Medicare could soon pay hospitals much less for common outpatient services like x-rays and checkups. We break down an old policy gathering new steam in Washington, how it could save Medicare and patients billions, and why it has hospitals worried.
Congress is actively considering nearly half a dozen pieces of legislation centered on an obscure Medicare payment change that could save the federal government as much as $150 billion over the next decade. All of this bipartisan interest in Washington has the nation’s biggest hospitals on high alert.
The proposed policy, known as site neutral payment, would lower the prices Medicare pays hospitals for many common outpatient services, like x-rays and checkups, to match what it pays independent clinics.
On average, facilities owned by hospitals rake in more than twice what independent doctors’ offices earn for providing the same services. “Medicare is currently overpaying in a way that they don’t have to be,” said University of Minnesota economist Hannah Neprash.
The policy could also put as much as $90 billion back in the pockets of Medicare beneficiaries, who often pick up 20% of the cost of their care, over the next decade. Plus it could generate billions more in savings for other patients and employers if private insurers follow suit.
Hospitals stand to lose billions a year from ‘site neutral payments’
All of those savings for Medicare and its beneficiaries, however, would come at a steep cost to some of America’s hospitals. “That money has to come out of somebody’s pocket,” said University of Pennsylvania physician and associate professor Amol Navathe, warning the policy would likely generate fierce pushback from the hospital industry.
Navathe is also vice chairman of MedPAC, a nonpartisan agency that advises Congress on Medicare policy. His agency estimated that hospitals overall stand to lose several billion dollars a year in Medicare revenue if Congress passes a site neutral payment policy like the one MedPAC just endorsed at its April meeting.
(After this story was published, MedPAC clarified by email that the particular policy it endorsed was budget neutral overall.)
“There’s nothing neutral about ‘site neutral payments,’” said Ashley Thompson, senior vice president at the American Hospital Association.
One of the hospitals’ main arguments against this policy change is that, yes, facilities they own do provide some of the same services as independent clinics and surgical centers, but the patients are different.
“Physician offices can cherry pick certain patients that are easier to treat,” Thompson argued. “It’s just not an apples to apples comparison.”
The American Hospital Association recently published research showing that patients who receive outpatient care in facilities owned by hospitals are more likely to have disabilities, chronic conditions or other complex needs. Experts agree that Medicare should pay hospitals a higher price for services where their additional expertise, capacity and equipment are essential.
Medicare’s current payment policy spurs hospitals to gobble up physician practices
However, as Loren Adler of the USC-Brookings Schaeffer Initiative for Health Policy points out, the payment cuts endorsed by MedPAC target largely simple services like scanning a patient’s heart or administering chemotherapy.
“There’s no safety or quality reason for [this care] to be happening in a hospital,” Adler said.
The number of services that can be provided effectively outside of a hospital-owned facility has grown over time, extending even to complex procedures like hip and knee replacements. “We’ve gotten smarter and faster, and we have better tools now,” MedPAC’s Navathe said.
Navathe regards lowering what Medicare pays hospitals for some outpatient services as less about cutting and more about keeping up with the pace of modern medicine. “Every so often we need to…reset how we think about payment,” Navathe said. “Otherwise we end up creating bad incentives that [make] the whole health system cost more.”
One incentive of particular concern to economists is hospitals’ hunger to acquire independent physician practices. After a hospital buys an independent clinic, once they have ensured it complies with certain regulations, they can recategorize it as a “hospital outpatient department” and begin billing Medicare two or three times more for the exact same services.
For example, the cost of a pain-numbing injection shoots up from $255 to $740 — and patients may have no idea anything has changed until they see their share of the bill.
The number of hospital-owned physician practices has more than doubled over the last decade and more than half the country’s doctors are now employed by health systems. The premium that Medicare pays for simple outpatient services is far from the only reason for these acquisitions, but research suggests it is a significant factor. Research also shows that greater consolidation can drive up prices.
