Amid an industry-wide shift of care to outpatient settings, Moody’s described the Medicare cut as a credit-negative for not-for-profit hospitals and health systems.


Dec. 5—Several hospitals and advocacy groups filed suit this week to stop a finalized Medicare payment change that would cut 2019 outpatient payments by an estimated $380 million.

The American Hospital Association (AHA), the Association of American Medical Colleges (AAMC), Olympic Medical Center in Port Angeles, Wash., Mercy Health in Muskegon, Mich., and York Hospital in York, Maine, filed a lawsuit against the U.S. Department of Health and Human Services (HHS) to stop a payment cut for hospital outpatient clinic services that are furnished in off-campus provider-based departments (PBDs). The new cuts apply to off-campus PBDs that were excepted from a previous such cut, which was authorized by the Bipartisan Budget Act of 2015.

The Centers for Medicare & Medicaid Services (CMS) finalized the controversial cut in the CY19 Outpatient Prospective Payment System (OPPS) final rule, and it goes into effect Jan. 1.

Hospital advocates said the cuts—projected to grow to $760 million when fully implemented in 2020—contradict the intent of Congress to apply the cuts to new facilities only and to exempt grandfathered sites. And there were practical reasons for such exemptions, the plaintiffs said.

"For example, patients who receive care in a hospital outpatient department are more likely to be poorer and have more severe chronic conditions than patients treated in an independent physician office,” Rick Pollack, president and CEO of AHA, said in a written statement. “In addition, only hospitals provide 24/7 access to care for patients, regardless of their ability to pay, hospitals are held to far higher regulatory requirements, and hospital outpatient departments in inner cities and rural areas are often the only sites of care that provide the services they do.”

The lawsuit was filed on the same day that Alex Azar, secretary of HHS, praised the $380 million cut in a Washington, D.C., speech

“Right now, the way that we pay for health care impedes competition, rather than promotes it,” Azar said in his speech at the American Enterprise Institute. “For instance, there is a huge differential between what Medicare pays for services at hospital-owned facilities, versus outpatient centers. This has driven hospitals to snap up their smaller competitors who can’t say no to the possibility of a new owner that will automatically increase the compensation they get from the government.”

“Fixing this perverse situation has been talked about for years by administrations of both parties and yet this administration is the one finally bold enough to do it,” Azar added.

The $380 million cut would “restore a more level playing field for providers,” Azar also said.

Lawsuit Points

As a potential response, the lawsuit points out that off-campus PBDs have higher costs than physician offices and often provide services that are not available in physician offices.

“Commenters also noted that paying off-campus PBDs at the lower rates paid to physicians would upset the reasonable expectations of hospitals that acquired or built off-campus PBDs with the understanding that they would be paid under the OPPS,” the lawsuit states.

Among the reasons why the court should reject the payment cut, the lawsuit argues, is that the CMS violated the Medicare Act by not making the cut budget-neutral and by treating excepted and non-excepted PBDs the same.

“If the Final Rule is left in place, Plaintiff-Hospitals and Plaintiffs AHA’s and AAMC’s members face the prospect of serious payment reductions for affected services, and may have to make difficult decisions about whether to reduce services in response to the lowered payment rate,” the lawsuit states.

Such concerns were spelled out by numerous hospitals and state hospital groups that submitted comments on the OPPS proposed rule.

For instance, the Kentucky Hospital Association (KHA) said the cut would cost hospitals in the state $5 million annually.

That loss would exacerbate the state’s Medicare margin on outpatient services paid under the OPPS. That margin was -6.3 percent in 2007 and declined to -12.6 percent in 2015.

“Approximately 50 percent of Kentucky hospital patients are covered by Medicare, making the proposed reductions in payment very damaging to the ability of hospitals to serve their communities,” wrote Nancy Galvagni, senior vice president for KHA. “Kentucky's hospitals cannot survive with declining payments from the Medicare program, and the loss of off-campus provider-based departments will only exacerbate the lack of access to healthcare services in the Commonwealth.”

Nationally, the cut was described as a credit-negative in an August report from Moody’s Investor Service soon after the proposed rule was released.

Moody’s noted that CMS currently pays OPPS rates of about $116 for Medicare off-campus PBD clinic visits. But at the same rate that applies to physician offices, based on the Physician Fee Schedule, the payment would be about $46, or 40 percent of the current rate. According to CMS, clinic visits (that are related to evaluation and management) are the most common service billed under Medicare’s OPPS.

“Outpatient care is already less profitable than inpatient care and these proposed changes would further reduce hospital margins,” the Moody’s report stated.

The cut also comes amid an ongoing shift to outpatient services. According to Moody’s, outpatient revenues comprised more than 50 percent of not-for-profit hospital revenues in 2018.

Updated Outlook

Fitch Ratings this week maintained a negative outlook for not-for-profit hospitals in 2019 and predicted waning operating profitability, in part due to Medicare’s growing share of payer mix.

Fitch noted that large health systems continue to push toward a longer-term goal of cutting billions of dollars from their expense bases through basic cost-cutting, clinical efficacy initiatives, and fundamental delivery transformation. The goal in undertaking such efforts is to become profitable on Medicare rates.

Larger health systems may have the credit status and balance sheet strength to give tactical and strategic improvement initiatives time to mature. However, lower-rated hospitals and health systems are usually “less able to trim expenses, often due to their smaller size and scale, and are less likely to be a price maker and more of a price taker in their individual markets when negotiating commercial rates,” Fitch stated.


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Thursday, December 06, 2018