Site-neutral payment: better for physicians and patients, or flawed policy that hurts hospitals?

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Health care gets reimbursed at different rates when delivered at physicians’ offices or hospital outpatient departments (HOPDs) – a method that some doctors and other advocates say should change.

KFF hosted experts offering answers to the question: “What’s Behind the Buzz about Site-Neutral Payments?” during its Health Wonk Shop, periodic webinars to discuss issues across health care. The June 17 topic “is about as wonky as they come,” said Larry Levitt, KFF executive vice president for health policy.

But it translates into real dollars and cents for patients paying bills and for physicians and hospitals trying to keep their doors open.

What’s happening now

Levitt summarized the payment situation: “Right now, in many circumstances, what appears to be the same service might cost much more in a hospital outpatient department than in a freestanding physician's office. It's become a much bigger issue as hospitals have acquired physician practices and started charging facility fees at these off-campus clinics.

“This has led to calls, especially in Medicare, for so called site-neutral payments. That is the same price for a service no matter where it is delivered,” Levitt said. “There's potential to save Medicare, and potentially private payers, a lot of money that, not surprisingly, has hospitals quite concerned, especially those with low or negative margins.”

Changes in the law

In 2015, Congress passed a law reducing payments for services at off-campus HOPDs, but that applied to new HOPDs, not the ones that existed when the law was passed, said Zachary Levinson, director of the KFF Project on Hospital Costs. In 2019, the U.S. Centers for Medicare & Medicaid Services reduced payments for clinic visits that were at off-campus HOPDs that were exempt under the 2015 law.

But most Medicare spending pays for hospital outpatient services performed at on-campus departments, and aside from clinic visits, the reforms exempted HOPDs that existed when the law was passed, Levinson said.

In December 2023, the U.S. House of Representatives approved the Lower Costs, More Transparency Act, which would lower payments for off-campus HOPDs for drug administration services, such as chemotherapy, Levinson said. There are various other proposals, such as lowering payment for all services at off-campus HOPDs, or applying cuts to certain services at on-campus HOPDs. Some proposals would include protections or support for vulnerable rural and safety net hospitals, Levinson said.

High prices

“Taking a step back, why are we here? Really high prices in the health care sector among providers,” said Zack Cooper, associate professor of public health (health policy) and economics at Yale University’s Institution for Social and Policy Studies.

In health care, the market is changing with lots of vertical integration of hospitals and physicians, and hospital mergers, in the last two decades, Cooper said.

“And the net result is really, really high spending that's putting tremendous pressure on the federal government. It's putting pressure on companies. I think most importantly, it's putting pressure on American families,” he said. “And so we now see that high costs are really an access issue, where something like one in four individuals are reporting putting off care each year because they just can't afford it.”

Cooper used the analogy of a large new owner taking over a local coffee shop. The store sells the same beans, has the same baristas and plates, but the coffee now sells for twice the price. In health care, doubling payment to doctor’s offices integrated into hospitals will raise spending and out-of-pocket costs; it incentivizes vertical integration in health care and embeds market distortions, he said.
“And it is true that hospitals do different things than doctor's practices, we have to acknowledge that,” Cooper said. “But at the end of the day, an infusion is an infusion is an infusion.”

It's also true there are financially vulnerable hospitals. They need targeted benefits and they won’t benefit from giving more money to large health systems such as Yale New Haven Hospital, the Cleveland Clinic, or Massachusetts General Hospital, Cooper said.

Hospital perspective

Site-neutral payments are not neutral and may be based on a flawed sentiment that hospitals may be overpaid, which is not true at all, said Ashley Thompson, senior vice president for public policy analysis and development of the American Hospital Association.

Using a different analogy, it is completely different to use an MRI to diagnose a sore shoulder of a healthy-67-year-old tennis player, compared with an 87-year-old person who fell out of bed at skilled nursing facility, with obesity and dementia, Thompson said.

“They are a completely different patient that needs additional resources and an additional care, and most of those are treated at hospital outpatient departments, and physicians send them there because they are aware of the differences,” Thompson said. “And when you get the same exact payment for that MRI, that means that hospitals are losing a ton of money, especially if you cut it further, because the resources that we use to provide that care are so much greater.”

Hospital patients are more likely to be sicker, non-White, low-income, or have just come out of a hospital outpatient department or emergency room visit, with severe complications, comorbidities or disabilities, Thompson said. Hospitals also have more equipment and services and higher standards for accreditation, she said.

Who gets paid?

Cooper and Thompson split over the potential effects of site-neutral payment on rural hospitals. Thompson noted they see a disproportionate number of Medicare and Medicaid patients, so cuts to reimbursement would have a greater effect, but Cooper argued those hospitals treating primarily Medicare and Medicaid patients are making money on them. Levitt noted the debate about site-neutral payment exists with the background question about overall adequacy of Medicare payments, and Thompson said “it was kind of a morass” of how Congress created the ambulatory, physician and hospital outpatient payment systems years ago. The physician payment system is no better, Thompson said, citing the American Medical Association calculations that physicians have not received a real payment update in years, when adjusting for inflation.

Changing the Medicare reimbursement rate to be site-neutral definitely would influence private payers’ reimbursement rates, Cooper said.

Tracking claims

Cooper and Thompson split over potential effectiveness of HOPDs using a separate identifier to track insurance claims. That would allow payers to set payment rates that are not “lumped into the whole hospital system,” Cooper said, but Thompson called it overly burdensome.

Not having site-neutral payment incentivizes vertical integration, Cooper said. Thompson countered that most of the time, physicians approach hospitals to take over practices due to low Medicare reimbursement, administrative burdens and some work-life balance issues. In the last five years, 65% of physician acquisition was from private equity, she said. Cooper noted across the physician sector, about 32% of doctors are employed by hospitals, and independent physicians are not on an even playing field with hospitals, which is why site-neutral payment is needed in the first place.

For the future, Cooper endorsed the Lower Cost, More Transparency Act, calling it a small change that would lead to lots of benefits for patients. Thompson differed.

“For me, instead of Congress considering flawed policies that might put patient access to care at risk, I mean, I think Congress should focus on ways to make sure hospitals and health systems have the resources they need to continue to provide (24/7) care to their patients and communities that they deserve,” Thompson said.