Section 603 Slams the Brakes on Merger Activity

Oncology Business News®, December 2015, Volume 4, Issue 11

The signing of the Budget Act of 2015 may have brought to a screeching halt much of the hospital merger activity that has characterized the community oncology practice sphere in recent years.

Jeffrey Vacirca, MD

The signing of the Budget Act of 2015 may have brought to a screeching halt much of the hospital merger activity that has characterized the community oncology practice sphere in recent years. Section 603 of the act removes a strong incentive for acquisitions—the right to bill at hospital rates for services rendered at outpatient, off-campus locations. The site-neutrality provision of the law—intended to eliminate wide payment disparities between hospital and private practice locations—is nowhere near the complete solution that critics of unequal payments had sought.

The provision applies only to practices acquired on or after November 2, 2015, and owing to a 14-month grace period, the payment adjustments do not kick in until January 1, 2017.

However, given the pace of acquisitions in recent years, it is fairly certain that the repercussions in the oncology setting alone will be widespread, said Teri Guidi, president and CEO of Oncology Management Consulting Group of Pipersville, Pennsylvania.

“For the [deals] that are in progress, I’m sure people are scrambling, trying to figure out what to do. ‘Do we back out of it now?’ ‘Do we try to take the year while it’s still under the outpatient prospective payment system (OPPS) and then just go to the physician fee schedule in 2017?’”

Merger and acquisition activity has been robust, largely on the strength of the OPPS Medicare income that hospitals can reap by absorbing the infusion elements of oncology practices, Guidi said. According to a survey of its oncology practice membership in 2014, the Community Oncology Alliance (COA) indicated that 544 practices had been acquired by hospitals since 2008 and 149 had merged with or been acquired by corporate entities other than hospitals.

Table 1. Unadjusted Chemotherapy Episode Costs, Offices Versus Hospital Outpatient Departments (HOPDs)a

aCosts include all care received by patients during chemotherapy episode, including some care unrelated to the provision of chemotherapy

Source: Avalere Health analysis of National Association of Managed Care Physicians (NAMCP) member data.

Still a Need for Parity

COA has embraced the move toward site-neutrality. “We‘re providing the same or better care in many instances. Why should we be paid less?” asked Jeffrey Vacirca, vice president of the COA and an oncologist with North Shore Hematology Oncology Associates of Long Island (Tables 1,2).That said, more needs to change before community practices feel they are receiving fair payment, Vacirca added. “This is not the parity that we were looking for.” He and others are hoping that pending legislation will address the broader issues. “If we’re going to recognize that moving forward we’re not going to pay augmented rates for these practices that are going to be acquired by hospitals, why should we be paying them now?”

Site-neutrality was a central topic of discussion at an October COA summit on payment reform, Vacirca said. He said it was a surprise to participants that the Budget Act got as much legislative support as it did. The Senate approved it 64-35 and it passed in the House by a vote of 266-167. Section 603 of the act is relatively short, and because of its narrow scope, there are unanswered questions that leave it unclear how the law will be implemented, said Guidi and others. It cannot be predicted with accuracy at this time how the Centers for Medicare & Medicaid Services (CMS) and the Health Resources and Services Administration (HRSA) will interpret the new law, how cost reporting compliance will be done, and whether 340B drug discount access will be affected, Guidi said. “I’m sure they delayed it one year to give everybody time to figure it out.”

Although 340B—another significant driver of merger and acquisition activity— is not specifically mentioned in the act, “It’s entirely possible that HRSA will step in and say something about off-campus provider—based centers not being eligible to purchase under 340B,” Guidi said. “That could make a mess.”

Others agree. “If CMS implements the statutory change in a manner that changes the way new off-campus outpatient locations are reported on the Medicare cost report or if HRSA otherwise opts to consider such locations not part of the 340B-eligible hospital entity, outpatient drugs prescribed or dispensed at such locations could be ineligible for 340B discounts,” Chicago law firm McDermott, Will & Emery said in an overview of the law.

Options for Struggling Practices

Other questions that remain are what hospitals may do to expand their operations now that a source of additional revenue has been closed off and what practices that may have wanted to merge will do as an alternative. One stipulation of Section 603 is that practices within 250 yards of an established hospital center may be considered “on campus” for purposes of Medicare billing, which means that hospitals may simply create oncology facilities closer to home and move independent oncology practices out of their existing locations, Guidi said. “If there are still a lot of centers and practices that want to do this, it could spur a little flurry of on-campus hospital construction— bringing infusion into the system but keeping it within the hospital space,” she said.Many practices under pressure to find solutions to their business difficulties may opt to merge with other independent physician groups, Guidi said. “Other than that, you’re looking at [hospital] employment or whatever contracts can be arranged, but very likely having to move into a hospital space that would qualify for the outpatient payment rates,” Guidi said.

