The Revenue Sky Is Falling – Are Hospitals the Safety Net? 2023

The economic fundamentals of anesthesiology practice are under greater stress than at any time in recent history. Although our ASA Conversion Factor Survey shows commercial conversion factors increasing over recent years, the positive effect on revenues may be ending. We may be very close to declaring that “the revenue sky is falling” and facing the challenge of how to preserve market competitive compensation to recruit and retain anesthesiologists in a tight hiring market.

In the simplest terms, the financial equation of any anesthesia business is the following:

Gross Revenue + Facility Payment = Staffing Costs + Benefits + Overhead

Although some anesthesia groups participate in Alternate Payment Models, most Gross Revenue comes from payments for anesthesia care, including anesthesia units as well as additional clinical care (e.g., catheter and line placements, postoperative pain blocks). Most payments are for anesthesia care billed using anesthesia units:

Anesthesia Care Payment = CF x (Base + Time Units) where CF is the Anesthesia Unit Conversion Factor

The Facility Payment has historically covered essential facility administrative work (e.g., medical director for ORs), poorly compensated clinical commitments (e.g., underutilized anesthetizing locations, late-running rooms, call coverage, labor and delivery), and nonbillable value-added clinical work (e.g., pre-anesthesia clinic, PACU oversight, emergency airway availability).

Even without changing the Gross Revenue portion of the equation, the Facility Payment has increased to cover escalating Staffing Costs that have far outpaced revenue. Any decrease in Anesthesia Unit Conversion Factor (CF) and Gross Revenue would result in either an increase in Facility Payment or an inability to support market-driven Staffing Costs.

Several influences are creating downward pressure on the Anesthesia Unit CF. Medicare payments are becoming a greater proportion of the payer mix for most practices. As a result of the COVID-19 pandemic and an aging population, more patients migrated to medical coverage that was dependent on government payment models. In a recent model of anesthesia payments produced by the ASA Committee on Economics, Medicare and Medicaid patients comprised up to 40% of the average sample practice. Prior to the pandemic, the ability of anesthesia revenue to keep up with inflation and offset the rise of governmental payers had been supported by a gradual increase of the commercial CF (Table).

The value of the Medicare CF has not increased since the creation of the Resource-Based Relative Value Scale (RBRVS) in 1992, when payment for anesthesia services were devalued by 29%. Three attempts were made to correct the CF valuation (in 1995, 2000, and 2005) with a resulting 40% total increase. Unfortunately, inflation over the same period has effectively consumed all of that increase. The value of the Medicare CF has essentially remained flat since 2005 and has not kept up with the 50%+ price inflation over the same period. Budgetary restrictions and governmental regulations have limited any potential increase in the CMS CF. The Medicare CF is at the same level in 2022 as it was in 2010, and only 10% higher than before the implementation of RBRVS in 1991. It is now 25% of the average commercial rate.

The effect of the low Medicare Anesthesia CF is threatening to the specialty for multiple reasons, including the relatively high percent of patients with governmental payers, the potential for Medicare to become a benchmark for private contracts, and the ever-looming “Medicare for All.”

A new threat to anesthesia payments, the No Surprises Act (NSA), took effect in January 2022 and has far-reaching implications for all medical specialties. Although it established a much-needed process to shield patients from unexpected medical bills, implementation of the regulations threatens to destabilize critical safety nets and access to care. Through the rulemaking process, the Department of Health and Human Services (HHS) has deviated from legislative intent in key respects that portend catastrophic losses to health care providers.

Mass provider contract terminations and payment reductions have resulted from flawed implementation that unfairly favors insurance companies through a number of mechanisms. First, HHS implemented the Qualified Payment Amount (QPA) for arbiters and the Independent Dispute Resolution (IDR) process. This QPA has been distorted by the insurance company practice of using “ghost rates” to artificially reduce the QPA. A study by Avalere Health demonstrated that contracted rates for rarely or never-used services by primary care physician services may influence median in-network contracted rates used to calculate QPAs for anesthesiology, emergency medicine, and radiology. By inclusion of ghost rates in QPA calculations, arbiters have been required to first consider fundamentally flawed comparators instead of requiring QPA calculations according to provider specialty. A second mechanism surrounds current rules that require subjecting all information except the QPA to a credibility test and forbids weighting information presumed to be accounted for in the QPA without additional explanation. The immediate impact has been a reduction in insurance payments by as much as 80% from prior contracted rates for a wide swath of providers during a time when physicians are struggling to maintain their practices due to the fallout from COVID, labor shortages, expansion of uncompensated clinical commitments, burnout, and inflation. Unsurprisingly, the IDR entities have been flooded with disputes far outstripping HHS estimates, leading to extensive delays and some refusing to accept new appeals.

