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Hospital facility fees: Why cost may give independent physicians an edge


As calls from government and private payers intensify for hospitals to trim costs and become more transparent in their pricing, some experts believe the pendulum may swing to favor providers delivering quality care at the best price.

In this era of cost reduction, independent primary care practices have an edge: It’s called value.

As calls from government and private payers intensify for hospitals to trim costs and become more transparent in their pricing, some experts believe the pendulum may swing to favor providers delivering quality care at the best price.

Read: How to survive in independent practice

The notion flies contrary to the current trend of physicians selling their practices to hospitals, which is believed to increase an institution’s bargaining power and allow the health system to deliver outpatient services and be reimbursed at a higher, outpatient rate.

All of these factors have perpetuated “the great myth” that it takes a large organization with numerous physicians to operate in today’s healthcare environment, says Harold Miller, chief executive officer for the Center for Healthcare Quality and Payment Reform.

“The myth is that you have to be a Geisinger to survive,” he says. “In every other area we promote small business. We have to show that independent practices really can provide better care.”

Independent physicians interviewed by Medical Economics agree. They have learned ways to provide quality care, reduce costs, and face the barrage of complex regulatory and management compliance requirements in an ever-changing health system.

Paying for place

Why do hospitals and large health systems cost more than independents, even for the same procedures? One major factor is facility fees.

Read: Hospital consolidation trends leads to rise in facility fees

When a service is provided in an independent practitioner’s office, it brings one single payment. But when the same procedure is performed in a facility, either an outpatient department or an ambulatory surgical center, Medicare pays twice: To the facility and to the provider. These fees are meant to cover hospitals for overhead that a freestanding physician’s office does not carry.

Hospitals charge these fees because, like many providers, they aren’t paid for a large part of what they do, Miller says.  They get no money specifically for having an emergency room that can treat patients 24 hours a day.

“There is a legitimate case to be made that they charge more than others,” he says. “People will be unhappy when a hospital is closed at night, and they have a heart attack.”

But hospitals are purchasing physician practices at a fast clip and, according to the Medicare Payment Advisory Commission (MEDPAC), these practices are increasingly being converted into outpatient departments, which allows the hospital to be paid more for various services than does a freestanding physician’s office.

These fees are costing the healthcare system billions, and contributing to an unlevel playing field between independent practices and hospitals. Insurance coverage of facility fees varies, and many patients become stuck with large, sometimes crippling, medical bills as a result.

Next: Facility fee backlash


According to a 2013 MEDPAC report, the fees for office visits, echocardiograms (EKGs) and nuclear cardiology tests at hospital-owned practices are dramatically higher than at independent ones.

The report found that Medicare paid $188 to a freestanding physician for a level II EKG without contrast. At a hospital outpatient provider, the provider payment was $62 and the facility fee was $390.49, totaling $452.89.

MEDPAC estimated that reducing rates for these hospital outpatient facilities for cardiac imaging services alone would reduce beneficiary cost sharing and program spending by $500 million in just one year. MEDPAC has recommended creating “site neutral payment” for Medicare ­beneficiaries.

This consolidation also shifts more financial burden to patients. Take, for example, a 15-minute evaluation and management (E&M) office visit for an established patient. If that E&M service is provided in an independent practice, Medicare pays the physician 80% of the physician fee schedule rate, while the patient is responsible for the remainder. That same service provided in an outpatient department means Medicare pays 80% of both the physician fee schedule rate and the outpatient payment rate, with the patient responsible for the remainder of both rates.

For example, in Medicare’s 2013 coverage year, the most basic E&M visit with an established patient that may not require a physician (current procedural terminology code 99211) would pay a doctor in a freestanding office about $20. A hospital would receive two payments totaling about $65 for the doctor and for the hospital. That’s 80% higher for the same service. A visit with a new patient requiring the highest level of care (CPT 99205) paid an independent doctor about $200, while a hospital would receive two payments totaling about $340.

Facility fee backlash

Why have Medicare and other insurers allowed this payment disparity to continue?

Stephen Zuckerman, PhD, co-director and senior fellow of the health policy center at the Urban Institute, said his best guess is that Medicare hasn’t been responsive to the explosive trend of primary practice buyouts.

“It is definitely a flaw in the payment system that should be corrected,” Zuckerman says. “If it costs more to provide a service in a physician’s practice owned by a hospital, maybe it shouldn’t be provided in that kind of a setting.”