Hospitals begin a push on the Hill against pay cuts for outpatient services
Eliminating Medicare’s higher payments to hospital-owned facilities could come with its own unintended consequences, though, warned Ashley Thompson of the American Hospital Association. She told legislators at a House subcommittee hearing on April 26 that the policy could ultimately lead hospitals to cut services and reduce patients’ access to care.
Experts note a reduction in pay would affect hospitals differently depending on the volume and variety of outpatient services they provide, as well as their overall financial health. Some hospitals made billions in profit during the pandemic, while others — especially in rural areas — are struggling to stay afloat.
One way to soften the blow of site neutral payments would be to add certain exceptions or to lengthen the timeline for implementation. However, the last time Congress took a crack at solving the problem of uneven payments back in 2015, the law ended up so narrow that ultimately it affected only about 1 percent of all outpatient care paid for by Medicare.
It’s still early in the legislative process, but this time around lawmakers are considering at least one more ambitious bill that could save roughly $100 billion over the next decade. For comparison, that’s the same amount the government expects to save from the Inflation Reduction Act’s highly touted move to let Medicare negotiate prescription drug prices.
Experts expect a full-court press from hospitals as they seek to stop any new legislation on this issue from moving forward. “If you’re talking about taking money away from anybody, then you’re going to have a fight on your hands,” said Joe Antos, senior fellow at the American Enterprise Institute.
Should the hospitals succeed, experts said the Biden administration’s Centers for Medicare and Medicaid Services could attempt to make payment changes on its own.
Tradeoffs’ coverage of health care costs is supported, in part, by Arnold Ventures and West Health.
Episode Transcript and Resources
Episode Transcript
Note: This transcript has been created with a combination of machine ears and human eyes. There may be small differences between this document and the audio version, which is one of many reasons we encourage you to listen to the episode!
Dan Gorenstein: There are a lot of times in health care when a policy crops up that could have a major impact on the money we spend or the care we receive. But the language around that policy can be so weedy — so weighed down by acronyms — that its purpose is near impossible to decipher. One of those wonk bombs is bouncing around Washington right now.
Rep. McMorris Rodgers: Several proposals would advance site neutral payments // Rep. Pence: a site neutral payment model for certain services // Rep. Miller-Meeks: Can you detail CMS has plans to implement site neutral payment reform?
DG: A proposal to change how Medicare pays hospitals for some kinds of care. Our senior producer Leslie Walker brought it to my attention a couple weeks back.
Leslie Walker: Site. Neutral. Payments. I mean, you have got to be kidding me! Is that a Swiss credit card company? The name of a NATO treaty?
DG: Like what are these sites? And what’s neutral about them?
I feel like we could do some good here, Walker…Whack through these weeds, clarify what this site neutral payment policy would change about Medicare, who it could help and who it could hurt.
LW: That does seem like a worthwhile challenge for us to take on. But I gotta be honest, I’m scared Dan: Sending you into jargon territory this dense…you might not make it out alive. Let me work on something over here.
DG: Two days later, Leslie called me from her place in San Francisco.
LW: Dan!
DG: Sounding like she hadn’t slept a wink.
LW: We’ve got it. We’ve built a magical, demystifying machine. We’re calling it…
Tradeoffs Team: The Jargonaut!
LW: And for its maiden voyage, you’ll pilot the Jargonaut — this beauty — into the obscure abyss that is site neutral payment policy.
Your mission: Decode this jargon. Uncover this policy’s intent and its potential impact. Are you up to the task?
DG: You know I’m a gamer!
LW: I knew we could count on you. One more thing: If you spend too long in those wonky weeds, the eyes glaze, the brain numbs. Lucky for you, this puppy was built for speed. You’ve got 15 minutes of oxygen. Stay any longer and that could be it — asphyxiation by acronyms, I hear they call it.
DG: With that ominous warning, I’m off!
Jargonaut Ground Control: Jargonaut-1, this is ground control. The AHD is engaged. Sensitivity level set to minus three. Prepare for take off. In T-minus 10, 9, 8. 7…
DG: Blasting off from the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.
