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CMS Final Site-Neutral Payments Rule Could Pose Trouble for Some Hospitals

Last week CMS released its long-awaited final rule for site-neutral payments, a new regulation that requires certain hospital-provided outpatient services at off-hospital locations to be reimbursed under the Medicare Physician Fee Schedule (PFS), rather than the Outpatient Prospective Payment System (OPPS). Mandated by the Bipartisan Budget Act of 2015, the adjustment is based off of recommendations from MEDPAC, whose analysis found that clinics operating under hospital outpatient departments were reimbursed as much as 141 percent more than private physician offices for the same services. The rule could have significant financial consequences for hospitals. Until now, they have benefitted from the higher payment rates that accompanied new construction of outpatient centers and physician group acquisitions. Some experts also predict it could slow the pace of outpatient service growth and reduce access to care for certain communities. However, it’s also possible that the effect will not be as damaging as originally feared.

For many hospitals, while the change may not have an immediate financial impact, it could reduce revenue over the long term. Services at outpatient facilities that were billing Medicare before November 2015 located more than 250 yards from the main campus will still be reimbursed under the OPPS, but the exemption is waived if the clinic relocates. However, a change to the final rule allows such facilities to add new services under the exemption and benefit from higher rates. Given the ongoing transition to outpatient care and efforts to broaden access to primary and specialty services, it’s certain that many hospitals will need to reassess their expansion strategies. Acute-care facilities with older offices or existing plans or construction projects will be the most immediately affected. The following table, derived from Definitive Healthcare data, contains several examples of hospital-owned outpatient centers that are either planned or under construction that will fall under the new reimbursement system.

Hospital-Owned Outpatient Facilities Affected by Site-Neutral Payments Rule*

Facility Name Hospital Owner Anticipated Opening Project Value (M) Notes
North Ridgeville UH Medical Center University Hospitals (OH) 2017 $32 50,300-sq-ft center with (exempt) freestanding ED
Northside Midtown Medical Northside Hospital (GA) 2018 >$40 Developer property filled mostly with Northside practices
Rush Orthopedic Center Rush 2019 $65 103,000-sq-ft orthopedic center, JV with Midwest Orthopedics at Rush
Kaiser Permanente Market Street Kaiser Permanente 2018 >$20 57,000-sq-ft full-service medical office building
Kaiser Permanente Dublin Campus Kaiser Permanente 2020 >$60 200,000-sq-ft medical office, campus to include hospital between 2025-2030
Reidman Health Center Rochester Regional Health 2017 $26 76,000-sq-ft outpatient center

*List consists of facilities planned or with construction starting after November 2015. The final rule also exempts facilities for which a construction contract existed prior to November 2015, granting a small possibility that certain projects on this list may be grandfathered in.
Source: Definitive Healthcare

Some observers have also raised concerns that the final rule will impede Americans’ access to healthcare by limiting the financial viability of new outpatient centers. In a February 2016 letter to the House Committee on Energy & Commerce, the Federation of American Hospitals concluded that the lower reimbursement rate would discourage the growth of care in underserved areas and potentially undermine population health initiatives. Specifically, they estimate that hospitals’ outpatient operating margins would decline from an average of -12.4% to -21.2%, primarily because hospitals have unique overhead costs. However, an analysis from the Advisory Board suggests that hospitals will have no choice but to keep investing in outpatient care, if for no other reason than that independent providers will fill the gaps otherwise. In addition, the growth of value-based care agreements will make vertical integration more desirable for hospitals, given that it provides greater control and oversight over patient care. As a result, hospitals will be forced to either trim operational costs or subsidize outpatient care with revenue from other services.

Though the changes to final rule reflect several concerns of hospital stakeholders, CMS has signaled that the accommodations may only be temporary, specifically regarding the expansion of services at grandfathered facilities. If hospitals attempt to abuse the exemption to the detriment of medical care, such as deliberately encouraging patients to use grandfathered facilities rather than more convenient options that provide less reimbursement, or if CMS determines hospitals have made sufficient progress in reducing costs, it is likely that the agency will issue new guidance. Such a move could put additional strain on hospital finances and possibly lead to depressed care access, as some critics anticipate. The next few years will indicate whether the payment adjustment poses a serious obstacle to hospital outpatient care expansion or becomes another manageable hurdle.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers.  Our database includes daily updated intelligence on construction projects, mergers and acquisition, executive changes, and other critical developments in the healthcare delivery industry.

November 7, 2016
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