Medicare Payment Perspective: Is Healthcare Really a Business?

CMS is encouraging the integration of healthcare providers so that their size is increased to have averaged payments represent a break-even or better.

CMS (the Centers for Medicare & Medicaid Services) views payment from a national perspective on a statistically averaged basis. Individual providers such as physicians, clinics, hospitals, home health agencies, and others must operate as businesses; that is, these providers must break even or better yet, actually generate a profit!

When CMS makes changes in various payment systems, great care is taken to make certain that at a national level, everything averages out, in terms of total CMS expenditures. Where does this leave the individual providers? In some cases, profitability is in jeopardy. To some extent, this is why healthcare provider organizations have grown in scope: so that each given organization is big enough to protect itself from this overall averaging process.

One of the recent proposed changes is relative to E&M (evaluation and management) payment for physicians. In the July 27 Federal Register, CMS proposes to collapse 99202-99205 into a single code with an associated payment of about $135. Similarly, 99212-99215 would be collapsed into a single code, with payment of about $93.

With a moment’s reflection, it becomes clear that this means that specialty physicians who normally use the higher levels of service (e.g., level 4 and level 5) will receive a substantial reduction in payment. Comparably, primary care physicians that typically use the lower levels (e.g., level 2 and level 3) will receive more payment. Basically, there is a shift in payment.

According to CMS, this is a budget-neutral change; that is, at the national level, it all averages out. But does it average out for an individual physician, or small groups of physicians?

For APCs (Ambulatory Patient Classifications), this same type of change was made in 2014. The 10 E&M levels, 99201-99215, were coalesced into a single code, G0463, with a payment of about $110. Again, CMS appears to favor an averaged payment here, which at the national level, all evens out. However, at the individual, provider-based clinic level, there is a great deal of difference between a brief clinic visit for an established patient versus a new patient who requires extensive evaluation and management. The difference in resource utilization is dramatic.

Note: It is interesting that CMS made this change to G0463 in 2014, just before the advent of Section 603 clinics, as mandated by the Bipartisan Budget Act of 2015. Starting in CY 2017, CMS was required to make the same payments to Section 603 provider-based clinics as those made to freestanding clinics under the MPFS (Medicare Physician Fee Schedule), but without the availability of the 10 levels of E&M codes on the facility side, the process of equalizing payments became very difficult.

Another example of this averaging process can be seen with brachytherapy sources. These sources come in various forms, such as seeds or ribbons. The cost for providing brachytherapy is intimately connected to the cost of these sources. There is a great deal of variability in the cost of even the same source, based upon the frequency of usage.

There has been a rather long history of payment by CMS. By virtue of the MMA (Medicare Modernization Act of 2003) and TRHCA (Tax Relief and Healthcare Act of 2006), brachytherapy sources were paid on a charge-adjusted-to-cost basis through 2007; that is, on a cost pass-through basis. Since that time, CMS has developed a mini-Ambulatory Payment Classification (APC) system for brachytherapy sources so that the charges-adjusted-to-costs approach has been modified in lieu of a limited number of APC categories. The payment for these categories is based on an averaging process, just as with the regular APCs. Over the past several years, CMS has been careful to include several pages of discussion for brachytherapy sources to justify this movement away from a cost basis to an average basis. This has generated some interesting comments from CMS. Here is an example from Nov. 14, 2015 Federal Register:

“Under the OPPS (Outpatient Prospective Payment System), it is the relativity of costs, not the absolute costs, that is important, and we believe that brachytherapy sources are appropriately paid according to the standard OPPS approach.” (80 FR 70324)

A given healthcare provider such as a hospital is always very interested in the absolute costs, because this is the amount that they must pay, and it will affect their profitability. CMS, on the other hand, is more interested in making certain that everything averages out (that is, in the relative costs).

Note: There is a keyword in the brief quote above that CMS uses quite frequently in the preamble to this Federal Register entry. The word is “believe.” CMS does not “know,” because there are no statistical studies, models, or other studies to substantiate this mini-APC payment process. CMS simply “believes” that it is proper.

There are other examples of this averaging process, particularly with APCs. Now that we have comprehensive APCs, this averaging process versus payment for individual services and items can affect various types of providers and their profitability. Consider APC 8011 or the comprehensive APC for observation services. Payment is calculated on an averaged basis. For your hospital, do you make money or lose money on observation services? CMS seems satisfied with an average payment on a national basis.

What is happening is that CMS is really encouraging the integration of healthcare providers so that their size is increased to the point that there is enough activity to have the averaged payments represent a break-even or even a profitable stance. Finding the correct approach for averaging of payments must be considered with due consideration to profitability of various types and sizes of healthcare providers.

Providers are encouraged to comment to CMS through the Federal Register concerning the various types of bundling and averaged payment processes.

Program Note:

Listen to Duane Abbey report this story during the next edition of Monitor Monday on Monday, Oct. 1, 10-10:30 a.m. ET


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Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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