The U.S. hospital industry was a major beneficiary of the Obama years. In exchange for significant Medicare rate concessions, hospitals received more than 20 million paying patients from the Affordable Care Act. They also received a significant political gift from Congress: The Medicare Access and CHIP Reauthorization Act applied new pressure on independent physicians to enter salaried employment by hospitals to escape federal recordkeeping requirements.

While the country remained fixated on the fate of Obamacare, HHS, headed by arch-conservative orthopedic surgeon Dr. Tom Price, has been quietly looking for ways to help independent practicing physicians. Recently, the department exempted most practicing physicians from the Merit-based Incentive Payment System reporting requirements of MACRA for 2018. It also markedly reduced the amount of hospitals’ 340B subsidies for drug purchases, which had quietly fueled a boom in hospital purchases of medical oncology practices. Finally, the CMS recently ended two mandatory hospital-centric bundling programs that, among other things, conveyed control over physician incomes to hospitals.

It is possible that this is just the beginning of a campaign to re-advantage independent practitioners at the expense of hospitals. Other policy options include:

• Lifting restrictions on establishing new or expanding existing physician-owned hospitals (part of the ACA) and loosening Stark law restrictions on physician-owned imaging and surgical facilities

• Ending Medicare’s policy of paying more for “hospital-based” physician services than for the same services offered by private practitioners in the same community

• More aggressive enforcement of Office of Inspector General fraud and abuse restrictions on hospitals’ physician compensation policies

• Offering independent practice association and other physician-sponsored enterprises financial help in sponsoring Medicare Advantage plans.

• Using reference pricing of surgical packages for regular Medicare patients, where physician-sponsored packages would define the reference price, as well as rebates for Medicare Advantage subscribers for using lower-priced services.

While some of these require statutory changes (requiring congressional assent), some changes adverse to hospital interests might sneak into law in late-night reconciliation negotiations.

While some of these require statutory changes (requiring congressional assent), some changes adverse to hospital interests might sneak into law in late-night reconciliation negotiations.
These new surgical facilities could feature Four Seasons-quality amenities and offer hip, knee and shoulder replacement and spine surgery packages, including home-based rehabilitation and wound care for under $10,000. Physician-sponsored imaging centers could offer $150 CT scans and $400 MR scans. Hospital imaging departments would quickly empty of their elective scans, a major source of operating profits.

What might these changes mean for hospitals?

Large independent specialty physician groups could undertake private equity-financed development of new short-stay surgical facilities, taking advantage of the rapid migration of joint replacement and spine surgery out of the hospital. There will be attractive long-term lease opportunities in vacant shopping malls recently abandoned by K-Mart, Macy’s and Sears.

Local oncology groups could offer patients fixed-price chemotherapy bundles including generic chemotherapy drugs, paired with aggressive nutritional assistance and alternative medicine therapy for pain control for men with prostate cancer and women with breast cancer. Patients could be incentivized by Medicare Advantage plans with cash rebates for groups that agreed to adhere to NCCI treatment protocols.

However, threats to outpatient and surgical volume could severely damage hospital operating margins. Hospitals would be challenged to push down the delivered cost of complex ambulatory care to create positive cash flow at the reference price. This would require not only leveraging vendors (e.g., standardizing implantables and restrictive formularies for specialty drugs), but also process redesign and blueprinting care models.

How might hospitals respond?

Hospitals would have to “right size” their employed physician cadres, reducing employment to mission-critical strategic areas. They would also have to double down on efforts to improve clinical productivity, terminating employment for less-productive salaried clinicians and reining in excessive compensation.

Additionally, outpatient margin compression would force hospitals to address the unprofitability of their inpatient services. It would no longer be tolerable to lose 10 cents on the dollar for each Medicare inpatient treated. Addressing with rigor both avoidable costs and cost variation among practitioners will be vital, with assistance from their key “process manager” physician-hospitalists, intensivists and emergency physicians.

Alternatively, though this may open a potential Pandora’s box of conflicts, hospitals may conclude that joint ventures with independent specialty groups (notably medical oncologists and orthopedic surgeons) on the use of the hospital’s ambulatory services is the only way to avoid duplicative investment in imaging, surgical and infusion therapy capacity in the community. This strategy has worked in some communities, but has had a sad and checkered history in others. To do it successfully requires deft political and financial decisionmaking and the ability to set limits.

At this stage in a new administration, it is not clear how aggressively Secretary Price and colleagues will tilt toward independent physician practice. However, it is worth thinking about how hospitals and systems position themselves for a fresh wave of competitive challenges from their physician communities.

Published by Modern Healthcare on August 29, 2017