***
DG: Captain’s log entry number 1: We’re just a few minutes from landing and I’m exhausted. I’ve lined up visits with five wonks who can help me decode this strange string of words: site … neutral … payments. My game plan: start by understanding the problem. Why do Medicare’s payments need changing and what the heck would making them neutral mean?
My first stop: the Twin Cities.
Ground Control: Ground control to Jargonaut-1. Prepare for landing.
LW: And remember, Gorenstein, you’ve only got 14 minutes left. Watch those follow-up questions!
DG: Alright! Here I am, Land of 10,000 Lakes and more economists than you’d think.
Hannah Neprash: My name is Hannah Neprash, health economist at the University of Minnesota School of Public Health.
DG: Hannah seems to be waving around a piece of paper. Maybe some kind of welcome message?
HN: I wrote you a poem, Dan.
DG: What?
HN: I know, right? I wrote an original Limerick on the topic of site neutral payments.
DG: Oh my god. Okay, you’re going to read it now, right?
HN: Yes! Here we go. What Medicare pays as a fee depends where you happen to be. The very same thing will earn you more bling if done in an H-O-P-D.
DG: Oh my God.
Sfx: Acronym Alert! Acronym Alert! Return to ship for safety!
HN: It stands for hospital outpatient department.
DG: HOPD? That is a brutal one.
HN: I know, I couldn’t get away from the acronym. Sorry. But I hear you’re the Jargonaut, so you’re all over this.
DG: Well, I’m supposed to be all over this. And as much as I love your limerick there, could you be a little clearer? I’m still trying to figure out what’s the problem site neutral payments could help solve. One sentence. Plain English and please, no more acronym attacks.
HN: So Medicare is currently overpaying in a way that they don’t have to be. They’re paying more for the same services depending on where they happen.
DG And, right, Hannah, I think I read that those prices are higher for care that happens at these so-called hospital outpatient departments — your HOPDs — even though these ‘departments’ are often just doctors offices that happen to be owned by hospitals.
HN: Exactly, and patients have to pay more because they’re on the hook usually in Medicare for 20% of those higher prices.
DG: Prices that, on average, are 2.5 times higher when the exact same care happens in a clinic owned by a hospital than in one not owned by a hospital.
LW: Tick tock, Dan! Too many follow-ups!
DG: Okay, okay, but one more thing. Hannah, I’m guessing it makes sense to pay hospitals extra for some kinds of care — complex procedures, services where you need fancy equipment or ER docs at the ready. So what kinds of care do site neutral payments target?
HN: We’re talking about common services — checkups, imaging, a group of services, [that are] essentially identical. The quality is the same. They’re equally safe and the cost to do it is basically the same regardless of where it’s provided.
DG: By paying hospitals higher prices for this care, Hannah tells me, Medicare is making a bad problem worse.
HN: Incentivizing hospitals to buy up all of these physician practices.
DG: Hospitals have many reasons to gobble up doctors offices, and the profits they can make off of simple outpatient services is a big one. The number of hospital-owned physician practices has more than doubled over the last decade and more than half the country’s docs are now employed by health systems. All that consolidation, research shows, leads to less competition and higher prices for a lot of people.
As I head back to the Jargonaut, Hannah explains that making payments more site neutral — I still gotta find out what that means — could slow down all that consolidation.
DG: Captain’s log entry number 2: After a rough landing and a nearly lethal limerick, I’ve recovered and have a clear picture of the problem. Now I just need to understand the solution. To do that, I’ll need to tackle those three strange words … site … neutral … payments … head on. We’ll be back.
MIDROLL
DG: Welcome back aboard the Jargonaut. Before the break, we got clear on the problem: Medicare’s paying hospitals a lot of extra money for pretty simple care. Now we need to understand the possible solution — what exactly site neutral payments are. After our time decoding that limerick with Hannah before the break, we now have about 9 minutes of oxygen left. So I’ll try to be quick at our next stop in the City of Brotherly Love with Amol Navathe, a professor at the University of Pennsylvania.
