Hospital M&A may slow if doctors lose ability to charge more to Medicare than private doctors
US doctors that work in a hospital-based care setting are set to lost the ability to charge more to Medicare than those who work in private practices, if part of the the budget agreed by the White House and congressional leaders passes; and the move may have an impact on the spate of mergers and acquisitions currently occurring in the US. The hospital lobby argues that it is deserving of higher payment as they are held to more regulation, and frequently subsidise services such as emergency rooms. If the current deal passes, new hospital-owned practices would not be able to pocket the higher payments simply by merging with a hospital. 

Hospitals argue that their higher payments rightly reflect their higher costs of providing care: They are bound by more requirements, tend to see sicker patients and have to subsidize costly services, like emergency rooms, that independent doctors do not. Nevertheless, the price differences have been criticized by the Medicare Payment Advisory Commission (MedPAC), which suggests improvements to Congress, and by the Obama administration, which has sought to equalize the prices in its budget.

Image An earlier article examined what happens to patient fees when hospitals buy doctors' offices. Credit... Mikey Burton

The critics say that paying higher prices just because of who owns a practice drives up health care costs and distorts business incentives. Studies show that the mergers can also drive up costs for privately insured patients.

I wrote about this difference — and the push to eliminate it — earlier this year.

The current budget deal, if it passes, would let any current hospital-owned practice continue to pocket the higher prices, but it would prevent future practices from being able to get higher payments just by merging with a hospital. In order to get hospital-size payments in the future, doctors’ offices will need to be located “on campus.”

“This is a big deal,” said Robert Berenson, a fellow at the Urban Institute and a former vice chairman of MedPAC. “Through the back door, they made a change they couldn’t do through the front door, it seems to me.”

The legislation, as written, might create some distortions of its own. By setting payment based on the location of doctors’ offices and not the services they are providing, the new rule might discourage hospitals from expanding services into underserved neighborhoods. The MedPAC suggestion was that the prices should be the same for certain services in all settings, not that the difference should depend on the location of the practice.