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If you need a colonoscopy, should you get the procedure done in the outpatient department of a hospital or at a free-standing surgery center?

The answer for a growing list of medical procedures including colon cancer screening is becoming a big source of controversy for the state’s hospitals, an industry that’s well represented on the Star Tribune’s annual survey of Minnesota’s largest nonprofit groups.

Blue Cross and Blue Shield of Minnesota, the state’s largest health insurer, last year adopted new rules that steer some patients away from outpatient departments at hospitals for colonoscopy and certain services that the carrier said can be performed at a lower cost in surgery centers. The Minnesota Hospital Association cried foul in response, saying the moves could violate state laws and threaten revenue that hospitals use to subsidize other services.

The trade group asked state regulators to investigate Blue Cross, and those reviews are ongoing. Health insurers across the county, meanwhile, are adopting similar policies for a variety of services, raising a significant financial challenge for hospitals in the process, said Dan Mendelson, the founder and former chief executive at Avalere Health, a consulting firm in Washington, D.C.

“Historically, I do think it’s been true that some services have cross-subsidized other services,” Mendelson said. “I think that in a world of value-based care, it will become increasingly difficult for hospitals to run those kind of cross-subsidies.”

Ambulatory surgical centers are licensed in Minnesota to provide surgical procedures that do not require overnight inpatient hospital care. The centers have been around for decades and have grown as technology improvements, financial pressures and other factors push more medical procedures outside of inpatient hospitals.

The Minnesota Department of Health licenses 81 ambulatory surgery centers. Ownership of the centers is varied — physicians often are involved, but hospitals, health systems, business entities and national groups also have ownership interests. Surgery centers typically have a lower cost structure than hospitals because procedures are scheduled, whereas hospitals run 24/7 and need capacity for unexpected surges.

The new health insurance rules that are pushing procedures into surgery centers, rather than hospital outpatient departments, are known as “site of service” policies.

In March, Eagan-based Blue Cross, which has the No. 3 spot on the Star Tribune’s nonprofit list, implemented a policy saying the insurer would only cover certain endoscopy procedures, including colonoscopy, when performed at an in-network surgery center for patients with commercial coverage. Coverage for those procedures at hospital outpatient departments would be allowed, Blue Cross said, only when required by medical reasons or if patients lived more than 25 miles from a surgery center. In July, the insurer implemented a similar policy for certain ear, nose and throat procedures (ENT).

Blue Cross said it studied claims data for two common gastrointestinal and endoscopy services, including colonoscopies, and found the average price is nearly $1,300 more at an outpatient hospital department than at a surgery center. For most of the endoscopy procedures, about 75% already take place in surgery centers, Blue Cross said, while the ENT procedures currently are split 50-50 between surgery centers and hospitals.

“What the policy really says is that barring conditions where they should have it in an inpatient setting, we feel that it’s safe and effective and efficient to be done in the ambulatory surgery center setting,” said Dr. Mark Steffen, the chief medical officer at Blue Cross.

Dana Erickson, a senior vice president with the health insurer, added: “Obviously there is a cost component to this, but predominantly this is around getting care at the most appropriate level of care considering the clinical situation.”

Hospitals and health systems, which account for more than a dozen of the state’s 100 largest nonprofit groups, haven’t been speaking out individually about the Blue Cross policy. But their trade group sent a letter to state regulators in July detailing concerns.

Blue Cross said the new rules are medical policies, but hospitals contend they are really all about financial distinctions — not medical matters, said Matt Anderson, the interim president of the Minnesota Hospital Association. Hospitals said the new Blue Cross policies conflict with contract terms that allow patients access to hospital outpatient departments for the procedures in question. They also question if Blue Cross has adequately notified subscribers of the change.

Federal rules require hospital outpatient departments to report more information on quality than what’s required of surgery centers, Anderson said. He pointed to a report last year from the Leapfrog Group, a watchdog group focused on health care quality, that found surgery centers lagged behind hospital outpatient departments in implementing best practices for patient safety.

“It appears that [Blue Cross’] financial interests and perception of its own power have led it to make unfortunate and seemingly unlawful decisions that will put some of its subscribers’ lives in grave danger, and Minnesota’s hospitals and health systems in an ongoing and escalating scramble to retain their physicians, secure payments for care they provide and ultimately maintain financial sustainability so they can continue serving their patients and communities,” the hospital association wrote.

The report from the Leapfrog Group, however, also found patients tend to give higher marks to surgery centers than hospital outpatient departments on measures of patient experience. Blue Cross noted that the procedures are already being performed in surgery centers, and pointed to a 2009 study that suggested a quality advantage for some ENT procedures at surgery centers.

“We saw no literature to reflect that there would be a lower quality of care delivered in an ambulatory surgical center,” said Steffen, the Blue Cross medical director.

Hospitals said they serve their communities by providing services such as mental health care that lose money, and make up the difference with services where they make a margin. Nonprofit hospitals also are expected to provide charity care, Anderson said, whereas he questioned whether surgery centers do.

“These site-of-service policies are saying: We are no longer willing to pay hospitals at the rates that generate a margin for some services,” Anderson said.

But Steffen, the chief medical officer at Blue Cross, said such arguments are “difficult to square” with the huge increase in hospital prices over the past decade. The trends with rising health care costs are not sustainable, he said. Site-of-service policies are part of a broader shift, Blue Cross said, where insurers want to pay for the value of care and get away from the current system of paying a fee for every service provided.

The policies are one reason that St. Francis Medical Center in Shakopee announced last year plans to build a new surgery center. The insurer welcomes such moves, since it shows that health care providers are investing in facilities where care “is less costly for them to administer, but as high in quality and experience if not more so,” said Erickson, the Blue Cross official.

“In the short term it may look like a direct result of [health plan] policies,” she said. “But I think it’s really ... they’re looking out three to five years [and saying]: ‘What do we need to be doing in order to be successful in a model that looks to reimburse us more for quality and total cost of care vs. fee-for-service?’ ”

Anderson of the hospital association questioned how such brick-and-mortar investments will save money.

“From a policy perspective,” he said, “there’s a concern about the medical arms race — now everybody needs an ambulatory surgery center to provide services that they’re already providing in the facilities they have.”

While the dispute over site-of-service rules in Minnesota is pitting nonprofit players against one another, it involves large investor-owned companies across the country including Minnetonka-based UnitedHealth Group, which runs UnitedHealthcare, the nation’s largest health insurer.

“In 2020, we expect to save nearly one half a billion dollars for our customers from site-of-service efforts while maintaining consistent strong health outcomes,” said Dirk McMahon, the UnitedHealthcare chief executive, during an investor conference in December.

The moves by United and other national players have hospitals across the country on edge.

“Hospitals and health systems are deeply concerned about the expansion of site of service policies that disrupt patient continuity of care and can decrease quality,” said Molly Smith, a vice president with the American Hospital Association, in a statement. “Because these changes are often enacted midyear, they amount to a ‘bait and switch’ for patients and undermine the terms of contracts between health plans and hospitals.”