Vertical Mergers & Provider-Based Billing

The Centers for Medicare and Medicaid Services (CMS) employ a "provider-based billing" (PBB) policy that differentially compensates health care providers based on where treatment takes place. Under PBB, services to Medicare patients seen in physician offices are reimbursed at one rate, while the same service performed in a hospital outpatient department (OPD) receives another. The policy reflects CMS' desire to link compensation to the average total cost of treatment. Thus, payments are designed to address fixed as well as variable costs. PBB also reflects the assumption that doctors and hospitals' interests are separable.

While historically accurate, recent merger-and-acquisition activity, and the advocacy in favor of vertically-integrated accountable-care organizations, has cast doubt on the separability of doctors' and hospitals' financial interests. As a result, there is increasing concern that treatments are being strategically shifted from one treatment location to another to receive higher compensation. To explore this possibility, we identify ten mergers of hospitals and physician groups, which caused their (financial) interests to coalesce. We match the list of associated hospitals to a Five-Percent Research-Identifiable Sample of Medicare enrolees and their outpatient claims, which include billing date and provider identifiers. Early evidence suggests that the timing of the mergers coincides with increased treatment in OPDs of procedure codes that could also be performed in physician office settings.

Such effects should not be surprising. Since the fixed costs of running an OPD exceed those of a physician office, payment for services provided at hospitals is often much higher. While the total payment for treatments provided in doctors' offices exceeds the professional rate for services provided in an OPD, the facility rate often is more than that of the professional component. For example, a doctor would receive $68.97 for a 15-minute visit for an established patient (CPT code 99213) when done in their office; however, if the patient saw the doctor in an OPD, the total expenditure would be $124.40, of which $75.13 goes to the hospital. (See Medpac's March 2012 Report to the Congress.)

The structure of CMS' differential payment system makes sense if where a patient receives care represents the outcome of an independent physician's thought process. Under this assumption, the doctor will prefer to provide care in their office, where they are the full residual claimant. Only if there are patient characteristics suggesting better outcomes if treated in a hospital will CMS end up paying the higher rate. However, the model obviously breaks down if ties between hospitals and physicians increase so that the decision-maker is the residual claimant for all compensation. CMS has become increasingly concerned that such profit-maximizing patient-shifting is occurring. For example, a 6.7 percent increase between 2009 and 2010 for the basic office visit discussed above. The 2012 Medpac Report to Congress hypothesizes that the integration of physicians and hospitals could lead annual expenditures to increase by $2.5 billion if current trends persisted for another 10 years.