On Sunday, the Senate settled on a stripped-down version of the health package, removing the site-neutral payments provision included in legislation the House passed in December. The Senate also punted on measures to codify price transparency rules and reform pharmacy benefit manager (PBM) practices. While the narrowing of the health package comes amid an approaching March 8 government funding deadline, Senate concerns over the more ambitious measures like site-neutral payments have been forming since late last year.

Broadly, a site-neutral payments policy would ensure that Medicare pays hospitals and physician offices the same price for the same service. Under the current system, Medicare part B pays hospitals almost double what they would pay a freestanding physician’s office for the same service, although reimbursement rates vary across sites. In some cases, such as for surgical specialties, Medicare reimbursement was 224 percent higher for hospitals. Even for routine services like X-rays, prices could be up to four times higher for Medicare in a hospital outpatient department. 

Medicare should pay hospitals enough to ensure adequate care and cover necessary costs. However,  to justify the significant price difference, hospital systems should provide a level and quality of care that sets them apart from independent physician offices. There is little variation in patient treatment when it comes to routine care, such as imaging and drug administration There is also no peer-reviewed evidence to support that hospitals provide better outcomes than physician offices for patients receiving routine services. Hospitals are instead passing those unnecessary costs onto Medicare and, ultimately, the patient in the form of higher out-of-pocket costs.

Site neutrality in Medicare part B would accomplish three primary objectives: Significantly reduce Medicare spending, reduce out-of-pocket costs for Medicare part B patients, and remove one of the core financial incentives to treat patients in a hospital rather than a lower-cost freestanding physician’s office.

Reduce Medicare Spending

Some progress has been made in the last few years. In 2015, Congress passed a narrow version of site-neutral payments for off-campus physician offices, but grandfathered in the existing off-campus hospital outpatient departments (HOPDs) and did not apply the rule to on-campus HOPDs, ambulatory surgery centers, or emergency departments. In practice, the bill applied to a small number of facilities. In 2019, a new Centers for Medicare and Medicaid Services (CMS) policy required site-neutral payments for “clinic visits” at off-campus HOPDs, but site-based billing persists for all other routine services. 

The current proposal in the Lower Costs, More Transparency Act would be limited, only covering site-neutral payments for physician-administered drug services. Recent savings projections estimate that Medicare could save $4.8 billion over ten years with this proposal. The CBO projects total savings at $3.8 billion over the same period. 

But a broader site neutrality effort could be applied to the 66 ambulatory payment classifications (APCs) that the Medicare Payment Advisory Commission (MedPAC) identified in June 2023 for potential realignment. These payment classifications are  mostly for routine services that  currently take place in freestanding physician offices in “the majority of circumstances.” Making these services site-neutral would allow Medicare to save money without restricting patients’ access to care or decreasing their quality of care. In this case, Medicare could save $18.3 billion when limited to off-campus hospital outpatient departments (HOPDs) or $126.8 billion over ten years if expanded to all HOPDs. The CBO estimated that a similar proposal by the Trump administration in 2020 would have saved Medicare $141 billion over ten years. 

Reduce Patient Out-of-Pocket Costs

Patients also face higher costs due to Medicare’s high reimbursement rates for hospitals. This is particularly true for individuals with chronic conditions. With more physicians and physician offices integrating with hospital systems, more patients receive care at larger, higher-cost hospital systems. For example, MedPAC found that chemotherapy services being billed by hospitals rather than physician offices increased from 35.2 percent in 2012 to 51.9 percent in 2021. That trend will likely continue as long as health systems are financially incentivized to consolidate.

Regarding specific savings from site-neutral payment reform, a recent analysis revealed that some patients with specific life-threatening conditions could save as much as $1,220 in out-of-pocket costs annually. A February 2023 report, using a broad site-neutrality policy found that enrollees could save $152 billion over ten years in out-of-pocket costs, with a combination of lower Medicare part B and private insurance premiums. 

Reduce Financial Incentives for Consolidation

Site-based payment policy has been one of the drivers of recent hospital consolidation, which has concentrated the market and left patients with fewer choices. When a hospital can locate a new physician in an on-campus HOPD or a grandfathered off-campus department, they are able to bill Medicare higher rates for that care. Hospital-physician integration also negatively affects the private market. As more physicians integrate with hospital systems, bargaining leverage shifts toward providers who can negotiate for higher prices with commercial payers. 

Rural hospitals and physicians are more likely to integrate than urban ones, partly due to less physician competition. Some have raised questions about the effect site-neutrality will have on rural hospitals, and the concerns have been a critical roadblock to the policy’s advancement. Physicians who practice in rural areas are more likely to serve Medicare patients, and are projected to lose revenue under some site-neutral policies. But many of those providers, such as Rural Health Clinics, Critical Access Hospitals, and Federally-Qualified Health Clinics, would not be affected by site-neutral proposals. Some proposals, such as the proposed 2020 site-neutral policy, exempted rural hospitals altogether from any payment reductions. Even with a rural hospital exemption, a site-neutral policy applied to outpatient departments would remove a key financial incentive for hospital-physician integration.

What’s Next?

Increasing the supply of care in non-hospital settings will create more affordable options for patients and lower the financial burden on Medicare. Although the Senate is not considering site neutrality ahead of the government funding deadline, the possibility of an eventful lame-duck session could put site neutral payments back on the radar. Congress should prioritize site neutrality in any future health package.