A new site-neutral CMS outpatient rule will cut reimbursements sharply for new outpatient centers, forcing hospitals and health systems to rethink construction decisions.
This article first appeared in the September 2017 issue of HealthLeaders magazine.
Last fall, with one regulatory swipe, CMS may have changed the plans of countless hospitals and health systems that counted on higher billing rates for "hospital-based" services provided to Medicare beneficiaries by off-campus hospital-owned facilities.
The move wasn't a surprise—the regulatory changes come directly from the Bipartisan Budget Act of 2015, Section 603—but it essentially means that payments to provider-based departments that were not billing as a hospital department prior to November 2, 2015, will be cut in half. Those established after that date will be considered "site neutral" and, thus, will receive the lower reimbursement rate.
Hospitals and health systems, for a variety of reasons, had been investing heavily in outpatient facilities, either by acquiring physician practices that owned them or by building off-campus facilities on their own.
One example is the proliferation of medical malls that combine a variety of outpatient services under one roof. Under the old rules, they could bill at the hospital rate. But those investments are now in question thanks, in large part, to this new rule.
"They took a significant sledgehammer to innovation and community focus, and all because they didn't like hospitals buying clinics and converting them."
While it's not affecting plans for a consolidated outpatient center for his organization, Mark Herzog, FACHE, president and CEO of Holy Family Memorial in Manitowoc, Wisconsin, says the rule will likely have a chilling effect on other organizations that want to either consolidate outpatient services or move more care out of the inpatient setting.
Several forces drive this trend: For one, all but the most specialized and complex care is generally more dangerous in an inpatient setting; it's also generally more inconvenient for patients and more expensive.
"It is a very poorly-thought-out regulation," Herzog says.
Inspired by the trend toward hospitals buying large physician group practices and converting them to provider-based sites, which, of course, also provided for better Medicare reimbursement, the rule was intended to put a stop to such behavior.
But like many government regulations added to stop a particular undesirable behavior, it's not retroactive—that is, if you already have established these facilities, you can continue to bill the old way.
Only future construction projects and strategic decisions associated with them are affected. In this way, the new OPPS rules are the equivalent of closing the barn door after a horse has already escaped. To extend the metaphor further, it may prevent the proper care and feeding of the horses that remain.
The root cause of the new regulation is to prevent gaming the reimbursement system through physician acquisition, says Herzog, "but in so doing, while they may have stopped a temporary problem … they put a huge barrier in place for existing providers trying to do the right thing for their communities."
Besides, he says, because the physician acquisition boom is years old now, hospitals and health systems are running out of new providers to acquire.
Holy Family Memorial, in fact, is attempting to decrease operating expenses by consolidating services under fewer "roofs," and the new regulation will effectively put a damper on that activity for health systems that are seeking to right-size their physical building infrastructure.
When he became CEO of the 67-staffed-bed medical and surgical hospital, which has more than 1,200 employees in its network, it had 27 network service facilities. By consolidating outpatient locations, such as physician offices, the system is down to six "roofs," he says, as part of an efficiency drive.
He says as a result of the consolidation, the health system has not experienced an increase in operating expenses since 2010, partially by reducing such fixed costs.
One example—HFM Lakefront, an outpatient medical campus that opened in summer 2017—consolidates three existing locations into one and reduces operating costs by about $500,000 a year, he says, adding that it provides better patient experience and integrates behavioral health. But it won't be able to bill under the old rate.
"We were well along with this project, and thanks to an enlightened board that was committed to doing what's right, we're continuing on that plan," says Herzog. "But if I had a corporate board, which is the norm, after this regulation came down, the system CFO probably would have said, 'No deal; we're not going to do it.' "
"There might be a tendency to reinvest on the hospital campus as opposed to other outpatient locations, which is unfortunate because the idea is to increase access."
He says the rule will prevent existing organizations with existing clinics from doing the right thing by relocating clinics because, if they do, their Medicare reimbursement rate will drop.
"As of the date of this reg, it presupposed that every clinic is already in the ideal perfect location and that the needs of the community would never change and we'd never need to adjust," Herzog says. "They took a significant sledgehammer to innovation and community focus, and all because they didn't like hospitals buying clinics and converting them."
Lee Domanico, CEO of Marin General Hospital, a 176-bed, general medical and surgical hospital in Greenbrae, California, agrees the regulation will hamstring leadership at many hospitals and health systems by placing a barrier on flexibility with brick-and-mortar investments.