Table 2. Average Adjusted Episode Costs for Eight Most Common Cancersa

aCost estimates adjusted for age, sex, and prior history of cancer. Costs includes all care received by patients during chemotherapy episode, including some care unrelated to the provision of chemotherapy.

Source: Avalere Health analysis of NAMCP member data

Healthcare legal and financial consulting firm Foley & Lardner of Milwaukee has predicted that Section 603 is going to “kill off many off-campus projects that are in the pipeline.” They note that hospitals and others may have invested significant time and resources in preparing for these expansions. They also said that the cutoff date of November 2 creates an arbitrary division that will lead to “haves and have-nots” in the hospital field: those that were able to establish desired remote locations, by virtue of the fact that they are grandfathered in, and those that were left out and may end up being at a competitive disadvantage because of it.

“Some of the ‘have-nots’ may be the lower-cost hospital providers that did not have the leverage to access capital to construct outpatient facilities as quickly as their better funded competitors,” Foley & Lardner wrote in a fact sheet distributed as supplemental material to a webinar on the subject they presented November 13.

Rural and underserved communities may therefore be disserved by Section 603. Further, “this may undermine hospital efforts to integrate and coordinate care between ambulatory, acute, and post-acute care sites at the very moment that public policy is trying to promote accountable care; the Triple Aim [improving the experience of care, improving the health of populations, and reducing per capita costs of health care]; and population health management,” the statement said.

Opponents Predict Access Problems

Section 603 is relatively short and much is left open to interpretation by CMS, noted Lawrence Vernaglia, partner with Foley & Lardner, who spoke during the webinar. He’s expecting there to be a lot of discussion over what it means to be an off-campus based department of a provider. He added that the new law places tight restrictions on appeals of determinations regarding which facilities are grandfathered under the law and which are determined to be off-campus. He noted that cost savings estimated by the Congressional Budget Office are $9.3 billion over 10 years. “It’s a cost-containment exercise, for sure,” he said.The American Hospital Association (AHA) is a staunch opponent of the legislation and was blindsided by the addition of Section 603 “at the last minute,” said Erik Rasmussen, vice president of legislative affairs for the AHA, which has predicted that access to care services could be reduced, particularly in underserved areas, as a result of the law. Hospitals could possibly react by opening more oncology facilities on campus, he said. “Our membership is mission driven, they’re care driven. That part of it I don’t think changes. It just makes it more difficult from the Medicare financing side.”

ASCO, which represents both community oncologists and hospital-based oncologists, has called site-neutrality an insufficient response to the problem of disparities in payments. The organization is pushing for a broader change that would provide payments for hospital services that are not adequately compensated to begin with. This would obviate the need for add-on payments that hospitals can apply toward underfunded services, ASCO said. For years, many policymakers, watchdogs, and the Medicare Payment Advisory Commission have expressed concerns that the inequalities caused by OPPS payments are not justified and incentivize hospitals to acquire physician practices and ambulatory surgical centers (ASC) to reap the OPPS payments, thereby raising overall healthcare costs and Medicare expenditures, McDermott, Will & Emery said. The insurance industry backed the Section 603 portion of the act through the Alliance for Site-Neutral Payment Reform. The group contended that unequal payment policies increase healthcare costs through higher premiums and co-payments and also “encourage market consolidations that limit patient access.”

“Payment policies that support higher reimbursement in the HOPD [hospital outpatient department] setting encourage the acquisition of office-based physician practices, which results in higher costs and the closure of community- based care settings, further restricting patient access to care in the lower- cost setting,” the group stated in a release just prior to President Obama’s signing of the law. “Site-neutral payment policies ensure that healthcare payments are based on the needs of the patient and not the site of service,” the Alliance added.

Whereas hospitals have long argued that they require additional funds to pay for certain services that are not adequately compensated by Medicare, those services should be paid for directly rather than through higher fees paid for unrelated services, Vacirca said. “For me to hear that hospitals need to have emergency rooms, I get it, but they also should be paid appropriately for that care. It shouldn’t be augmented [from] reimbursement in other areas.”