A legal challenge from provider groups in a case filed by the Texas Medical Association (TMA) argued that the responsible federal agencies erred in creating the IDR process. In February 2022, the U.S. District Court for the Eastern District of Texas upended the key aspect of the NSA’s Interim Final Rule (IFR), which presumed that the QPA is the correct price unless proven otherwise during the IDR process. In response, a Final Rule was issued in August 2022 but again came up short of Congress’s legislative intent. The TMA filed a second lawsuit, this time contending that the arbitration process is skewed in favor of health plans. ASA, the American College of Radiology and the American College of Emergency Physicians have also filed a joint suit with similar complaints; however, that suit has been stayed until resolution of the second ongoing TMA suit. Areas of NSA regulation needing improvement include network adequacy requirements, comprehensive audits of payer QPAs, mechanisms for expeditious IDR process, giving equal consideration to all factors listed in the law pertaining to QPAs, and many more.

With revenues declining, growing demand for services, and an expanding shortfall of qualified providers, a perfect storm is brewing in the anesthesiology world. While practices continue to attempt negotiations with managed care companies, payers are using the NSA to reduce contracted and non-contracted rates. ASA continues to advocate for fair payment from Medicare/Medicaid, but the pleas fall on deaf ears as state and federal governments grapple with unbalanced budgets. Provider shortages are escalating, and it has become an “arms race” to recruit and retain providers amid bidding wars that include escalating salary packages, signing bonuses, loan forgiveness, and a host of other perks.

Are hospitals the safety net? Returning to the original equation above in the face of declining Gross Revenue, either Facility Payments must rise or Staffing Costs must decrease. Staffing Costs can only decrease by decreasing cost per provider (unlikely amid a staffing shortage) or decreasing the number needed. Hospitals are also struggling with finances in the wake of COVID, nursing shortages, and other pressures; yet in many instances, they are unwilling to reduce anesthesiology services, even when faced with data showing requested services are underutilized. Responsible anesthesia groups needing financial assistance often approach hospital administrators with data showing poor utilization of anesthetizing locations, particularly nonoperating room anesthesia, or NORA, sites. Expense savings could be realized if all anesthetizing locations were better utilized. The implications sometimes result in fewer surgeons having a 7:30 start or a flip room, but if the same revenue could be realized with less expense, the amount of financial support needed for anesthesia (and perioperative nursing) services could decrease. The obstacle to this approach is that hospitals are looking to recover their profits by driving more surgical services through their doors because ORs are their most efficient avenue to accomplish this. As such, they are reticent to confront surgeon inefficiencies for fear these physicians will take their business to other hospitals.

Underutilized obstetric units are another prime example of services that are costly to staff from an anesthesia perspective, yet hospitals value these services because they are profitable, and they do not want obstetricians to take their surgeries to another hospital.

In as much as savvy anesthesia groups understand these dynamics, most simply cannot absorb the cost of staffing these inefficiencies. Even groups that have previously been able to provide a financially viable anesthesia practice are now finding themselves having to approach the “hospital safety net” for assistance. They are finding that justifying financial assistance can be very challenging and that many hospitals do not embrace this concept easily.

Along with escalating requests for financial support, there has been a concomitant shift toward hospital employment. Reduced revenue in certain geographic markets has made it nearly impossible for private groups to exist, leaving employment as the only option. In other markets, hospitals are driving the employment model in exchange for significant financial support. While academic practices have traditionally lived within this employment arrangement, most private practitioners have not. Answering to the hospital C-suite as an employee is vastly different than as a contracted service, where negotiations are often replaced by demands. Hospitals acting as the employer have much to learn about the business side of anesthesia, a nuanced challenge many hospital CFOs struggle to digest.

In summary, while economic forces may indeed cause hospitals to become some form of “safety net,” the relationship dynamics will be complicated and require adaptation on both sides.