In meetings held in both October and November 2012, members of the Medicare Payment Advisory Commission (MedPAC) again suggested that MedPAC aims to equalize the reimbursement rates for certain services provided in outpatient hospital departments with those currently paid for similar services provided in stand-alone doctors’ offices. Last March, MedPAC recommended to Congress that payments for evaluation and management (E&M) services paid to outpatient departments be lowered so they are equal to payments made for similar services provided in doctors’ offices. The recommended cuts could result in an estimated $1 billion payment reduction for hospitals. While Congress has yet to act on MedPAC’s recommendations, this idea has gained traction as lawmakers seek ways to implement Medicare savings.

The use of multiple payment systems – which result in differing reimbursement scales for similar services – has increased Medicare program spending as well as beneficiary cost sharing. In its November 2012 meeting, MedPAC discussed equalization of ambulatory care service rates across locations, in addition to the earlier proposed E&M service payment cuts. According to MedPAC’s discussion, Medicare savings of as much as $780 million per year could be realized through these equalization efforts. The savings to beneficiaries through reduced cost sharing would be approximately $220 million per year. To date MedPAC has paid considerable attention to policies devoted to equalizing payment rates based on the resources needed to treat patients in the lowestcost, clinically appropriate setting. MedPAC highlighted that while a patient should have access to appropriate care, a “prudent purchaser” would not pay more for a service in one setting over another.

MedPAC’s attention to the equalization of reimbursement rates could make the benefit of the recent trend of hospital conversion of office practices to provider-based clinics shortlived. Today, for example, in some outlier instances Medicare reimbursement may be as great as 90 percent higher for certain services provided in provider-based clinics (which are billed as services provided in hospital outpatient departments) when compared with those same services performed in a doctor’s office.

Although MedPAC has not yet provided a recommendation reflecting its recent analysis to Congress, MedPAC continues to discuss options to reduce or eliminate payment differences across provider settings. MedPAC is expected to provide a recommendation to Congress before the end of this session.

Which Services Will be Subject to Rate Equalization?

According to MedPAC discussions to date, ambulatory services ripe for reimbursement reduction have similar characteristics, including: (1) those that are performed in a physician’s office a majority of the time; (2) those that do not involve many other tests or procedures; (3) those that usually do not involve an emergency department visit; and (4) those with few differences in the sickness of the patient. While payment rates could differ based on how a hospital incurs costs related to other services it must provide, or due to the sickness of the hospital’s patients, MedPAC identified 24 ambulatory services that could have equal rates across settings due to their shared characteristics. For example, certain diagnostic tests like bone-density testing, neuropsychological testing, or extended EEG, sleep and cardiovascular studies are services that could be paid equally across settings under the MedPAC system. MedPAC identified 47 other ambulatory services for which a hospital outpatient department could continue to receive additional reimbursement because it provides other services, but for which the reimbursement should be reduced.

If MedPAC’s suggested policy is implemented to reduce rates for both E&M services and ambulatory services, hospitals could see a decline in outpatient department revenue of as much as 5.5 percent, and a reduction in overall revenue of approximately 1.2 percent.

During its discussion, many MedPAC Commissioners expressed concern about the potential impact of such program changes on rural hospitals, teaching hospitals and Disproportionate Share Hospitals in particular. If recommended by MedPAC and adopted by Congress, these cuts would be just one policy in addition to other program cuts established under the Affordable Care Act regarding readmission penalties and reduction in Medicare DSH payments, and budget sequestration under the 2011 Budget Control Act. Nevertheless, some commercial payors have already begun to equalize reimbursement rates regardless of the care setting.


MedPAC’s recent policy discussion of the impact of rate equalization for ambulatory services on Medicare spending has not yet been recommended to Congress. However, considering MedPAC’s March recommendation for reimbursement equalization on E&M services, and the current MedPAC discussion regarding ambulatory services, hospitals should review the financials carefully before taking widespread action to move physician practice operations into provider-based clinic settings. The legal and operational costs of conducting these transactions may not outweigh their relatively short-lived benefits, as we should expect reimbursement for some ambulatory services to be equalized over time.