One sentence: what is this site neutral policy solution?
Amol Navathe: The solution is actually a very elegant, simple one, which is we pay for the health care service at the same rate regardless of where it’s provided.
DG: Aha! That’s where this whole site neutral payment term comes from, Amol. The price Medicare pays is neutral — the same no matter where care is happening, whether it’s in an independent doctor’s office, the hospital or a doctor’s office owned by a hospital.
AN: That’s right.
DG: Now Amol Navathe is the rare academic who actually has the ear of lawmakers. He’s vice chairman of the non-artisan agency that advises Congress on Medicare, also known as — jargon alert here — MedPAC. And in April, Amol and his MedPAC pals voted that, for 66 of these simpler services, Congress should allow Medicare to start paying a single, lower price.
He tells me, this fix helps catch Medicare up.
AN: What has happened over time is that care has become easier to provide outside of the hospital. We’ve gotten smarter and faster and we have better tools now.
DG: Procedures like hip or knee replacements that used to require overnight inpatient stays can now happen same-day in settings outside the hospital.
AN: Every so often, we need to go through and reset how we think about payment because otherwise we end up creating bad incentives that end up actually making the whole health system cost more.
Ground Control: Ground control to Jargonaut-1: You’ve only got 7 minutes left!
DG: Amol and I say our goodbyes. The next stop on my list: I need some data — a sense of how much money switching to site neutral payments could save Medicare. But this leg of the trip could be fatal.
Captain’s log entry number 3: I’ve set the coordinates for the Jargonaut to zoom south, down the northeast corridor towards the motherland of all things inscrutable. Yes, Washington D.C.
LW: Dan, I gotta strongly advise you against this move. We never tested the Jargonaut in such weedy terrain!
DG: I knew this was going to be dangerous when I signed up, but good data calls for desperate measures! And I know just the guy.
Loren Adler: Loren Adler, associate director at the USC Brookings Schaffer Initiative for Health Policy in Washington, D.C.
DG: Loren, thanks for meeting. My time is tight. Let’s cut to the chase. How much money could a plan like the one MedPAC just endorsed save the government?
LA: So Medicare stands to save over $150 billion over the next 10 years.
DG: $150 billion?
LA: That’s right.
DG: And that’s a lot of money that lawmakers could use to fund other stuff, right Loren? Even put back into Medicare [to] make sure the program stays in the black. Now I get why this idea, which I read dates back to the Obama Administration, is generating so much interest in Congress now.
LA: Yeah, and it has a lot of support from the sort of consumer and patient advocacy groups as well, because there is very clear direct savings to patients and beneficiaries here.
DG: Right, I think I saw one estimate that this could put another $90 billion back in the pockets of people on Medicare.
LA: Correct.
DG: Plus it could save billions more for people with private insurance by slowing down consolidation and creating a roadmap for other insurers, who often copy Medicare’s payment policies. And that could mean…
LW: Gorenstein! Enough with the numbers! Time is running out!
DG: Gotta run, Loren!
Captain’s log entry number 4: I’d come on this trip to decipher the jargon and understand the winners and the losers of this policy. Now that I’d seen the numbers, I knew patients, taxpayers and the Medicare program could be all winners.
And the loser? Everyone told me the same thing.
Montage: Hospitals!
DG: Hospitals. They’d lose several billion dollars a year in revenue from Medicare alone. Plus they could lose more money if private insurers follow the government’s lead. How big of a deal is that amount of dough? Depends on who you ask.
From the Jargonaut I made a quick call to the American Hospital Association’s Ashley Thompson. She told me it’s dire.
Ashley Thompson: There is nothing ‘neutral’ about site neutral payments. A cut to hospitals means that they’re gonna have to scale back on services and offerings in the community.
DG Services, according to Ashley, like extra clinic hours or mobile cancer screening vans. Ashley said, as COVID and labor shortages continue, this kind of pay cut comes at a terrible time.
AT: Hospital expenses are up almost 17.5% over the last three years and Medicare reimbursement is up only 7.5%.
