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To integrate care, provide more services and stay competitive, hospitals are still building outpatient facilities.

Site-neutral payments all but stopped hospitals from building outpatient facilities in 2016.

Outpatient development effectively froze in 2016, down from $19.6 million in projects in 2015, to $16.4 million in 2016, according to Revista, a resource for healthcare property data.

Historically, hospital-owned outpatient centers received significantly higher reimbursement than private physician offices or ambulatory surgical centers performing the same procedures.

The Medicare Payment Advisory Commission recommended closing the gap between the rates. There was also concern that hospitals were buying up physician practices to take advantage of the higher reimbursement rate.

Congress enacted the Bipartisan Budget Act of 2015, putting site-neutral payments into effect.

New outpatient facilities that used to be paid on the outpatient prospective payment system are now reimbursed by Medicare on the physician fee schedule. The estimate on savings to Medicare runs into the billions.

Those hospitals that had new off-campus departments and began billing before Nov. 2, 2015, were still reimbursed at the higher outpatient rate. Outpatient facilities built later than the cut-off date are now paid under the less lucrative physician fee schedule.

The result of the legislation that went into effect on January 1, was to effectively freeze the geographic footprint of hospitals that rely heavily on Medicare reimbursement, according to Larry Vernaglia, an attorney and chairman of Foley & Lardner’s healthcare practice group in Boston.

For some hospitals, Medicare represents half of their operating revenue.

“It’s one more assault on the financial stability of hospitals,” Vernaglia said. “It definitely means the economics of outpatient services are dramatically different now. Hospitals have to work twice as hard to structure their outpatient buildings to get proper reimbursement.”

While some experts predicted a continued freeze in outpatient building, a surprising thing happened in 2017. The amount of outpatient projects soared to $22.9 million, the highest it has been in four years, according to Revista. However, that could be driven by the latest way skirt site-neutral rules.

“There was a big jump in 2017, that may come down a little bit,” said Revista principle Hilda Martin. “There was a sudden hold-off while systems wrapped their head around (the new policy). It is coming back. I’m wondering if this is beginning of a new trend, because so much inventory is starting this year.”

Martin said Revista is still analyzing the building boom, especially the new focus on micro-hospitals.

There’s been a significant uptick in micro-hospital development, she said. At medical real estate conferences, micro-hospitals are the hot topic because they offer a way to circle around the change in reimbursement, Martin said.

Also, the outpatient slowdown in 2016 may reflect in pause as providers submitted applications to the Centers for Medicare and Medicaid Services to show they were far enough along in planning to get an exemption and remain on the outpatient prospective payment system.

The 21st Century Cures Act provided exemptions. Hospitals in the middle of building an off-site facility could submit an application under the mid-build requirement by Feb. 13.

Many hospitals submitted mid-build applications before the deadline, including 40 in New York, seven in Massachusetts and five in Maine, Vernaglia said.

Applications are still being reviewed, and CMS did not respond to a request for information on the total number of submitted requests, or the names of the applicants.

“I’m familiar with at least 86 of them,” said Vernaglia, who also did not give specific information.

Exemptions allow hospitals to build new outpatient settings on-campus and be reimbursed at the outpatient rate.

“You’re going to see hub and spoke arrangements,” Vernaglia predicted of facility design.

Hospitals can also can build an emergency facility and still receive the higher reimbursement.

In a proposed 2017 payment rule, CMS originally required off-campus provider-based sites to offer the same services they did on Nov. 2, 2015, in order to be excluded from the site-neutral payment provisions, but opted not to include that requirement in the final rule.

For 2017, CMS finalized a Medicare physician fee schedule policy to pay non-excepted, off-campus provider-based departments at 50 percent of the outpatient rate for most services. For 2018, CMS proposed to reduce those payments further, by 25 percent.

Site neutrality creates hardships for hospitals trying to provide more services, integrate care and stay competitive in regions where patients have numerous choices for healthcare.

“There is quite a bit of cynicism in Congress and others that led to passage of Section 603 of the Bipartisan Budget Act of 2015,” Vernaglia said. “It assumed the only reason hospitals were developing these sites was to take advantage of preferential outpatient payment.”

Site neutrality also gave an advantage to hospitals that were early movers in getting their outpatient facilities built. The downside, said Vernaglia, is they’re stuck with what they’ve got. They can’t build another one or relocate. And if they don’t own the building, they can’t threaten to move if the landlord jacks up the rent.

“Soon we’ll see facilities getting long in the tooth,” he said. “There will be fewer outpatient facilities off-campus. I think you’ll see more on-campus. It’s status quo for sure, unless you do some creative things like off-campus emergency.”

Developer Henry Johnson, chief strategy officer for Freese Johnson in Atlanta, Georgia, said hospitals are still building, because not to do so would mean the loss of a competitive edge. The ambulatory facilities may be less profitable now, but there’s the risk that the gap for off-site care will be filled by another facility, or physician practice.

“There’s a greater impact not filling these gaps in the marketplace,” Johnson said. “Right now it’s a battle for marketshare, rather than site-neutral payments.

Johnson has been in the business for over 20 years, working with healthcare systems and large physician practices.

“We’re building micro hospitals, ambulatory surgery centers, outpatient surgery centers,” Johnson said. “Everyone is trying to build a network.”

Value-based care has also given incentives to have patients visit outpatient clinics, rather than the more expensive emergency room.

“They want to keep less expensive procedures in a less expensive environment,” Johnson said.

Providers are being cost-conscious on square-foot costs as well, he said.

“Most of our clients are saying, ‘This is expensive real estate. Let’s build a building that costs half as much, that’s what we want to do.'”

The two trends he’s seeing are micro hospitals, and smaller, acute care facilities, which he likens to “a hospital without beds.”

These freestanding ER facilities are still reimbursed at outpatient rates.

Patients would also rather go to a local, smaller facility, than drive to a hospital, try to find parking and walk the long hallways.

“They’re not going to go places if it’s inconvenient,” Johnson said.

Off-campus buildings, he said, invite people in.

“I’m personally seeing in healthcare, patients aren’t just patients now, they’re consumers,” Johnson said. “The biggest trend we’re seeing, is the consumerization of healthcare.”