Vertical integration drives higher Medicare spending on common testing procedures

Medicare spending costs money
Physician practices integrating with hospitals and health systems cost Medicare more than $73 million in higher testing costs between 2013 and 2016. (Getty/zimmytws)

Medicare costs on common imaging and lab tests rose more than $73 million between 2013 and 2016 due to vertical integration in the healthcare industry.

The longstanding trend toward consolidation in the healthcare industry has been indisputable. The consequences of that consolidation, however, have generated considerable dispute. In particular, Medicare’s site-based payment policy, which has historically reimbursed hospital-based clinics at a higher rate than independent physician offices for identical procedures, has come under fire as the Medicare Payment Advisory Commission named it a driver of physician and hospital consolidation.

Whether or not those payments are a key factor in encouraging vertical integration, they’re definitely costing taxpayers more money, according to a study published in the latest issue of Health Affairs.

Looking at Medicare data from 2013 to 2016, researchers found increases in both the cost of common diagnostic imaging and laboratory tests and the rate at which those procedures were undertaken after vertical integration between physician group practices and hospitals or health systems.

“Medicare and many other payers pay more for the exact same service if it is done in the hospital versus the non-hospital setting,” the study’s lead author, Christopher Whaley, a policy researcher at the RAND Corporation, told Fierce Healthcare. “If you’re a provider that vertically integrates, that represents an arbitrage opportunity for you from a financial perspective—and that’s exactly what we find happens in the data.”

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Industry pushback on claims about higher costs incurred following consolidation have countered that Medicare beneficiaries treated in hospital outpatient departments require more complex care, and that vertical integration produces efficiency gains alongside improved care coordination and simplification of payments.

The cost increases uncovered by the study, however, involve a sampling of the most common tests administered. “This is really the tip of the iceberg, because there are hundreds of other lab tests and imaging, and the same site-differential payments exist for things like surgeries and other types of care that can be done at multiple sites of care,” Whaley said.

Researchers chose common tests because they are likely to be highly standardized across providers, meaning the difference in the level of care provided to a patient would presumably be negligible depending on where they received it. “These are not therapeutic procedures and not typically associated with high morbidity or mortality risks,” said Whaley.

Furthermore, these tests are performed in such a high volume that even a moderate increase in prices translates into substantial costs for Medicare.

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The obvious solution to these cost increases would be a shift to site-neutral payments, where Medicare would pay the same rate for a procedure or test regardless of where it got delivered.

An attempt by the Centers for Medicare and Medicaid Services (CMS) to move in that direction in late 2019 got derailed by litigation and struck down by the courts. More recently, the Federal Trade Commission (FTC) has begun looking at the impact of healthcare consolidation on market competition.

Site-neutral payments will be politically difficult to achieve because they ultimately will require hospitals to take a cut in reimbursements, higher costs for Medicare, or some combination of the two.

“If Medicare and other payers had site-neutral payments, we frankly wouldn’t be having this conversation,” said Whaley.