Facility Fees 101: What is all the Fuss About?

Facility Fees 101: What is all the Fuss About?
Facility Fees 101: What is all the Fuss About?

A piece by Linda J. Blumberg and Christine H. Monahan

Regulators are increasingly shifting their focus toward the rates health care providers bill private insurers, employer health plans, and their members, and for valid reasons: Research shows that private insurers pay nearly 2.5 times Medicare rates for hospital care and 1.2 times Medicare rates for physician care at the median. There is also substantial evidence that the prices providers negotiate with private insurers are increasingly driven by local provider market concentration rather than the resources required for providing care.

An element of provider pricing gaining prominence is hospitals imposing “facility charges” for care rendered in outpatient and physician office settings that hospitals own or oversee. These charges are purportedly overhead expenses, but for the hospitals and health systems overseeing these practice settings, the fees are not necessarily intended to cover costs specific to the setting or the patient being billed. Facility charge assessments are becoming more prevalent as hospital systems have intensified their acquisition of ambulatory settings and practices, leading to increased total costs for outpatient care. Consumers bear the brunt of this, as they face augmented out-of-pocket expenses as well as higher premiums due to these additional charges. Consumer exposure to these fees, combined with the fact that these fees frequently seem unrelated to the level of care received, is contributing to the growing public belief that provider prices are excessively high.

The federal government, through both legislative and executive actions, has started addressing these issues in the Medicare program, and policymakers are currently contemplating proposals to take further action. Equivalent attention must be given to the private sector, where provider prices remain unregulated and subject to the often limited bargaining power and interests of private insurers.

Insight into Invoicing Practices

Typically, insurers and patients receive two distinct types of bills for care provided in hospitals. One form – the professional bill – encompasses the care provided by physicians and other medical professionals (for instance, nurse practitioners, physical therapists). The second form – the institutional bill – covers the additional costs of delivering that care in the hospital (beyond professionals’ care). However, when professionals provide services outside of hospital, insurers generally necessitate the professional to bill for both their time and for other practice expenses, such as rent and equipment, on the same bill. That way, insurers could negotiate with physicians for a single consolidated price for the entire episode of outpatient care.

This traditional segregation of professional and hospital billing endures today, even in the increasingly common scenarios where physicians are employees of a hospital or health system. In addition to being split across two separate bills, the overall price for care administered in hospitals has always been higher than the price for the same care provided elsewhere. This reflects the general acknowledgment that keeping hospitals staffed and maintained for emergency and high-intensity care necessarily incurs larger overhead expenses that could be distributed among all patients receiving inpatient care. This rationale for overhead charges is more fragile for outpatient care, however, especially when the care provided is of low complexity and has historically been provided in a physician office most of the time.

Hospital Unionization Is Instigating Illogical Outpatient Facility Charge Assessments

This payment inequality, whereby insurers pay more for the same care delivered at a hospital than at a physician office or independent outpatient department, has been exacerbated by and has contributed to the financial toll attributable to the surge in hospital-system acquisitions of outpatient clinics and physician practices.

As hospitals and health systems have procured and established outpatient departments and physician practices (some on or near hospital campuses, some miles away from hospitals), more care is being provided in these locations, which command higher prices than independent provider offices. And the charges of these system-owned outpatient facilities appear far from logical, with facility charge assessments varying significantly across the nation, providers, services, and payers. The magnitude of these fees can range from $0 to thousands, without any correlation to the specific service being provided. Some patients have observed the price of the same type of office visit substantially increasing from one year to the next following the acquisition of their physician’s practice or fluctuating considerably depending on which of a physician’s offices they are seen.

Insurers’ Management of Facility Charges Differs Across Regions and Schemes

Insufficient data precludes a comprehensive depiction of how different insurers handle facility charges in their plan coverage. Initial analysis of the issue suggests that some insurers have adequate leverage to forbid these charges from being imposed in outpatient departments or physician offices – a prohibition that can safeguard consumers from significant out-of-pocket exposure – but only by consenting to reimbursement increases in other areas. Other insurers confront the concentrated market dominance of providers in their region and thus are unable to limit these charges. Some insurers may decline to cover facility charges in certain circumstances, such as for care provided in an out-of-network physician’s office. In such scenarios, providers may then “balance bill” the patient for the charges not reimbursed by the insurer.

Separate hospital and professional bills can also result in separate consumer cost-sharing obligations even when insurers cover outpatient facility charges. Some insurers consider the facility charge as hospital care, which may entail its own deductible or co-insurance fee, while the professional bill for the same visit is regarded as physician care and may carry a separate copayment or other contribution. Witness this example of a prominent insurer’s summary of benefits and coverage for 2022. As depicted at the bottom of page 2 in the example, for a provider office visit, the insurer imposes two distinct cost-sharing responsibilities (for “Provider” and “Hospital Facility” charges) when the provider’s office is deemed a “Hospital Facility.”

