Check out our episode for more on this Medicare budget proposal.
Right now, Republicans in Congress are fighting over hundreds of billions of dollars in health care spending cuts. Most options for slashing that much from programs like Medicare and Medicaid are deeply unpopular.
Except maybe one.
Republicans and Democrats have historically endorsed one policy that could reduce federal health spending by roughly $150 billion over the next 10 years. The savings would come from Medicare paying hospitals less than they get now for providing routine medical care.
Clinics owned by hospitals often get double or more of what Medicare pays independent clinics for identical treatments or procedures. The rationale: Hospitals have to pay for expensive equipment and highly paid specialists that the sickest patients sometimes need. But a growing share of minor procedures and simple screenings now also happen at hospital-owned clinics. Many economists and policymakers argue having Medicare pay more for this routine care is wasteful.
“This is not the way to spend government money,” said Loren Adler, the associate director at the Center on Health Policy at the Brookings Institution. “There is no reason that Medicare should be paying more for the exact same service.”
Hospitals pushback on the notion that they’re overpaid. Patients with more serious health needs seek out hospital-owned clinics, hospitals say, and their clinics cost more to run because they face higher regulatory standards than independent competitors.
But for many common procedures, there’s actually little difference in Medicare patients’ underlying health, regardless of the clinic they choose, according to an analysis by the Medicare Payment Advisory Commission, a nonpartisan government agency that advises Congress on Medicare.
The significantly higher payments made to hospitals cost the federal government at least $6 billion in a single year. Patients enrolled in traditional Medicare — about 34 million people — pick up some of that added cost, too. They have to pay 20% of the bill on most trips to the doctor. In 2021 patients spent an extra $1.5 billion of their own money because of these higher Medicare payments to hospitals, according to Medicare’s advisors.
Republicans see $150 billion in potential savings
The idea of closing the gap between what Medicare pays hospital-owned clinics and all others is known by the wonky name “site-neutral payment.” The concept has won broad backing across political lines, as well as from consumer groups and employers.
“This is the first one that I can remember in 30 years of health policy where literally everybody agrees this is a good idea,” said Dean Clancy, senior health policy fellow at Americans for Prosperity, a conservative policy group.
“The procedure is exactly the same no matter where it’s done, so the price should be the same too,” said Sophia Tripoli, senior director of health policy at consumer advocacy group Families USA, which has endorsed universal coverage.
House Republicans in January listed site-neutral policy among several options to achieve deep budget cuts. Lawmakers projected savings similar to what the Congressional Budget Office has estimated for a proposal to broadly lower Medicare payments to hospital-owned clinics — around $150 billion over a decade.
Rural hospitals could be threatened
It’s an attractive option for Congressional Republicans under pressure to deliver the Trump administration’s tax cuts. But it also risks angering voters; many GOP lawmakers represent rural areas. Rural hospitals are especially dependent on this federal funding.
Hospital industry officials say big cuts to what Medicare pays hospitals could endanger rural hospitals, many of which already struggle to break even in remote and sparsely populated communities.
Rural hospitals have high labor and equipment costs, like any hospital, but fewer patients to pay for them, said Carrie Cochran-McClain, policy chief for the trade group the National Rural Health Association.
More than 190 rural hospitals have closed or shut down inpatient services since 2005, according to researchers at the University of North Carolina at Chapel Hill.
“We’ve got a real fragility to our rural hospital infrastructure right now,” Cochran-McClain said.
Policymakers have floated several ways to protect these financially vulnerable hospitals. In the final budget of his first term, President Trump proposed a site neutral policy that would have exempted rural hospital clinics in some cases.
But many economists and policy experts oppose excluding rural hospitals, warning that such exemptions would stick Medicare patients in those small towns with higher bills. A better approach, they argue, would be to have Congress funnel financial aid in other ways to vulnerable hospitals.
Tradeoffs analysis finds many rural hospitals in stronger financial position
Tradeoffs analyzed financial data on the roughly 900 rural hospitals that could be subject to site-neutral payments and found that some have more financial and market strength than their peers.
About 1 in 5 — nearly 150 hospitals — are owned by some of the wealthiest U.S. health systems, with high credit ratings from Moody’s Investors Service or S&P Global Ratings. There are roughly 50 well-funded health systems, including Mayo Clinic, Intermountain Health and Kaiser Permanente.
Rural hospitals with wealthy owners are more profitable, on average, than rural hospitals in Tradeoffs’ analysis, though their finances get worse as the areas they serve grow more remote and sparsely populated.
These rural hospitals with wealthy owners had an average operating margin of about 3%, for the most recent year available. Meantime, the average rural hospital basically broke even.
“There are a number of rural hospitals that look very much like what you would consider a suburban hospital — in an area that is not particularly low-income — and are doing just fine,” Adler said.
Additionally, nearly two-thirds of the rural hospitals owned by wealthy, highly-rated systems don’t have any direct competition in their area, according to recent market-concentration data from researchers at Yale University and the University of Wisconsin, shared exclusively with Tradeoffs.
Hospitals that have a monopoly on the market, research shows, charge patients higher prices for treatments and procedures.
Stronger hospitals generally shouldn’t be a target for relief under proposals to equalize Medicare clinic payments, health policy experts said.
“We’d want to keep it as narrow as possible,” said Clancy at Americans for Prosperity. “Define rural or high needs hospitals tightly.”
Site-neutral payments could slow consolidation of hospitals and physician practices
Saving Medicare and its enrollees money is just one reason to change how Medicare pays clinics, health economists told Tradeoffs. When Medicare pays hospital-owned clinics more, hospitals have an incentive to buy up neighboring independent clinics and physician practices.
The bigger the health system grows, the more leverage hospitals have to demand higher prices in negotiations with commercial health insurers. Employers and workers who buy these private health plans end up spending more as a result.
“The difference is stark,” said Shawn Gremminger, chief executive of the National Alliance of Healthcare Purchaser Coalitions, which represents employer groups. “The more consolidated the market is, the higher the prices are.”
Research suggests hospitals have capitalized on Medicare’s higher payments for hospital-owned clinics.
George Washington University health economist Ali Moghtaderi and colleagues tracked Medicare payments for heart disease tests between 1999 and 2021.
The team found the gap between what Medicare paid hospital-owned clinics swelled to nearly 300% more than to other clinics. During that same period, the share of cardiologists working for hospitals increased to roughly 60% from about 20%.
Asked if he was surprised by his results, Moghtaderi shrugged, “it was actually pretty predictable,” he said given the strong financial incentive for tests to be done in hospital clinics.
Heart-disease tests are among many procedures to shift from independent medical offices to hospitals’ clinics. Across a number of specialties, Moghtaderi said, more physicians are now working for hospitals. “It creates market concentration, it creates market power, and it just increases the overall cost,” he said.
Employers are closely monitoring Republicans’ next steps on Medicare.
Gremminger said employers hope a change to site-neutral payments will help cool down the dealmaking between hospitals and doctors. “We want to do everything we can to take away the incentive toward further market consolidation.”