The Wonky Policy That’s Got Hospitals on High Alert

May 4, 2023


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.

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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.

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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


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.