Payers and hospitals are at odds over proposals that would level out payments to hospital outpatient departments and physician offices.
Healthcare costs are projected to soar in the coming years, and one proposed option to rein them in is to expand a model through which Medicare pays providers the same amount for the same service, whether it takes place at a hospital outpatient department or a doctor’s office.
“Initial signals are that Congress is interested in addressing payment differences across different outpatient settings,” says Eric Zimmerman, J.D., MBA, principal at McDermott+Consulting in Washington, D.C.
Current law requires Medicare to pay higher prices for services such as X-rays and lab work that are done at hospital outpatient departments rather than physician’s offices, driving up costs for both taxpayers and patients, who face higher cost sharing, says Kelly Parsons, M.A., director of media relations at the Blue Cross Blue Shield Association (BCBSA).
Under a site-neutral model, health plans and patients would pay providers the same rate for a service, regardless of where it is provided. A study by the association released in February 2023 found that expanding site-neutral payments would save the government and patients $471 billion over 10 years. A new projection by the Centers for Medicare & Medicaid Services shows U.S. healthcare costs will reach nearly $7.2 trillion, or 19.6% of gross domestic product (GDP), by 2031. That compares with total costs of less than $4.7 trillion, or 17.6% of GDP, in 2023.
The Medicare Payment Advisory Commission (MedPAC), which serves in an advisory capacity to Congress, issued a report in June 2023 in which it recommended that “Congress should more closely align payment rates across ambulatory settings for selected services that are safe and appropriate to provide in all settings and when doing so does not pose a risk to access.” The commission voted 17-0 in favor of the recommendation.
Site-neutral payments are already in place in some instances. The Bipartisan Budget Act of 2015 required site-neutral payments at newly established off-campus hospital outpatient departments, rather than allowing them to charge higher rates. But hospital outpatient departments that were already established as of 2015 did not have to adhere to payment limits and could charge the same rates as those charged in a hospital setting.
The MedPAC report states that in many cases the current arrangements “result in care being billed from settings with the highest payment rates, which increases total Medicare spending and beneficiary cost sharing without significant improvements in patient outcomes.”
The report also states that being allowed to charge higher rates prompts hospitals to acquire providers, which has caused a major shift in the billing for services, according to the MedPAC report.
For example, in 2012, 35.2% of chemotherapy administration was billed through the outpatient prospective payment system used by services provided by hospital outpatient departments. By 2021, just over half (51.9%) of chemotherapy administration was billed for by hospital
“In general, the commission maintains that Medicare should base payment rates on the resources needed to treat patients in the most efficient setting. If the same service can be safely and appropriately provided in different settings, a prudent purchaser should not pay more for that service in one setting than in another,” the MedPAC report states.
But it cautioned that Medicare “should be selective about which services should have payment rates aligned across settings, as many ambulatory services cannot be safely or appropriately provided in freestanding (physician) offices in the majority of circumstances.”
Not surprisingly, the American Hospital Association (AHA) has pushed back strongly against calls to increase the usage of site-neutral payments. Jason Kleinman, M.P.P., senior associate director of federal relations for the AHA, says hospitals are already feeling a financial pinch because Medicare only reimburses them 84 cents for every dollar they spend on caring for Medicare beneficiaries. Further cuts “would be really detrimental to hospitals and health systems,” he says.
Hospital outpatient departments often care for patients who are sicker, have more medically complex conditions, are people of color, are 85 or older, and are dual eligible for Medicare and Medicaid, Kleinman says.
Matthew Fiedler, Ph.D., a senior fellow at the Brookings Schaeffer Initiative on Health Policy at the University of Southern California, says hospital outpatient departments generally have “equipment and capacity that doesn’t exist in a physician’s office setting,” which carry increased costs. But he also noted that efforts to rein in payment costs are generally focused on “run-of-the-mill visits,” Fiedler says, such as intravenous drug infusions and imaging.
Parsons at BCBSA says the association takes the position that the current reimbursement setup “has created a strong financial incentive for hospitals to purchase physician practices and for physicians and other medical providers to sell their practices to hospitals.”
She says physician’s offices often provide the same services to the same patients at the same location but are able to charge more if they are considered a hospital outpatient department. Moreover, hospital acquisition of physician practices gives hospitals systems even more clout when they are negotiating with private insurers over rates, Parsons says.
But a 2023 study by the AHA shows that that almost two-thirds of physician’s practices were acquired by private equity firms between 2019 and 2023, with insurers acquiring 11% and hospitals just 6%. An AHA fact sheet argues that “hospitals aren’t even the largest employer of doctors.”
That distinction belongs to UnitedHealth Group and its subsidiary Optum, which the AHA says has more than 70,000 employed or affiliated physicians. The fact sheet also mentions CVS Health’s recent acquisitions of Oak Street Health and Signify Health as an examples of insurers acquiring practices.
Kleinman points out that if hospitals acquire a physician’s office that was not previously billing at a higher rate as of 2015, the office would continue to bill at its current rate.
In an April 2023 hearing by the House Energy & Commerce Subcommittee on Health, lawmakers indicated there was bipartisan support for expanded site-neutral payment provisions. Parsons says the BCBSA wants Congress to eliminate the exemption that allows some hospital outpatient departments to charge higher rates even if the department is not located at a hospital. Along with saving Americans more than $470 billion over 10 years, it would be “expected to make care more affordable for those with private insurance over time,” she says.
Zimmerman says the committee is most likely to advance a modest proposal to Congress. But changes could have “far-reaching and very significant impacts on the hospital industry,” he says. “There’s a high likelihood this Congress will consider site-neutral payment policy changes,” he says. On the other hand, “hospitals are very politically powerful, and they will not like to see policies enacted that impact their revenue. Politicians are not going to take on hospitals for the fun of it,” Fiedler says.
Susan Ladika is an independent journalist in Tampa, Florida, who writer about healthcare and business.