The increasing prevalence and likelihood of site-neutral payments creates a major challenge that hospitals and health systems must address.  The federal budget is one contributing factor, with the likelihood that concerns about deficits will make provider rates an easy target.  Longer term, the advance of Value-Based Care makes it more likely as well.

Health systems have too much at stake to not actively assess the risks and act on that assessment.  The current world includes provider based reimbursement, 340b, and incentives that relate to hospital based rates services.  These issues at times distort provider decisions.  For the purpose of this discussion, we are considering all vulnerable targets.

Additionally, the current environment allows payers to not fund the real cost of 24 hour services.  If a service must be available around the clock, that group of costs are not directly considered.   Simply, the costs of running an MRI 24/7 in a hospital is greater than the freestanding one that runs 60 hours a week.

Obviously the budget deficit and Medicare cost dynamic create risks.  The drive to make providers accountable creates risks.  How should your organization think about and plan for those risks?

Outpatient Strategy.   If outpatient service reimbursement is standardized, hospitals revenue will be reduced and margins will be squeezed.  Six factors should be affecting your strategic decisions today.

  1. Define which outpatient services are vulnerable to site neutral reimbursement.  Create a plan of action now as to how you will deal with those, before you are faced with a crisis.  You will likely make better decisions now rather than when you are under urgent pressure to act.
  2. Creating lean and productive outpatient systems will be crucial.  To do otherwise is to risk having a string of unprofitable ambulatory facilities as reimbursement lowers.
  3. Well thought out economies of scale will be key.  As hospitals diversify their geographic locationns, they have been aided by favorable reimbursement.  But when you are modeling these opportunities, create a worst case scenario around site neutral reimbursement.  Depending on the population density of your target market, less aggressive expansion may be prudent.
  4. Consider buying some services rather than making them.  If your financial projections look bad, it is at least worth considering outsourcing a capability.  When doing that, it is important to focus on providers who can help you managed the total cost of care, not just the fee for service.  Especially if controlling that part of the care process does not help you manage overall costs, it may be useful to divest that service.
  5. Evaluate the rules to understand how to leverage services grandfathered in.  In the most recent budget, site neutrality applied solely to new sites.   Building on the old sites is an option to consider.
  6. Through 340b, outpatient pharmacy has become a major revenue source.  The scope of the program will undoubtedly be challenged, and scenarios about the magnitude need to be considered.

Physician Strategy.  Provider based billing has been a boon to many health systems, although patient resistance has slowed its growth in some markets.  How vulnerable is it?  In our opinion, less so than some other aspects of differential reimbursement.  Why?  Many large, integrated health systems use this approach.  Many of those are the poster children for effective health systems.

But there is still risk.  To prepare for that possibility, you should develop financial scenarios related to your physician group.  There is nothing magic about the plan to deal with this challenge.  You must aggregate practices to get economies.  Align compensation to ensure you do not overpay.  Build systems and support staff that maximize productivity.  And build a culture that acts like an integrated multi-specialty group and understands and accepts the economics of medical practice.  This will give you allies who understand the need should you have to cut costs.

Inpatient Strategy.   At the core of your inpatient challenge is understanding full costing and getting rates that cover full costs.    Analysis and understanding of those costs is the first step.  Depending on your circumstances, it may or may not be wise to discuss these issues with insurers.  But you must understand the reality.

As must your board.  This will require board education so they better understand the issue and the urgency.  They must understand all the issues surrounding site neutrality.

Finally, make this issue a focus of your lobbying efforts.  Do not just focus on preserving the rate differentials, explain that if some go away the rates for inpatient services will need to rise.  Explain the underlying cost realities that justify the differentials.

Financial Strategy.   Throughout this discussion we have discussed financial scenarios that must be modeled.  Building scenarios around possible federal actions is prudent.  Building this thought process into business feasibility planning is likewise needed.  That will aid you as you educate stakeholders on the risks faced as the landscape changes.

We recommend five analyses in particular.

  1. Understand standby costs in your institutions.
  2. Understand the real costs of your inpatient services.
  3. Create scenarios around cuts in 340b.
  4. Understand how the loss of provider based reimbursement will help impact physician networks and necessary remedial actions.
  5. Understand the outpatient reimbursement bump you get vs. non-hospital services, and model how you will deal with reductions in that bump.


Addressing this challenge will take a mix of capabilities.  Financial planning.  Developing sustainable strategic initiatives.  Building physician culture.  Lobbying and education of stakeholders.  Building systems to manage risk.  Not a simple undertaking, but necessary if you are going to anticipate vs. react to the upcoming changes.


David W. Miller

Founder and Chairman