"It will have an effect on decision-making because the return on those investments will be lower," he says. "There might be a tendency to reinvest on the hospital campus as opposed to other outpatient locations, which is unfortunate because the idea is to increase access."
Conversely, hospitals and health systems on the margin will see better returns by investing on campus going forward, while the trend had been the opposite—toward better patient convenience and integration of outpatient services into single locations away from the main campus.
Marin General, in fact, is in the process of planning and building a replacement hospital, and while the regulation was not a factor in that decision in the years-old plan to replace the hospital (in part because of California's seismic safety regulations), the project will include not only a four-story, 260,000-square-foot hospital replacement building, but also a five-story, 100,000-square-foot ambulatory services building on the same campus.
District hospitals such as Marin General are exempt from some of that legislation because they are able to provide diagnostic services under the license of the district, but it will have some future effect.
"When the regulation first passed, we looked at everything through a new lens, he explains. "It's going to lower returns, but we decided to go forward in any case with a brand-new breast health center that was on the drawing board. Long term, it could have an effect on our outpatient plans, but in the short term we're still trying to meet needs on an ambulatory basis."
Unintended consequences
Both CEOs said they think the regulation could be tweaked to prevent gaming the system, but the current regulation is so blunt that it creates obvious unintended consequences, such as limiting flexibility for hospitals and health systems to move more care outside of their main inpatient campuses.
"The easiest way would be to say you couldn't bill newly acquired provider-based clinics as hospital-based in the future, but they added the prohibition against relocating provider-based practices with the new regulation, which makes no sense," says Herzog.
"They put a huge barrier in place for existing providers trying to do the right thing for their communities."
Based on his conversations with representatives of the American Hospital Association and other healthcare lobbies, Herzog says the industry was surprised by the prohibition against relocation.
"Inclusion of that is unwise regulatory overreach," he says.
He says he speculates that hospitals and their lobbying organizations were blindsided by the rule because government officials were concerned that allowing input from those being regulated would water it down.
But the result is that the broad regulation created unanticipated outcomes and is now damaging the broader trend of moving care into sites of lesser acuity for patients who don't need the extra clinical support that a full-service hospital offers.
But on the aggregate, is this regulation significant enough to dampen the effect of hospitals and doctors coming together?
"Possibly, but you're stamping out innovation and consolidation forever and maybe slowing down doctor acquisition for two years," Herzog says.
Because the board at Holy Family sees the new Lakefront center as right for the community, the regulation did not change the health system's planning process, Herzog says.
"We're doing it because it's right, and the fact that this 15,000-square-foot clinic is going to get a half million less in annual reimbursement because of this rule is not going to change our plans," he says. "It will possibly take other resources away from the community, however, and our ability to provide other services such as combating opioid abuse and other population health initiatives."
The bigger picture
The main problem with the legislation is the effect it will have on health systems' flexibility to locate and build facilities tailored to the needs of the patients they serve rather than the whims of government bureaucrats, says Herzog.
"Here we use a term called 'right care,' which means we're going to provide patients the right care at the highest-quality location and the lowest-cost setting for the right outcome," he says.
The inpatient hospital, from a financial point of view, is the absolute worst place, he argues, and it's the worst place for the many other patient needs, in terms of safety and convenience.
Right care, by Holy Family Memorial's definition, means moving patients to the clinic setting and, when possible, to the home.
Yet home healthcare is the worst-reimbursed setting, even though many studies, including a recent one by UCLA researchers in the peer-reviewed journal Medical Care, showed that hospitals that referred patients to inpatient facilities (e.g., postacute care) most often were more likely to readmit patients within 30 days compared to those who referred patients to inpatient facilities least often.
The study did not find a similar correlation between referrals to home healthcare and hospital readmissions.
"Now this regulation comes along, and it's one more reason to reinforce the hospital as center of the healthcare universe," says Herzog. "Health policy should support higher quality and lowering the cost of healthcare. This regulation does neither, and one could argue that, long term, it's deleterious to that effort."
Even so, while it may change the calculus on outpatient construction trends overall, Herzog says this regulation won't deter Holy Family Memorial from following its philosophy whether the government supports it or not.
"But you shouldn't increase the use of hospitals unnecessarily," he says, "because that is just volume-driven healthcare."
Philip Betbeze is the senior leadership editor at HealthLeaders.