How Misplaced Reimbursement Incentives Drive Healthcare Costs Up

For all of those out there anticipating the 2014 official role out of Obamacare, also known as the ACA (Affordable Care Act), here is a cautionary tale.

Many years ago, as I was growing my cardiology practice, it became evident that diagnostic services for my specialty, like stress tests, echocardiograms, etc., were done less efficiently and cost more at the local hospital, then in the office. This stimulated many groups in the 1980s and 90s to install their own “ancillary” diagnostic services. Patients loved not having to deal with the long waits and higher copay prices at the hospitals. And yes, the cardiologists did increase their revenues with these tests. However, lower costs to patients, insurance companies, Medicare, and improved patient satisfaction were just as powerful a stimulus to the explosive growth of these diagnostic tests, and later even cardiac catheterization labs, when integrated into the physicians’ offices.

As the growth in testing spiraled upward, the hospital industry saw their slice of the outpatient revenue pie nosedive. Hospital lobbyists and policy-makers cried foul and complained of greed and self-referral, which they said was spiking the rapid rise in healthcare costs.

Studies laying blame on self-referrals being the major culprit for escalating healthcare costs, have been inconclusive. However, after years of lobbying and the passage of ACA, the hospital industry finally had the weight of the Federal government on their side. It did not take long for Medicare to start dialing back the reimbursements for in-office ancillary tests and procedures, and outpatient cardiac catheterization labs were one of their main targets. Hospitals had lost millions of dollars to the burgeoning growth of these labs inside the cardiologist’s office.

Our twelve-man group had a safe and successful lab for about ten years. Then after the ACA was passed, Medicare began to cut the reimbursements for global and technical fees in this area. The cuts were so Draconian that it became impossible financially to continue the service. Never mind that we could provide the same service as the hospital more efficiently, with better patient satisfaction, and at a third of the cost.

Other diagnostic tests are being similarly placed under the reimbursement gun. Fiercely independent as a group, cardiologists have finally given up and began selling their practices to hospitals where they could be reimbursed based upon their work, (or RVU), and not worry about reimbursement from insurance and Medicare. So powerful has been this incentive that at the end of 2012, it was estimated that more the half of US cardiologists had sold, or were in the process of selling, their practices to hospitals.

But now Medicare and Congress realize they may have made a mistake. A federal advisory panel just said that Congress should move immediately to cut payments to hospitals for many services that can be provided at much lower cost in doctors’ offices.

So after taking measures to increase the cost of care and testing, it has finally dawned on them that they have incentivized the wrong entity. Unfortunately the Genie has left the bottle, and it is unlikely that the steady tide of cardiology groups selling their practices to hospitals will be stemmed. The end result will of course be higher costs to patients, insurers, and Medicare.

How bad is it? Here’s an example: Medicare pays $58 for a 15-minute visit to a doctor’s office and 70% more, $98.70, for the same visit in the outpatient department of a hospital. The patient also pays more: $24.68 rather than $14.50. When a patient receives an echocardiogram in a doctor’s office, the government and the patient together pay $188.  They pay more than TWICE as much, $452, for the same test in the outpatient department. From 2010 to 2011, the number of echocardiograms provided to Medicare beneficiaries in doctors’ offices declined by 6% while those in hospital outpatient clinics increased by 18%. Perhaps the ACA should be renamed the “Unaffordable Care Act.”

The federal advisory panel now realizes that the hospital buyouts of doctors, which have turned independent practitioners into hospital employees, has led to higher spending by private insurers and higher co-payments for their policyholders.

So where is the accountability here for the original poor judgment and decision to attack the cost-saving independent doctors’ offices and labs? No one has been named in this advisory panel’s report cited above, and I doubt anyone will ever be held responsible.

This is the kind of government snafu we have to look forward to with ACA­­––skewed incentives based solely upon lobbying and misinformation.

Truly free market forces, which we have never had in medicine since the passage of Medicare, restrain costs. It is unlikely that the clock can be turned back, but I am betting that more increases in cost will result from ACA then savings.

David Mokotoff, MD founded the Bay Area Heart Center in St. Petersburg, Florida. You can follow him at his personal site here.

7 replies »

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  2. There is another side to the question.

    Although the total charge for a particular test might be lower at a private office, once physicians had the facilities in their offices, the volume just took off.

    Yes, it is called “self referral”, and it has been amply demonstrated in many studies that have looked at the problem.

    So the Feds, as is typical, decided to throw out the baby with the bath water and are now regretting that they didn’t approach it differently.

  3. It sounds like an old conflict in Medicare:

    namely, that if unit costs go way down but volumes go way up, it looks to Washington like higher aggregate spending.

    Traditional Medicare has no tools to control utilization. It has a fee schedule that tends to reward volumes and it operates basically on the honor system.
    (i.e. doctors submit claims and they are paid quickly.)

    I have no easy solutions. Other nations might have looked at the higher volume and then reduced the fee it was paying each doctor.

  4. Thanks. There may be nothing in ACA to mandate this move towards rewarding hospitals and punishing doctors. However, the timing relationship of CMS flexing its muscles in this regard, and the passage of ACA, seems more than coincidence. CMS has known of the escalation of out-patient testing volumes, and therefore, costs for years, but only recently decided to act upon it by essentially putting out-patient physician labs out of business.

    Lacking transparency and competition for business based upon quality and price; costs of course will always escalate. Artificial wage and price controls are not an effective answer.

    Insurance in general, and Medicare in particular, are the problem and not the solution

  5. The majority of your assessment is spot-on, moving from office to hospital-based billing inevitably raises costs. I am a bit confused how the ACA drives and I am not sure that this was solely driven by the hospital industry as you purport. CMS noted significant huge increases in study volume relating to physician owned office-based imaging and other services and thus reflectively and erroneously concluded that is they stake direct compensation away, utilization would drop. While this may be the case, it has not matched the increase in costs associated with hospital-based pricing. Additionally, I think we did a poor job of patrolling our peers in preventing conflicts of interest to maintain appropriate and cost-effective imaging. Indeed, these same docs are now able to maintain income precisely based on hospital-based pricing and reimbursement. Certainly the current situation has backfired.

    Note though, this is not just about making more for the hospital as the costs associated with hospital-based services are indeed significantly higher than in the office. The underlying physical plant, distribution of fixed asset costs, regulatory requirements, overhead, staffing etc. simply contribute more than in an office.

    Fundamentally though, you have it right, this was a huge miscalculation on CMS’ part. Not sure we will be able to dig out though.