Imagine that there are two providers of the same service. Their quality and timeliness are comparable. However, one provider charges significantly more than the other. In a normally functioning market, you would expect that the more expensive provider would have to significantly change its cost structure to stay in business.
What if the more expensive provider argued that it had higher overhead, and therefore needed and deserved to be paid more? He would be laughed out of the marketplace. Yet, this is exactly what happens in Medicare. Because of different fee schedules, doctors in independent practice are paid less for the same procedure than hospital-based outpatient facilities. Unsurprisingly, this has resulted in hospitals buying up physician practices, in order to profit from this arbitrage:
For example, Medicare pays more than twice as much for a level II echocardiogram in an outpatient facility ($453) as it does in a freestanding physician office ($189). This payment difference creates a financial incentive for hospitals to purchase freestanding physicians’ offices and convert them to HOPDs without changing their location or patient mix. For example, from 2010 to 2012, echocardiograms provided in HOPDs increased 33 percent, while those in physician offices declined 10 percent. (Medicare Payment Advisory Commission, March 2014, p. 53)
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