Mandated Hospital Disclosure of Negotiated Rates and Its Potential Impact on Fair Market Value (FMV) Analyses

Healthcare spending in the United States has been consistently touted as disproportionately high when juxtaposed with certain healthcare outcome measures, including life expectancy and infant mortality.[1] The most recent reporting from the Centers for Medicare and Medicaid Services (CMS) estimated total U.S. healthcare spending in 2019 at $3.8 trillion, accounting for nearly 18% of Gross Domestic Product; in particular, Medicare spending in 2019 increased to nearly $800 billion, from $750 billion just two years prior.[2] One solution proffered to address this concern is to increase price transparency at the hospital level, with the ultimate goal of cost savings to the consumer, as well as an overall increase in patient satisfaction.[3]

The concept of hospitals publishing standard charges for items and services for the general public’s use is not a novel reform, but is a statutory requirement originally set forth under §2718(e) of the Public Health Service Act, which was enacted as part of the Patient Protection and Affordable Care Act in 2010. Within the United States’ fee-for-service payment model, hospital charges (commonly referred to as a “chargemaster”[4]) do not necessarily equate to the dollar amount reimbursement that will be received; instead, the ultimate payment is a result of negotiated reimbursement between the particular hospital and the particular payor. Acting as an impetus for transforming these statutory directives into action and providing actionable information to the public, on June 24, 2019, then-President Trump issued an Executive Order seeking improved transparency in healthcare spending.[5] Directly answering this call to action, CMS, in its finalized outpatient prospective payment system rule for calendar year 2020, imposed a mandate requiring hospitals to publicly disclose “standard charges,” which include negotiated reimbursement rates with third party payors for certain “items and services,” such as “services furnished by physicians and non-physician practitioners who are employed by the hospital.” Additionally, CMS also mandated that hospitals disclose a list of payor-specific negotiated reimbursement for “shoppable services.”[6] Failure to comply with these new rules may result in civil monetary penalties in the amount of $300 per day.[7] These mandates officially took effect on January 1, 2021.[8]

In promulgating its rule, CMS highlights the advantages of the public sharing of standard charge and reimbursement information, in that patients may be encouraged by price transparency measures to shop around for medical services and select service providers who offer lower rates for services of similar or better quality.[9] However, some industry experts are not optimistic that this proposal will have its intended effect, contending that the mandatory disclosure of negotiated rates is the “wrong approach to price transparency, and that the administration should reverse course on this provision.”[10] Many of these concerns revolve around the notion that the new rule will undermine a hospital’s ability to negotiate competitive private-payor rates, and would incite anti-competitive behavior in which a race to establish a “floor for hospital prices” would ensue.[11]

In addition to the posited negative consequence to a hospital’s bottom line, the publishing of the negotiated rates for “shoppable services,” including physician services, may eventually impact the fair market value[12] for those services, as one indication of FMV looks to the allowable fees reimbursed by commercial payors as compared to Medicare. The correlation between Medicare and commercial payor rates has been a longstanding concern to the U.S. Congress, and, in 2002, the non-partisan Medicare Payment Advisory Commission (MedPAC) sponsored a study comparing average rates of commercial reimbursement to Medicare.[13] This regulatory concern has continued with the annual publication of a report to Congress, which, inter alia, examines allowable Medicare physician reimbursement to private payor allowed fees.[14] Given the current proposal concerning the publication of private payor rates, we would expect this regulatory concern to diminish somewhat, as market conditions may pressure reimbursement rates for both government and private payors to become more standardized, gradually closing the gap between private payor allowable rates and those set forth by Medicare.

Although the long-term impact of the new price transparency rule remains yet to be determined, some predict the short-term consequences to revolve around an increased effort to set competitive prices for “discretionary” services (such as imaging, laboratory services, and certain non-emergent or elective medical and surgical procedures)[15], while insulating any financial loss through the raising of prices for emergent services (including trauma and emergency department visits).[16] Healthcare Appraisers, as an expert in valuation and healthcare strategy, is well suited to help our healthcare clients navigate any needed revisions to compensation arrangements in an effort to get ahead of the impact of the price transparency rule.