Even as value-based payment is demanding tighter clinical integration to improve outcomes and the efficiency of care delivery, the Medicare Payment Advisory Commission (MedPAC) is recommending that payments to provider-based physicians be reduced for select outpatient services.


Hospital acquisitions of physician practices as a means to facilitate clinical integration have led to a marked increase in provider-based billing, increasing overall costs to the Medicare program. In response, MedPAC recommended Congress equalize payments for evaluation and management (E&M) services between the hospital outpatient department and freestanding settings and is exploring expanding the policy to other outpatient services. If the disparate policies are implemented, they will have varying degrees of impact on different types of hospitals. Providers should prepare for implementation of these policies by reevaluating their physician integration strategies and improving the efficiency of their physician practices.

Growth in Provider-Based Billing

In a presentation in 2011, MedPAC reported that, from 2004 through 2010, the number of physician office visits provided in a hospital-based setting increased 28 percent.a MedPAC noted that the growth was most pronounced with certain cardiology services, including echocardiology and nuclear medicine. Given this marked rise, MedPAC has expressed concern that program costs are rising without an appreciable difference in the complexity or quality of patient care provided. 

Although the two settings of care might appear similar, the cost structure disparities between them could not be more different. Hospitals treat higher severity patients, have higher cost structures than physicians’ offices due to the need for emergency standby capacity, and have higher costs associated with regulatory requirements that don’t apply to freestanding practices. Despite these factors, MedPAC recommended in its March 2012 report to Congress on Medicare payment policy that a “site-neutral” payment policy be adopted for 10 E&M services, and the commission is exploring a similar policy for 71 other outpatient ambulatory payment classifications (APCs). 

MedPAC’s Recommendations for E&M Services

MedPAC recommended making payments for like services the same for the E&M services in question (CPT codes 99201 through 99215) whether the services were delivered in a freestanding or a hospital-based setting. The recommendation included a three-year phase-in period, during which any provider with a disproportionate share hospital percentage at or above the median would be subject to a hold-harmless stop loss of 2 percent of overall Medicare payments. The top exhibit below shows the recommendation’s payment impact for CPT code 99213.

 Exhibits 1 & 2


Based on MedPAC’s estimates, major teaching and government hospitals would be most affected by the E&M policy. If Congress were to implement this recommendation, it could reduce annual Medicare spending by roughly $250 million to $750 million per year, for a five-year programmatic savings of somewhere between $1 billion to $5 billion. 

MedPAC’s Recommendations for Other Outpatient Services 

During meetings over the past year, MedPAC has explored extending this recommendation to other APCs. It has focused on two groups of services, recommending that payments be equalized between freestanding and hospital-based care settings for one group of APCs (Group 1) and that differences in payments between the two settings be reduced for the second group of APCs (Group 2).

Group 1 includes 24 APCs and Group 2 has 47 for a total of 71 target procedures. Both groups consist of services that are provided in physician offices more than 50 percent of the time and in emergency departments less than 10 percent of the time, and for all services, the severity of patients’ conditions is similar across settings. 

Both groups would exclude services with 90-day global periods in the physician fee schedule.

The main difference between the two groups is that Group 1 is composed of APCs in which packaged items make up less than 5 percent of the total cost, whereas Group 2 is composed of APCs in which costs of packaged items exceed 5 percent of the total cost. This difference explains MedPAC’s different recommendations for the two groups: MedPAC’s recommendation to only reduce differences in payment between hospital-based and freestanding settings for services in Group 2—rather than equalizing payments between the settings—acknowledges the high cost of packaged items for services in that group. The bottom exhibit on page 49 illustrates how MedPAC’s contemplated policy would affect one APC in Group 1, APC 698, Level II Eye Test and Treatment.

MedPAC did not include a site-neutral recommendation for other outpatient services in its March 2013 report to Congress and is still exploring the issue. It is clear from comments made during discussion of the policy that commissioners are struggling with concerns about access to care for beneficiaries in rural areas and acuity differences. 

If MedPAC were to move forward on a recommendation for other outpatient services (and if the recommendation were implemented by Congress), the estimated savings would be approximately $1 billion annually. Almost half of the projected savings stem from two cardiac imaging services. The policy would have the greatest impact on rural, community, and physician-owned hospitals. 

The exhibit below shows the estimated annual percentage reduction in total Medicare payments that would result from the two combined policies.

 Exhibit 3


Overall Prospects and Provider Responses

The site-neutral policy either for E&M services or for other outpatient services has yet to appear in a package before Congress. However, given the need for offsets to “fix” the sustainable growth rate and reduce overall Medicare spending as part of addressing ongoing deficits, it is likely that at least the E&M policy will be implemented. Not surprisingly, the private sector is not waiting for Congress. In 2012, Group Health Cooperative sent letters to all hospital providers announcing that it will stop paying facility rates for E&M codes for all patients.c

Given that, even with the higher payment rate for physician services in provider-based settings, hospitals can easily incur losses that approach or exceed $100,000 annually per employed physician, the implications are twofold. 

First, hospitals should reevaluate their physician integration strategies. They should make sure they are employing the right mix of physicians to improve quality and reduce costs. Part of this review should be to ensure that physician compensation structures align physicians’ goals related to cost and quality with those of the organization. 

Second, hospitals should focus cost-control and margin-improvement efforts on their physician practices. Although the cost of this component of the delivery system is not significant relative to inpatient services, as more services migrate to outpatient settings, these efforts will be crucial to improving the overall value of care delivered and protecting provider margins.

 Chad Mulvany is a technical director in HFMA’s Washington, D.C., office and a member of HFMA’s Virginia-Washington, D.C. Chapter.


a. Stensland, J., Zabinski, D., and Winter, A., “Payment Rate Differences Across Ambulatory Sectors,” MedPAC meeting presentation, Nov. 4, 2011. 

b. Zabinski, D., and Winter, A., “Addressing Medicare Payment Differences Across Settings: Ambulatory Care Services,” MedPAC meeting presentation, Nov. 2, 1012. 

c. MedPAC public meeting transcript, Nov. 1, 2012, page 410.


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