How Congress Is Using $9 Billion in Medicare Savings to Finance the Budget Deal—and Why Hospitals Hate It

A payment-reform idea that was a long time coming finally passed as a budget offset.

In Congress, there’s much merriment after Democrats and Republicans found a way through their differences to prevent a government shutdown, stave off another debt-ceiling showdown, and create some long-term stability in the federal budget.

But while Congress breathes a sigh of relief over its budget deal, hospitals are fuming, furious that lawmakers chose to finance part of the bargain with a $9 billion Medicare change.

The deal, which passed in the wee hours Friday morning, will change the rate at which Medicare reimburses doctors’ offices that have been bought by hospitals. Previously, services at these offices would to be reimbursed at the rates paid to hospitals. Currently, hospitals are reimbursed at higher rates than physician’s offices because, the argument goes, of the additional expenses, such as being open 24 hours a day and maintaining standby capacity.

But under the new deal, these hospital-owned doctors’ offices will be reimbursed at the same rate as other doctors’ offices for their services.

Health and Human Services Secretary Sylvia Burwell touted the change as another step toward controlling health care costs: “In the piece of legislation that we see before us, the site-neutral payment issue, which was something we have had in our budget, which has been taken in a different form, but is continued progress on things we think will have downward price pressure and help this issue overall for the nation,” Burwell said in a briefing with reporters on Thursday, before the Senate also passed the bill.

The argument for “site-neutral payment”—as the new regime is called—is twofold: Not only does it keep Medicare from overpaying for services, but it also takes away incentive for hospitals to buy freestanding physicians offices and, consequently, for providers to consolidate.

“Medicare has a problem in that it pays a different amount for the same services if the services are provided in a different place,” said Dan Mendelson, CEO of Avalere Health, an independent consulting firm. Now, he said, “if you do the same thing, you’ll get the same amount.”

In addition to saving Medicare dollars, it’s also expected to drive down the number of provider acquisitions. “This makes it less lucrative for a hospital to buy a physician practice, so it reduces the economic value to the hospital,” Mendelson said.

Hospitals see it differently, and they’re lobbying hard against the change: The American Hospital Association released a statement earlier this week warning the policy could have unintended consequences for Medicare patients.

“This untested idea may endanger patient access to care, especially among patients who are sicker, the poor, minorities, and seniors who often receive care in hospital outpatient departments,” wrote Thomas Nickels, AHA’s executive vice president of government relations and public policy. “Moreover, rural communities will be most adversely impacted, as hospitals will no longer be able to help physicians in these communities continue to provide access to their patients.”

The provision goes into effect in 2017. The new rule only applies to practices bought after the effective date. Other, previous proposals would have applied more broadly, said Tricia Neuman, a senior vice president at the Kaiser Family Foundation.