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March 2, 2021 – Doctors who work for hospital outpatient facilities get much higher payments for their services from Medicare than doctors who practice independently, according to a new study.

The research, based on Medicare claims data from 2010-2016, found that the program’s payments for doctors’ work were, on average, $114,000 higher per doctor per year when billed by a hospital than when billed by a doctor’s independent practice.

According to the study by Brady Post, PhD, Edward C. Norton, PhD, and colleagues published in Health Services Research, the amount Medicare would pay for outpatient care at doctors’ offices would have been 80% higher if the services had been billed by a hospital outpatient facility. The researchers calculated that in 2010, the average set of Medicare services independent doctors performed annually for patients was worth $141,000, but charging for the same group of services would have grossed $240,000 if a hospital outpatient facility billed for them.

The payment difference varied by specialty. The payment gap was $63,000 for primary care doctors, $178,000 for medical specialists, and $150,000 for surgeons.

Moreover, the study found, the differential grew over time. From 2010-2016, the average difference between hospital outpatient and private practice payments grew from 80% higher to 99% higher.

The main reason for these large payment differences: For each service a doctor performs, Medicare pays hospital outpatient facilities both a fee for the doctor’s work and a fee for the facility, whereas private practices receive only doctor fees. Although the doctor fees are a bit lower in hospital outpatient locations, the facility fees more than make up for the difference, and the total payments to hospitals are reflected in higher doctor salaries and bonuses.

The Centers for Medicare & Medicaid Services (CMS) has been trying to correct this imbalance for years with policies that would pay both sites the same amount. In 2015, the Bipartisan Budget Act authorized CMS to impose site-neutral payments but grandfathered existing hospital outpatient facilities. Later CMS expanded the equal payments to other hospital outpatient facilities, but the American Hospital Association sued to overturn this regulation. The courts have yet to decide the outcome.

Effect on Consolidation

According to the Medicare Payment Advisory Commission, the significant difference between Medicare payments to hospital outpatient facilities and independent offices has encouraged hospitals and health systems to buy doctor practices. But this study noted that good research about this has been lacking up to now.

The researchers said they found little evidence of a direct relationship linking the size of the pay gap between hospital outpatient facilities and independent offices with hospitals buying doctor practices in particular medical specialties. But they did find that doctors whose services had larger pay gaps were more likely to have a hospital buy their practice than doctors whose services had a smaller pay gap.

In an accompanying commentary, Michael Chernew, PhD, of Harvard Medical School in Boston, said the study had found that the ability of hospitals and employed doctors to earn more from Medicare had resulted in a greater amount of integration.

Many Factors at Play

The authors, however, pointed out that the Medicare payment difference is only one of many factors that have contributed to the huge increase in the share of doctors employed at hospitals over the past decade. For example, they found a higher probability of a doctor going to work for a hospital in highly concentrated hospital markets and rural areas.

Other studies, they noted, have established that some health systems use integration with doctors’ offices as a bargaining chip with commercial health insurance plans. Also, some doctors may find that independent practice is less viable than it used to be for a variety of reasons. It has also been suggested that many younger doctors prefer hospital employment to private practice because they crave economic security and work–life balance, the authors said.

It's been estimated that evening the payments to hospitals vs. doctors could save CMS $11 billion over 10 years, Chernew noted. But this paper, he said, illustrates that the payment disparities can also create "broader market distortions," because consolidation of hospitals and doctors’ offices has been shown to lead to higher prices overall.

The study authors agreed. "These results cohere with recent work that has found much of the increase in U.S. health care costs is attributable to rising prices or changes in service intensity (such as the migration of services to [hospital outpatient facilities])," they said. "Integration [between hospitals and doctors] appears to threaten the affordability of care with minimal gains in quality."