The financial incentives of this payment system have led hospital systems to buy practices and migrate them from freestanding offices into outpatient departments, where they can charge more for the same service, according to Mark E. Miller, PhD, the executive director of MEDPAC. This must be addressed, he told Congress in testimony in May 2014.

“Payment variations across settings need immediate attention because the billing of many ambulatory services has been migrating from freestanding offices to the usually higher-paid OPD setting,” Mark E. Miller said during testimony to Congress.

The tide may be turning, though, as more healthcare reformers look for ways to level the playing field.

MEDPAC recommends that Medicare equalize fees between hospitals, private practices and other settings such as ambulatory surgical centers, for services that can be provided safely in the lower cost setting.

Next: The American Hospital Association opposes site neutral payments


The American Hospital Association (AHA) opposes site neutral payments because it ignores the differences between hospitals and physician offices, including higher cost structures and more stringent licensing, accreditation and regulatory requirements.

“Americans rely heavily on hospitals to provide 24/7 access to emergency care for all patients, to serve as a safety-net provider for vulnerable populations, and to respond to every conceivable type of disaster,” says Reginald Coopwood, MD, president and chief executive officer of Regional One Health in Memphis, Tennessee, who spoke on behalf of the AHA during testimony before Congress in May.

“These roles are not explicitly funded; instead they are built into a hospital’s overall cost structure and supported by revenues received from providing direct patient care across various settings.

“Ensuring adequate payment for all services will allow hospitals to continue to ensure access to care for all patients,” he adds.

And more patients are fighting back against these facility fees, many of which are not paid by private payers.

In Connecticut, consumer complaints to the attorney general’s office about facility fees resulted in an investigation that found that most hospitals in the state charged facility fees without providing adequate notification and price transparency to patients. The state is exploring legislation that would require hospitals to provide notice about facility fees to patients before treatment. Lawmakers are also exploring a bill that would provide greater transparency regarding physician acquisition, so patients will know  when a practice is acquired and facility fees may come into play.

Patients have also challenged facility fees on legal grounds. In 2012, a couple from St. Louis, Missouri, filed a class action lawsuit against Tenet Health for “misleading and undisclosed” facility fees charged at doctor’s offices and outpatient clinics affiliated with Tenet Health’s hospitals. Court records show a judgment was issued against Tenet  Health in the amount of $135,000 plus attorneys’ fees.

In 2006, Virginia Mason Medical Center and the University of Washington Medical Center settled court cases, paying refunds to thousands of patients and posting price listings for consumers.

The patients were charged facility fees that greatly increased their bills without knowledge of the fees prior to the visit. One plaintiff claimed she was charged $8,189 for a cyst removal at a University of Washington outpatient site, of which more than $6,500 was the facility fee.

Most patients don’t understand that the majority of their medical bills are not going to their physicians, says Thomas Thomas, CPA, co-founder of the Association of Independent Doctors (AID), a trade group for independent practice owners.

“There is tons of money in our healthcare system to pay for healthcare, it’s just going to the wrong people,” he says. Hospitals have the clout to negotiate prices but small independent practices do not.

“Hospitals are making it harder and harder for physicians to be independent,” Thomas says. According to the AID, the number of independent doctors declined from 57% in 2000 to 36% in 2013.

Next: Payment disparity


Surviving as an independent

In order to remain independent, primary care providers can use their strengths to their advantage.

Robert Wergin, MD, FAAFP, president-elect of the American Academy of Family Physicians, says nimbleness and productivity can help increase reimbursements. He recommends developing what he calls a fast track. When a patient calls with an acute, easily treatable problem like an ear infection, his office schedules them for a fast-track appointment.

The patient comes in; the nurse takes his or her information and puts a bright orange flag on the file. When the physician is moving from room to room, he knows to see that patient between those already scheduled because the visit will only take a few minutes.

“We get to see the patient and bill for self-limited problems and the patient is happy,” Wergin says. “That’s one way to address the fee-for-service world.”

Another option is offering ancillary services, which helped the practice of John Burke, MD, a physician in Augusta, Maine, stay afloat and independent for 32 years. The  practice had its own lab, bone density machine, EKG, and Holter monitor and did coagulation blood testing.

“You can bring in extra cash flow that can be used to maintain the bottom line of the practice,” he says. “We offered a lot of services that other offices might not have had.”

