Published on by Dan Goldberg and Katie Jennings on Politico New Jersey

In the waning days of the Obama administration, the Centers for Medicare and Medicaid Services announced two groundbreaking rules intended to push Medicare providers toward value-based payments and reduce costs to one of the nation’s most expensive entitlement programs.

But one little discussed side effect of these two rules – announced just weeks apart – may be that hospitals become more hesitant to acquire physician practices just as smaller physician practices face new pressure to find larger partners.

But there are also plenty of critics who wonder whether the federal government is sending mixed signals.

“It does create countervailing pressures,” said Ken Raske, president of the Greater New York Hospital Association. “There are forces pulling against each other.”

Both rules — the Medicare Access and CHIP Reauthorization Act, known as MACRA, and the Outpatient Prospective Payment System, or OPPS — have garnered a mixed reaction from physicians and hospital executives, who are thankful that some of the harshest proposals were left out of the final rules, but worry that the burden of new regulation and lower reimbursement rates will hurt their businesses.

MACRA, most believe, will further encourage consolidation among physicians with solo and small practices looking for larger partners that will spare them the burden of new federal reporting requirements.

The OPPS rule makes physician practices less lucrative to health systems because the federal government is lowering the reimbursement rate it pays for many hospital services provided in an outpatient setting. This is good for seniors whose co-insurance reflects a percentage of the total bill. The less Medicare pays for a service, the less the patient pays.

The Medicare program expects to save $500 million because of the change. That money comes from the pockets of hospitals, which had, for many years, been buying physician practices and charging Medicare more than physicians could charge on their own.

Taken together, these two new policies may make it harder for smaller medical practices to stay in business by themselves and harder for them to find a home with a health system, meaning they may just close up shop.

“We do have concerns that in some communities, it is no longer financially viable to partner with a physician practice,” said Susan Van Meter, a senior vice president with the Healthcare Association of New York State. “It will put the community at risk of losing those physicians.”

While only a small percentage of physician practices become the types of facilities that would be impacted by the new rule, it is enough to concern hospitals and doctors alike that one avenue of health reform may have a roadblock.

MACRA was created by Congress when it repealed the Sustainable Growth Rate formula in 2015. The CMS, charged with administering the new law, announced last month rules for the Merit-Based Incentive Payment System and the Advanced Alternative Payment Models, which are fancy names for payment models that move away from fee-for-service or volume based medicine, a top priority of the Obama administration and one it believes will lower costs and improve health.

The Merit-Based Incentive Payment System, or MIPS, is a performance score based on four categories: quality, advancing care information, clinical practice improvement activities, and resource use. Physicians who outperform their peers receive a bonus. Those who don’t receive a penalty. The bonuses and penalties begin at 4 percent of Medicare payments and increase to 9 percent in three years. Physicians can opt out of the MIPS track if they participate in an alternative payment model, such as an accountable care organization or patient-centered medical home.

Physicians, particularly those in smaller practices, worry the reporting requirements will be too cumbersome and take them away from patients, and that the penalties will be too steep should they fail to keep up with their peers.

Andy Slavitt, acting administrator for the CMS, made several changes between the draft rule and the final rule in an attempt to allay those concerns, and he has received high marks for doing so.

The rule now exempts physician practices with less than $30,000 in Medicare charges or fewer than 100 unique Medicare patients per year. That’s up from $10,000 per year. The CMS is also making it easier for accountable care organizations to qualify as alternative payment models, and reducing the meaningful use measuring requirement. The idea was to reduce the incentive for smaller practices to raise the white flag and join a larger health system.

It won’t work, said Dr. Scott Hayworth, president and CEO of CareMount Medical, a multispecialty group in the Hudson Valley.

“It is going to reduce the number of independent practices,” he said. “It’s not just MACRA. It’s all the bureaucracy. We’re seeing a lot more physician burnout.”

Physicians in smaller practices turn to larger groups because they have economies of scale and are often more adept at managing population health and complying with federal regulations.

