The patchwork of state regulations on hospital outpatient reimbursement has led to a wide variation in healthcare costs, according to a new report.
The average workers' compensation payment for similar knee and shoulder surgeries performed in 2019 at hospital-owned outpatient departments in the highest-cost state, Alabama, was more than seven times the level paid in Nevada, the lowest-cost state, according to the Workers Compensation Research Institute's latest annual report. The variation between the average workers compensation payment and Medicare rates for those procedures were even greater, reaching a low of 38% (or $2,294) below Medicare in Nevada to a high of 502% (or $24,758) above Medicare in Alabama.
That stems, in part, from the different state regulations. Some states have fixed fee schedules while others don't regulate hospital outpatient reimbursement. Those with fixed fee schedules had relatively lower costs and demonstrated slower cost growth, the report found.
States with percent-of-charge ratios, which are based on hospitals' chargemasters and allow a pre-specified percent of charges to be reimbursed, had substantially higher costs compared to Medicare rates. Workers compensation payments in those states, including Nevada, were at least 221% higher ($12,105) than Medicare hospital outpatient rates.
Some states have cost-to-charge ratios, where a hospital's expenses are divided by revenues reported in Medicare cost reports, or no fee schedule at all. Both of which significantly exceeded Medicare rates, up to 128% and 329%, respectively.
WCRI used commercial claims data for common outpatient knee and shoulder surgeries billed through workers compensation across 36 states, which represent 88% of the workers' compensation benefits paid in the U.S. It also compiled data from self-insurers, state funds and third-party administrators.
"Relatively higher and increasing hospital outpatient payments for surgical services is one of the drivers of increasing healthcare costs," said Dr. Olesya Fomenko, the lead author of the report and economist at WCRI. "Surgery-related payments typically made up about 40% of payments for all outpatient services across the study states in 2018, so it is an important factor of healthcare costs."
The report underscores the wide variation in prices for routine procedures, which has little, if any, bearing on the cost of delivering the care, said Fred Bentley, managing director at the healthcare consultancy Avalere, who pointed to other factors like providers' bargaining leverage.
"It means you have no idea how much the procedure will cost," he said. "If you have higher a deductible and coinsurance rate, it can be devastating."
A growing number of states use a Medicare ambulatory payment classification-based method to set their fee schedule rates, which uses Medicare rates as a benchmark. CMS and HHS are pushing for a site-neutral policy that would level payments for evaluation and management services delivered at hospital-owned outpatient departments and independent physician clinics.
That, coupled with price transparency initiatives, could build on the momentum to reduce price variation for common services across all payers, Bentley said.
"The writing has been on the wall for hospital-owned outpatient departments, it has been for some time," he said.
Still, there is wide variation among other expensive inpatient procedures that will not move to other settings anytime soon, Bentley added.
Hospital-owned outpatient departments account for a significant, and growing, portion of hospitals' revenue. Hospitals' outpatient revenue increased to 98.6% of inpatient revenue in 2019, up from 89% in 2015, according to the latest data from the American Hospital Association.