Some of the best practices can have 15% to 20% of revenue coming from ancillary services, says Marc Halley, founder, president and chief executive officer (CEO) of the Westerville, Ohio-based Halley Consulting Group. This is a way to boost profit and align with hospitals without selling the practice. If ancillary services are less expensive in an independent office, hospitals might use them to lower costs under a risk-based reimbursement model.

Next: Joining accountable care organizations


Many physicians are also remaining independent, but joining accountable care organizations (ACOs) and independent physician organizations to grow revenue and reduce expenses.

Mitchell Perelman, MD, is an internal medicine physician in Boynton Beach, Florida, who has worked in private practice for 22 years. He says about 20% of his revenue comes from fee-for-service reimbursements with the other 80% coming through health maintenance organizations.

A couple of years ago, he joined an ACO, which he says has “allowed him to survive.”Perelman sees a large number of Medicare patients and nets about $500 annually from each of these patients. By keeping costs down and meeting quality measures, he also receives a lump-sum bonus of about $500 per patient each year. 

Rich Lucibella, CEO and director of Accountable Care Options, LLC, which Perelman takes part in, says physicians received an average shared-savings bonus of $150,000 this past year.

An independent physician association (IPA) is another way physicians can band together with other physicians while remaining independent.

Barbara Spivak, MD, president of the Mount Auburn Cambridge IPA, says an independent physicians association like hers allows physicians to provide high-quality service and reduce costs simultaneously. Mount Auburn has 68 employees managing and hosting databases for electronic health records (EHRs) for nearly 250 doctors. The association employs a full-time pharmacist, psychologist, case managers, social worker, health coaches, a metabolic team to track patients with diabetes, and a quality improvement team that tracks data from hospitals and labs and runs reports for primary care physicians.

Michael McNamara, medical director of Hill Physicians Medical Group, Inc. in Pinole, California, and an internal medicine doctor, said his group knew that being part of an IPA was the only way they could practice managed care the way they wanted to. That’s why they joined Hill.

“We needed economies of scale … so we found a large group to affiliate with,” he said. “HMO patients require far more intensive management than they did in the 90s for a variety of reasons. We needed, and still need, very robust resources to effectively manage those patients.”

It was caring for patients that drove McNamara to medicine. At the same time, he valued the idea of being independent and entrepreneurial, something he said is also important to many of his colleagues.

“Most physicians are pretty independent- minded and those docs that practice in the independent community have a strong sense of entrepreneurship,” he says. “The employed model is not for everyone.”

Burke said his former colleagues held out for years. They finally sold, he said, because of their desire to avoid a costly investment in EHRs and to avoid financial difficulties.

The hospital offered to take on the expense of the changeover to its EHR system. In addition, his colleagues all liked the idea of a reliable paycheck, and received salaries greater than what they were making independently.

“We were trying to figure out a way to stay independent without going into debt to finance the EHRs and turned out to be a dollars and sense sort of issue at the end,” Burke says.

But they were used to defining their practice methods, hours, and how they dealt with patients and employees. After just six months of employment, they are “realizing how good they had it,” as independents, Burke says.

“When you have a bureaucracy, there are rules for everything and the secretary can’t get someone to cover for her to go to her kid’s soccer game,” he says. “There are rules there; they have to punch in and punch out.”

Steve Lovato, MD, who runs the family practice La Loma Medical Office, Inc. in Oakland, California, enjoys the freedom to do as he wishes with his practice. He moved to the community in which he was raised after medical school and a stint in Modesto. Even when Sutter Health began buying up nearby practices, he never gave a second thought to selling or moving out of his underserved residential community.

If he were working for a large employer, Lovato says, it would be nearly impossible to do what is important to him like low-cost sports physicals in the schools, health fairs at the local church, and acting as the doctor for football games at his former high school.

“I enjoy working here,” he says. “There is not another job where I can do the kind of work that I want to do and be part of the community.”

The end of independence?

At the same time, that spirit of independence may be fading as younger physicians replace those who are retiring.

The number of physicians employed by hospitals has been steadily rising in recent years. According to the AAFP’s Wergin, the academy has about 115,000 members. The most recent surveys have found about 60%  are employed by hospitals or health systems,  a figure that is expected to rise, he says.

It’s becoming more difficult for independent practices to “perpetuate themselves like they used to” because there are fewer young physicians wanting to purchase practices, Halley says.

“Physicians coming out of medical school today are a different breed. They aren’t interested in an 80-hour work week,” Halley adds. “They want a life outside of medicine, and don’t want to work as hard.”

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