Medicare, which remains on GAO’s High Risk List, spent nearly $40 billion on hospital outpatient department services in 2013. Medicare spending on such services has grown rapidly—faster than the growth in total Medicare Part B spending and the growth in the national economy from 2007 through 2013. Some of the growth in hospital outpatient department spending is attributable to the fact that services that were typically performed in physician offices have shifted to hospital outpatient departments. Some services can be performed in multiple settings, including physician offices and hospital outpatient departments, and Medicare’s total payment rates are often higher when services are performed in hospital outpatient departments compared to physician offices. For example, the total Medicare payment rate for one common service—a mid-level evaluation and management office visit for an established patient—was $51 higher when the service was performed in a hospital outpatient department instead of a physician office in 2013. One reason services may shift to hospital outpatient departments is an arrangement health care experts commonly refer to as vertical consolidation—when hospitals acquire physician practices or hire physicians directly as employees. After such consolidation occurs, the same services that were once reimbursed at a lower total payment rate can be classified as hospital outpatient department services and reimbursed by Medicare at a higher total payment rate.
Medicare Part B covers certain hospital outpatient department services, physician, and laboratory services, among other services.
Evaluation and management office visits are provided by physicians and nonphysicians to assess patients’ health and manage their care. In general, Medicare pays roughly 80 percent of the payment rate for evaluation and management office visits under Medicare Part B, and the beneficiary is responsible for the remaining 20 percent.
In a December 2015 report, GAO’s analysis of American Hospital Association survey data showed that from 2007 through 2013, the number of vertically consolidated hospitals and physicians increased substantially. Out of the approximately 4,700 surveyed hospitals included in GAO’s study, 1,408 reported having a vertical consolidation arrangement with physicians in 2007. This number increased to 1,707 in 2013, an increase of 21 percent. In addition, GAO found that the number of vertically consolidated physicians nearly doubled between 2007 and 2013, going from approximately 96,000 in 2007 to 182,000 in 2013.
Number of Vertically Consolidated Hospitals and Physicians, 2007 through 2013
Note: GAO limited its analysis to hospitals that served Medicare beneficiaries on an inpatient basis based on an analysis of Medicare claims data.
GAO’s analysis of American Hospital Association survey data and Medicare claims data showed that the percentage of evaluation and management office visits—as well as the number of office visits per beneficiary—performed in hospital outpatient departments was generally higher in counties with higher levels of vertical consolidation from 2007 through 2013. For example, after dividing counties into five equal groups based on their 2013 level of consolidation, GAO found that the median percentage of evaluation and management office visits performed in hospital outpatient departments in the group of counties with the lowest levels of vertical consolidation was 4.1 percent. In contrast, this rate was 14.1 percent for the counties with the highest levels of consolidation.
Median Percentage of Medicare Evaluation and Management Office Visits Performed in Hospital Outpatient Departments, by County Level of Vertical Consolidation, 2013
Note: Counties were sorted into quintiles based on their level of vertical consolidation in 2013. Specifically, the counties in the lowest quintile were considered to have low levels of vertical consolidation, and the next four quintiles were considered to have medium-low, medium, medium-high, and high levels of vertical consolidation, respectively.
The association GAO found between higher levels of vertical consolidation and higher utilization of evaluation and management office visits in hospital outpatient departments remained after using regression analyses to control for other factors that could affect the setting in which evaluation and management office visits were performed. Specifically, GAO’s regression analyses found that the level of vertical consolidation in a county was significantly and positively associated with a higher number and percentage of evaluation and management office visits performed in hospital outpatient departments—that is, as vertical consolidation increased in a given county, the number and percentage of evaluation and management office visits performed in hospital outpatient departments in that county also tended to be higher.
GAO concluded that rapid growth of vertical consolidation, and with it the higher utilization of evaluation and management office visits in hospital outpatient departments from 2007 through 2013, resulted in Medicare paying more for these services than necessary. Such excess payments are inconsistent with Medicare’s role as an efficient purchaser of health care services. According to the Centers for Medicare & Medicaid Services, the agency does not have the statutory authority to equalize total payment rates between hospital outpatient departments and physician offices without legislation. Further, the agency lacks the authority to return the associated savings from any rate changes to the Medicare program. Therefore, absent legislative intervention, the Medicare program will likely continue to pay more than necessary for certain services.
The Bipartisan Budget Act of 2015, enacted in November 2015, effectively limits certain providers from billing at the higher hospital outpatient department rates. Specifically, the legislation excludes services furnished by off-campus hospital outpatient departments from reimbursement under Medicare’s hospital outpatient prospective payment system, effective January 1, 2017. According to the Congressional Budget Office, this action could save the Medicare program $9.3 billion over 10 years. However, the Act does not apply to services furnished by providers billing as hospital outpatient departments prior to enactment of the legislation—which includes providers billing as hospital outpatient departments during GAO’s study period—as well as hospital outpatient departments located on hospital campuses. This means that, even in 2017 and beyond, many providers will not be affected by the Act, and Medicare will continue to pay more than necessary for certain services.
See Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 603, 129 Stat. 584, 597-598 (2015).
To prevent the shift of services from physician offices to hospital outpatient departments from increasing costs for the Medicare program and its beneficiaries, GAO recommended in December 2015 that Congress consider the following action:
Several organizations, such as the Bipartisan Policy Center and Medicare Payment Advisory Commission, have estimated that equalizing payment rates between physician offices and hospital outpatient departments for evaluation and management office visits would save billions of dollars, with some estimates predicting savings of nearly $1 billion to $2 billion a year.
The information contained in this analysis is based on findings from the product in the related GAO products section. To examine trends in vertical consolidation between hospitals and physicians from 2007 through 2013, GAO analyzed American Hospital Association survey data, in which hospitals report the types of financial arrangements they have with physicians and the number of physicians in those relationships. This analysis was limited to hospitals that served Medicare beneficiaries during this period, which were identified using Medicare claims data. To examine the extent to which higher levels of vertical consolidation were associated with more evaluation and management office visits being performed in hospital outpatient departments instead of physician offices, GAO first determined the (1) the level of vertical consolidation in counties using American Hospital Association survey data and Medicare claims data and (2) the setting in which evaluation and management office visits were performed based on Medicare claims data. GAO then analyzed how the utilization of evaluation and management office visits differed among counties with varying levels of consolidation. To ensure that the relationship observed in this analysis was not due to other factors, GAO developed regression models that controlled for county and hospital characteristics.
Table 17 in appendix V lists the program GAO identified that might have opportunities for costs savings.
Other than technical comments, which were incorporated as appropriate, HHS did not comment on GAO’s December 2015 report on which this analysis is based. However, the American Hospital Association noted several reasons why, in their opinion, a service performed in a hospital outpatient departments should receive a higher Medicare reimbursement compared to when the same service is performed in other settings. GAO recognizes that it might be inappropriate to equalize the total Medicare payment rate in all circumstances. However, Medicare aims to be a prudent purchaser of health care services, and that goal is not achieved if Medicare’s total payment rate is substantially higher simply because hospitals have acquired physician practices.
GAO provided a draft of this report section to HHS for review and comment. The department did not provide comments on this report section.
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Vertical consolidation is a financial arrangement that occurs when a hospital acquires a physician practice and/or hires physicians to work as salaried employees. The number of vertically consolidated hospitals and physicians increased from 2007 through 2013. Specifically, the number of vertically consolidated hospitals increased from about 1,400 to 1,700, while the number of vertically consolidat...