However a plan’s cost-sharing is structured, the addition of a hospital facility charge on top of a physician’s fee for care that can be safely provided in a physician’s office leads to higher out-of-pocket costs for patients and frequently higher costs for insurers than are necessary. This, in turn, results in higher premiums for all consumers and greater government spending to subsidize this premium

The Expansion

What Measures Can the Federal Government Take?

Possible federal policy choices exist to tackle the concerns regarding escalating expenses for consumers and the healthcare system, arising due to the increasing prevalence of outpatient facility charges. At a fundamental level, federal mandates facilitating analysts and regulators to cross-reference a professional claim with an institutional claim for the same service and specify the service location (i.e., a physician’s office, on-campus hospital outpatient department, or off-campus hospital outpatient department) would clarify the extent of the facility fee problem. Astonishingly, existing billing procedures make it arduous, if not impossible, for many insurers to ascertain the total payments they make to providers for specific services on behalf of their policyholders.

Various bipartisan bills with similar aims are currently under consideration in Congress, such as the SITE Act (S. 1869). These proposals would enable more insurers to access information about the total payments made for specific services in different care settings, equipping them with the necessary data to negotiate care costs with providers. Nevertheless, in highly consolidated provider markets, the bargaining power of many insurers would still remain restricted despite having comprehensive information.

Another approach would be to prohibit facility charges for certain types of services or provider settings, like off-campus locations or physician offices. Under this approach, providers would be obliged to bill for these services using a single professional form. Several states, including Connecticut, Indiana, and Maine, have initiated steps in this direction. Although this approach would eliminate the issue of patients being subjected to two different types of cost sharing or bearing the entire facility fee bill in some cases, it might result in increased professional fee charges or other hospital service costs, depending on the negotiated deals between professionals and hospitals and the balance of market leverage between insurers and providers. For instance, restrictions on facility charges could prompt hospital-owned physician practices to hike their professional charges and allocate a segment to the hospital or health system, leaving insurers with limited bargaining authority to reimburse them at the current elevated prices for outpatient services that could be safely administered at significantly reduced costs. Alternatively, a hospital might opt to uniformly raise its rates to compensate for the revenue loss from outpatient facility charges.

A more comprehensive approach would entail providers accepting payments from private insurers for specified services at levels lower than a defined threshold, such as the median price paid to independent physician offices in the same geographic zone, or 120 percent of the rates Medicare disburses to physicians for identical care. These cost limits could be applicable to a predetermined set of services routinely provided in physician offices without additional patient risk, periodically updated by the Department of Health and Human Services to reflect changes in technology and practice patterns. As a starting point, the Medicare Payment Advisory Commission has recognized numerous low-risk services that could securely be administered in a physician’s office in its recommendations for site-neutral Medicare payments. The cost limits could be exclusively imposed on off-campus outpatient locations or potentially on both on-campus and off-campus outpatient departments. This site-neutral payment approach would markedly curb the price variations for the same service provided in different non-hospital locations, eliminating exorbitant charges.

Implementing a site-neutral payment strategy for entities providing medical services to privately insured individuals could either bring down overall costs or maintain cost equilibrium, contingent on how the payment rate limits are determined. For example, setting the cost limits at levels corresponding to those paid for the services in a physician’s office would lead to cost reduction. Conversely, setting the limits at an average of the pre-reform prices across settings would likely result in no cost savings.

Future Perspectives

The federal government could limit outpatient facility fee billing in the commercial market just as it takes analogous steps with regard to Medicare. The ongoing federal and state proposals to enhance billing transparency and prohibit facility charges in certain instances would mark significant strides forward. These initiatives will help expose and safeguard consumers from a particularly egregious instance of irrational pricing practices in the commercial healthcare market. Nevertheless, effectively curbing the high and variable costs linked with care dispensed in hospital-owned outpatient departments and physician offices nationwide will necessitate further Federal legislative actions, including the implementation of a site-neutrality approach.

This contribution is part of the Health Affairs Forefront series, Provider Prices in the Commercial Sector, supported by Arnold Ventures.

Linda J. Blumberg and Christine H. Monahan, “Facility Fees 101: What is all the Fuss About?,” Health Affairs Forefront, August 4, 2023, https://www.healthaffairs.org/content/forefront/facility-fees-101-all-fuss. Copyright © 2023 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.

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