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The Hospital Payment Differential: CMS Decides to Stop Paying More for Less

By Miranda Preston, JD, and Robert Milligan, JD, Shareholders at Milligan Lawless, PC

Digital 2021


True story.[1]  A 61-year-old Medicare patient had an echocardiogram at his cardiologist’s office.  Six months later, the same patient had the same study at the same office in the same room using the same equipment.  The difference between the two studies?  The first study cost the patient $373; the second study cost $1,605.  The reason for the difference?  The cardiologist’s practice had been acquired by a local hospital system in the interval between the two studies.  The reason that mattered?  Under Medicare’s reimbursement rules, services billed under the Outpatient Prospective Payment System (“OPPS”), applicable to hospital-based clinics, are reimbursed at much higher rates than the same services provided in a physician’s office and billed under the Medicare Physician Fee Schedule; in this case, approximately 330% more.[2]


The Site of Service Differential

There are plenty of real-life examples of this type of reimbursement differential.  What seems to be lacking is any economic or quality-based justification for the differential.  The hospital referenced in case described above claimed that having cardiologists move into hospital employment helps to “eliminate duplication, improve coordination, and reduce hospitalizations … to improve the health and wellbeing of our patients.”  The literature does not support the claim that hospital-physician integration improves quality;[3] in fact, the reverse may be true.[4]


Other hospitals argue that their clinics must meet stricter regulatory requirements than private physician offices, and that they often treat patients who lack insurance.  It is true that in at least some states some physician offices are exempt from the licensing requirements that are imposed on outpatient offices owned by non-physicians.  However, many private physician practices are subject to those same requirements, and these practices have not found the licensing requirements to be particularly daunting or expensive. Regarding the costs associated with the obligation to provide charity care, there are several weaknesses in that claim.[5] 

One of the many benefits associated with the higher reimbursement paid to hospitals is that it helps fund higher salaries than physicians can earn in private practice.  A recent study analyzing seven years of Medicare data revealed that on average, a physician working for a hospital would earn $114,000 more than a physician doing the same work in a private practice setting.[6]  While this is not the only advantage hospitals enjoy when they compete with private practices for physician employees,[7] it is a significant advantage.

CMS Strikes, and the AHA Strikes Back.

It appears that CMS is beginning to recognize that paying more for certain services, just because they are provided in a hospital-based clinic, does not make sense.  In 2019, CMS proposed a rule lowering OPPS rates for a small slice of physician services (E&M services), to make them equivalent to the rates paid to private physician practices.[8]  Among the evidence CMS cited in support of this practice was a 2014 MedPac Report that showed a 43.8% increase in the provision of E&M services provided at hospital outpatient departments, and virtually no growth, 0.4%, in the provision of the same E&M services provided at physician practices.  In promulgating the rule, CMS cited an estimate that the elimination of the payment differential would result in savings of $610 million for CMS, and an additional $150 million savings for Medicare beneficiaries.[9] 

The American Hospital Association (AHA) and certain of its members brought suit challenging the rule.  Although the District Court ruled in favor of the AHA and its allies, the U.S. Court of Appeals for the DC Circuit reversed, holding that the rule was proper under CMS’s rulemaking authority.[10]  The plaintiffs have asked the U.S. Supreme Court to review the decision.

If the Azar decision stands, it will represent a step towards leveling the playing field between hospitals and private physician practices.  It is a small step, however, because Medicare payments for E&M services constitute only about a third of the total payments made by Medicare for Part B Services.[11]  Also, the favorable payment differentials under the OPPS are merely one of the significant competitive advantages hospitals enjoy over physician practices.[12]



Given the evidence that hospital-physician integration causes higher prices without a corresponding increase in quality, CMS’s elimination of the payment differential for E&M services and reduction of the benefits of the 340B Program are steps in the right direction.  Similarly, efforts to prevent hospitals from using the profits from referred services to pay employed physicians more than they could earn in private practice should help curb those abuses.  Other potential remedies include increased pricing transparency, so patients can compare the cost of care in hospital outpatient  clinics with the cost of that same care in private physician offices, and, in some cases, heighted antitrust scrutiny of anticompetitive integration of hospital and physician services.[13]  None of this is likely to happen, however, without the efforts of organized medicine to counteract the lobbying power of the AHA and its allies.[14]




[1] Anna Matthews, Same Doctor Visit, Double the Cost, Wall Street Journal, August 27, 2012. 