Dr. Richard Morel, medical director for WESTMED Medical Group, said if insurers push doctors to take on more risk — meaning payment reductions when outcomes suffer — it will be better to be in a large group with lots of patients so that any one patient doesn’t too greatly impact the bottom line.

“If you’re an individual or in a smaller practice and looking at the reporting requirements for this, the IT infrastructure needed for tracking quality, you have to be of a certain size to do that,” he said.

Dr. Charles Rothberg, president-elect of the Medical Society for the State of New York, said MACRA is just one of a number of hurdles that encourage physicians – particularly older ones – to sell their practices.

“I think it’s a little bit demoralizing — this whole MACRA thing,” he said.

Though the CMS is predicting that only 10 percent of practices with fewer than nine physicians will be hit with a MACRA payment penalty, physicians, even those who don’t completely understand the law, may sell their practices to blunt its effects.

A Deloitte survey, published before the final rule was released, found that 58 percent of physicians would opt to be part of a larger organization to lessen their payment risk, and 80 percent thought MACRA would drive further consolidation. A more recent MedScape survey showed similar responses.

The recent OPPS rule, however, complicates the decision for hospitals. The rule says that off-campus providers will be paid under the physician fee schedule, which is substantially less than the OPPS fee schedule. Prior to this rule, Medicare paid one price to independent doctors and a higher price to doctors who work for large health systems, even if those physicians performed the exact same service in the exact same building. Providers who began billing before November, 2, 2015 are grandfathered in under the old rules.

Whether that cut is warranted or draconian, it will certainly influence the pace at which hospitals and health systems acquire physician practices.

That’s one reason the Obama administration implemented the rule, saying that the payment differential had “encouraged hospitals to acquire physician offices in order to receive the higher rates.”

Eliminating the payment differential, therefore, would seem to discourage hospitals from acquiring physician practices.

“They are maybe not so attractive,” Van Meter said. “Under MACRA it is the case that smaller physician practices have a harder time being successful. One could argue they will be subject to lower reimbursement. In some communities, hospitals have an interest in keeping those physicians in the community but the hospital needs to make a financial decision.”

Hospital executives see this as a particular affront because the federal government has pushed for more outpatient and ambulatory care.

Raske said the new policy “flies in the face of health reform,” as it discourages hospitals from creating new ambulatory centers.

“Health reform is predicated on trying to find high quality and effective alternatives to inpatient care, which has proven to be the most expensive both at a national level and state level,” Raske said.

If the CMS wants to push care to the outpatient setting, “you have got to push the money there too,” said Rich Miller, CEO of Virtua Health, a hospital system in South Jersey.

“You want hospitals and physicians to work together, you don’t want that at odds,” he said. “If you’re producing rules that effectively create the inability of physicians to partner with hospitals because of the regulatory environment, that’s going to create problems in the delivery model.”

What that might mean for different communities is difficult to say but it certainly will make deals more complex and provide hospitals with something new to consider when looking at acquiring a practice.

“It will have to be based on the individual market,” Raske said “I don’t think you can make generalizations. On the surface, yes, there would be reluctance, but it gets much more complicated.”

Despite the complications and considerations, there are many who believe the drive toward population health and alternative payment models may make owning the primary care practices – and even specialist practices such as cardiologists and oncologists – too important to worry too much about the reimbursement model. Hospital executives may grumble but they won’t be deterred, said Dr. Bruce Hamory, a partner and chief medical officer at Oliver Wyman, a consulting firm..

“Those folks are going to be highly desirable whatever the hospital payment is because they represent the front door for taking care of populations,” Hamory said.

Linda Schwimmer, CEO of the New Jersey Health Care Quality Institute, pointed out that other forms of consolidation may take the place of acquisitions.

“You can have affiliations, you can integrate through an [electronic health record], an accountable care organization contract, you don’t need to buy the practice,” she said. “In fact, I think we’re starting to see some buyer’s remorse from some of these practices because you’re seeing the higher rates, you’re seeing the lower volume and they’re wondering if the investment really made sense.”