DG: Of course not all hospitals are the same and some made billions during the pandemic. Still, hospitals argue their outpatient facilities have to comply with more costly rules and, on average, serve patients with more complex medical needs.
AT: Physician offices can cherry pick certain patients that are easier to treat. It’s just not an apples to apples comparison.
DG: When a patient’s complexity makes care more costly, or less safe to perform outside a hospital, everyone I spoke to agreed: Medicare should pay hospitals more. But the cuts Congress is considering are largely for simple services — an x-ray or chemotherapy infusion — where neither cost nor quality vary much by patient.
LW: Dan, it’s Walker again. We’re taking over the controls. You just used the words cost, quality and chemotherapy infusion! We’re worried the wonkery is getting to your head. We gotta get you home!
DG: As I start the long flight back to Tradeoffs HQ, I feel clear on what this policy could do. But what will it do? Heading safely away from D.C. I convince the crew to let me call one last economist: Joe Antos of the intergalactic sounding American Enterprise Institute.
He tells me those hundreds of billions of dollars in projected savings, they could melt away as hospitals adjust, making up for the lost revenue.
Joe Antos: All policies have a tendency to age and this is a policy that I think will age very quickly.
DG: Maybe hospitals try to hike prices on private insurers and employers, or, as Ashley Thompson said, they’ll just have to cut back on services. That’s the kind of doomsday talk Joe says we’ll likely hear a lot more as hospitals lobby to stop lawmakers from pushing site neutral payment policies forward.
JA: If you’re talking about taking money away from anybody, then you’re gonna have a fight on your hands.
DG: As of this recording, there were at least five active bills in the House advancing site neutral payment policies — some more ambitious than others. If legislative efforts fail, experts said the Biden administration could try moving the policy along on its own.
AP: Dan, man, are you a site for sore eyes!
LW: When Hannah lobbed that HOPD grenade at you, we thought you were a goner for sure!
DG: I know! That was insane! That limerick, wow…
AP: And just 30 seconds left in the oxygen tanks!
DG: Leslie, I’m okay but the Jargonaut did take some damage.
LW: With all the recent talk of QALYs, PBMs, the FTC, I’ve got a feeling we’re going to need that puppy up and running again soon.
DG: That sounds daunting, but you know what, I’m ready. I’m Dan Gorenstein. This is Tradeoffs.
Episode Resources
Selected Reporting and Research on Site Neutral Payments:
- Aligning fee-for-service payment rates across ambulatory settings (Dan Zabinski, MedPAC, 4/13/2023)
- The big-money Medicare policy that has hospitals worried this Congress (Rachel Cohrs, STAT, 3/16/2023)
- Equalizing Medicare Payments Regardless of Site-of-Care (Committee for a Responsible Federal Budget, 2/23/2021)
- The effect of hospital acquisitions of physician practices on prices and spending (Cory Capps, David Dranove and Christopher Ody; Journal of Health Economics; 5/2018)
- Medicare Payment Differentials Across Outpatient Settings of Care (Avalere Health, 2/2016)
- Increasing Hospital Physician Consolidation Highlights Need for Payment Reform (Government Accountability Office, 12/18/2015)
Episode Credits
Guests:
- Loren Adler, MS, Fellow and Associate Director, USC-Brookings Schaeffer Initiative for Health Policy
- Joe Antos, PhD, Senior Fellow, American Enterprise Institute
- Amol Navathe, MD, PhD, Associate Professor of Health Policy and Medicine, University of Pennsylvania
- Hannah Neprash, PhD, Assistant Professor, University of Minnesota School of Public Health
- Ashley Thompson, MHA, Senior Vice President, American Hospital Association
Additional thanks to Kahaari Kenyatta and Cristina Boccuti.
The Tradeoffs theme song was composed by Ty Citerman, with additional music this episode from Blue Dot Sessions and Epidemic Sound.
This episode was produced by Leslie Walker and mixed by Andrew Parrella and Cedric Wilson.