Between Hospital-Physician Consolidation and Increased Medicare Spending for Evaluation and Management Services, Recommends Equalizing Rates for E/M Services in Office and Hospital Outpatient Settings

On December 21, 2015, the United States Government Accountability Office (GAO) issued a report entitled, “Increasing Hospital-Physician Consolidation Highlights Need for Payment Reform.” (Click here for the full report.) The GAO’s study was prompted by an inquiry from lawmakers about the more than 8 percent rise in Medicare expenditures for services rendered in hospital outpatient departments (HOPD) between 2007 and 2013, as compared to a 5 percent increase in total Medicare Part B spending during the same time frame.  Some policymakers questioned whether the increase in HOPD spending might be attributable to the growing number of hospital acquisitions of physician practices (“vertical consolidation”), resulting in services that were typically performed in physician offices being performed instead in HOPDs, resulting in higher reimbursement. For example, in 2015, Medicare’s total payment rate for E/M office visits ranged from $58 to $86 higher when performed in an HOPD compared to a physician office. This discrepancy is due to the fact that when the service is provided in a physician office, Medicare makes a single payment to the physician at Medicare’s physician fee schedule rate, but when the service is provided in an HOPD, Medicare makes two payments, one at the physician fee schedule facility rate and another payment to the hospital, typically at the hospital outpatient prospective payment system (OPPS) rate. The GAO noted that although, beginning in 2014, CMS revised its formula for payment of HOPD E/M visits, the revised approach still results in higher total reimbursement for E/M services performed in HOPDs.

The GAO confirmed the trend of vertical consolidation, noting that between 2007 and 2013 the number of vertically consolidated hospitals increased from about 1,400 to 1,700, while the number of vertically consolidated physicians nearly doubled from about 96,000 to 182,000. The GAO then used various analytical methods to determine if there was a correlation between consolidation and the increase in HOPD spending.  The GAO found that the percentage of E/M office visits performed in HOPDs, rather than in physician offices, was approximately 10 percent higher in counties with the highest levels of vertical consolidation.

The GAO recommended that Medicare equalize reimbursement for Evaluation & Management (E/M) services regardless of provider setting, and, absent equalization of E/M reimbursement rates in the HOPD and office settings, the Medicare program would pay more than necessary for E/M services.  The report notes that the Bipartisan Policy Center and Medicare Payment Advisory Commission (MedPAC) have estimated that equalizing payment rates for services, including E/M services, performed in HOPDs and physician offices could save Medicare between $1 billion and $2 billion annually.  The GAO acknowledged, however, that legislative action would be required to achieve equalization as CMS lacks statutory authority to equalize total payment rates between HOPDs and physician offices.

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