Care Transformation Center Blog

Site-neutral payments: The billion-dollar Medicare revenue hit you should plan for now

by Michele Molden, MBA and Eric Passon, MBA

Today, hospitals and health systems around the country benefit from differences in payment rates between the hospital setting and the physician practice setting. But Congress could be closing the gap between those payment settings—and that change could have huge financial consequences for the provider industry.

No matter your political views, we believe that Medicare’s adoption of some form of site-neutral payment is increasingly becoming a matter of when, not if. From the Medicare Payment Advisory Commission (MedPAC) to the President’s recent budget proposal, the call for a site-neutral payment methodology continues to attract attention and support from policymakers.

A big problem under fee-for-service

"Site-neutral payments"—also referred to as "equalization of payments" or "[eliminating] site-of-service differential"—is the term for making reimbursement for certain outpatient services the same across hospital- and non-hospital based settings. This concept sparks a sense of panic for many health system leaders, because according to MedPAC, hospital revenue could decrease by $1.44 billion each year.

It’s not great news for hospitals that are still operating under fee-for-service. And it’s particularly tough on hospitals that have acquired physician practices and moved their ancillary services into the hospital setting—a big issue in cardiology.

But through a clear contracting and operational strategy, our hospital partners can take steps today to prepare for a new reimbursement reality that includes site-neutral payments.

Offsetting revenue losses with strategic contracts

For health systems participating in shared savings or Medicare Advantage, providing care in a lower cost setting is rewarded. So if your system is already operating under these models, performing more services in the ambulatory setting may increase savings, making your system eligible for greater rewards.

Granted, the rewards from these value-based care programs, particularly shared savings, aren’t nearly enough to completely offset the revenue losses associated with site-neutral payments, at least not yet, and especially not for health systems that are just "dipping their toe" in the value-based payment world.

However, they can help tremendously. And if ultimately faced with site-neutral payments, health systems might consider other strategies for greater impact—such as transitioning into meaningful risk sharing arrangements.

Regardless of where a health system is in the transition to value-based care, developing a more robust contracting plan can help soften the blow when the government decides to move forward with site-neutral payments.

Getting outpatient operations in order

When we asked the CEO of an academic medical center in the Northeast what he would do if site-neutral payments were instated, he said: "We’re going to push our hospital-based clinics and ancillaries’ management to the physician-led medical group."

To address site-neutral payments, systems like this academic medical center are returning certain outpatient services to the practice setting—where integration into practice operations can lower costs and provide greater access. They can also realize cost savings by reducing duplication of equipment and labor, and backfill hospital outpatient space with services that are truly needed in that setting.

But hospitals of course can’t send everything out—they need to carefully downsize what’s in-house now, in favor of a bigger ambulatory offering.

Transforming to an ambulatory enterprise

The bright side is that this new approach can change the way most health systems typically view their employed medical groups—as a significant investment and major net loss.

But as part of planning for this change, organizations must re-evaluate operational activities such as current management of outpatient services, revenue cycle operations, physician compensation, and patient access.

For example, as ancillaries are moved back to practice locations, health systems enhance their ability to manage the costs and revenues associated with these services. As a result, they will have greater alignment with physicians when moving from managing how many worked RVUs are produced to managing the cost of delivering care along with the quality and experience.

This is why so many health systems are rethinking how they pay physicians given a majority of compensation plans are largely worked RVU based. Progressive compensation models, for both primary and specialty care physicians, are based on what is financially sustainable for the enterprise, looking beyond fee-for-service economics and taking into consideration non-productivity factors such as quality and other system goals.

In addition, this shift has the potential to promote a better patient experience. Under the current health system structure of hospital outpatient ancillary services, the process is very inconvenient for patients. Patients are often required to make two appointments, check-in to two locations (which may require driving to a location further away), and pay two bills. It’s an access nightmare.

By moving certain hospital outpatient services to the ambulatory setting, many patients will be accessing the physician practice—with just one system to navigate, and less confusion and duplication along the way.

No matter when or to what extent CMS implements site-neutral payments, it is going to be important to develop a strong ambulatory strategy that aligns the economics around value, outcomes, and patient access.

Become a market leader in value-based care

With the health care industry rapidly moving toward value-based care, Sparrow Health System had a dilemma at hand: take the plunge as market leaders or wait until others in the mid-Michigan area made the first move.

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