[2] Commercial insurers also report significant rate increases when hospitals acquire physician practices.  Id.  Those increases have not hurt the insurers’ stock prices, because they are passed along to the insureds and employers.  Alan Farley, Health Insurance Stocks in ‘Sweet Spot’ Despite Pandemic, Investopedia, July 2, 2020.

[3] See, e.g., Ho, V, et al., Annual Spending per Patient and Quality in Hospital-Owned Versus Physician-Owned Organizations: an Observational Study, J Gen Int Med, 35, 649-655 (2020).  “We find that financial integration between physicians and hospitals raises patient spending, but not care quality.” 

[4] See, e.g., Ho, V and Short, M,  Weighing the Effects of Vertical Integration Versus Market Concentration on Hospital Quality, Medical Care Research and Review, 2020; 77:6, 538-48.  “[I]ncreased market concentration is strongly associated with reduced quality across all 10 patient satisfaction measures at the 95% confidence level….”    

[5] For starters, EMTALA applies to patients who present to the emergency department, not patients who schedule visits at hospital outpatient clinics.  42 U.S.C. 1395dd.  We have not been able to find any data submitted by for-profit or nonprofit hospitals to suggest that the volume of charity care provided at their outpatient clinics justifies the significant payment differential.  As for nonprofit hospitals, there is evidence that the benefits of their tax-exempt status far exceed the value of the charity care they provide. Bai, G, et al., Analysis Suggests Government

And Nonprofit Hospitals’ Charity Care Is Not Aligned With Their Favorable Tax Treatment, Health Affairs, April 2021; 40:4, 629- 636.

[6] Post, B, et al., Hospital-physician integration and Medicare’s site-based outpatient payments, Health Serv Res, 2021; 56: 7-15. 

[7] See footnote 12, below.

[8] CMS also implemented a 30% cut in payments to hospitals under the 340B Drug Pricing Program.  AHA filed suit, the District Court sided with the AHA, and the Circuit Court reversed, finding that the cuts were within CMS’s authority.  AHA has asked the Supreme Court to review the Circuit Court decision.  Jacqueline LaPointe, “Hospitals Ask Supreme Court to Take Up 340B, Site Neutral Payments,” February 11, 2021, Revenue Cycle Intelligence,

[9] 83 Fed. Reg. 58.818, 59009 (November 21, 2018).

[10] American Hospital Ass’n, et al., v Alex M. Azar, D.C. Cir., December 29, 2020,$file/20-5193-1877500.pdf.

[11] Coding Trends of Medicare Evaluation and Management Services, Department of Health Services Office of Inspector General, May, 2012, at page 2.

[12] Another advantage hospitals have over physician practices is the fact that hospitals can pay employed physicians more than the physicians’ professional services warrant.  This is because the hospitals can legally require their employed physicians to refer to the hospital and its affiliates, and the physicians’ referrals to the hospital subsidize the losses the hospitals incur on their compensation to physicians for professional services.  According to an article in the Harvard Business Review, an MGMA study showed that “hospitals’ multi-specialty physician groups lost almost $196,000 per employed physician.”  Jeff Goldsmith, et al., Do Most Hospitals Benefit from Directly Employing Physicians?, May 29, 2018.  See also, Merritt Hawkins 2019 Physician Inpatient/Outpatient Revenue Survey: “Though hospitals and other employers have been shown to lose money on physician salaries in some cases, they often recoup these loses from the downstream revenue physicians generate.”  The Department of Justice and qui tam relators have contended, often successfully, that when hospitals pay physicians high salaries with the expectation of profits from “downstream” referrals for hospitals services, those arrangements violate the Stark Law or the Anti-Kickback Act.  See, e.g.,

[13] Reed Abelson, “Buoyed by Federal Covid Aid, Big Hospital Chains Buy Up Competitors,” The New York Times, May 21, 2021.  See also, Baker, L, et al., Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices And Spending, Health Affairs, May, 2014; 33:5.

[14] The AHA and its subsidiaries spent $26,272,680 on lobbying in 2019.  See also, the AHA Report, “The Return on Your Investment Dues,”

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