The Ongoing Debate Over Site-Neutral Payments
By Jarrod Fowler, MHA, FMA Director of Healthcare Policy and Innovation | Aug. 24, 2023
One of the debates raging in the healthcare policy community is what, if anything, should be done about the higher costs associated with hospital outpatient care relative to the care provided at independent physician practices. On one hand, it has been argued that some of these higher costs, such as facility fees in the private market, drive up costs for patients, particularly in consolidated markets. Meanwhile, insurers only occasionally possess the market power to reign in facility fees, albeit at the expense of agreeing to increase reimbursement for other services.

Some states, such as Connecticut, Indiana, and Maine, have already begun taking action against certain types of facility fees. Again, the efficacy of this approach is debatable since hospitals in consolidated markets may attempt to offset the loss of income associated with these facility fees by increasing their professional charges and taking other measures that ultimately lead insurers to pay the same costs in totality.

Some health policy analysts have proposed setting price limits in the private market, though such measures are particularly controversial, as they interfere with market-based negotiations. Establishing such a precedent could also lead to any number of downstream consequences for independent physicians, facilities, and other clinicians. In any case, various proposals are currently under consideration to address the increased costs at hospital outpatient settings relative to independent physician practices, such as by adopting more comprehensive so-called site-neutral payment policies.

While Medicare has taken some action to mitigate the cost difference between care provided in hospital ambulatory settings vs. independent physician practices, these restrictions do not apply in all instances. It has been argued that the numerous exceptions to these restrictions lead to higher overall costs and incentivize hospitals to acquire more physician practices. In some cases, these cost differentials can be rather significant.

MedPAC, which advises Congress on Medicare payment policies, noted that, in 2023, Medicare pays 194% more to hospital outpatient departments than to freestanding offices for transthoracic echocardiograms with image documentation. Because of such higher costs, MedPAC recommends that, with respect to specified services, Congress should more closely align Medicare hospital ambulatory payment rates with independent physician practice rates — insofar as doing so does not jeopardize access to care or compromise patient safety.

As MedPAC puts it, “In general, the Commission has maintained that Medicare should base payment rates on the resources needed to treat patients in the most efficient, clinically appropriate setting. If the same service can be safely provided in different settings, a prudent purchaser should not pay more for that service in one setting than in another.”

MedPAC believes that, if done correctly, reducing or in some cases eliminating the price differential between hospital ambulatory payment rates and the prices paid to independent physician practices would benefit the Medicare program and its beneficiaries and reduce the incentive for hospitals to acquire physician practices.

Hospitals have argued that Medicare should pay them higher ambulatory rates to subsidize the increased costs associated with operating hospital facilities — for example, by offsetting the higher costs associated with complying with more stringent regulatory standards, and with maintaining standby emergency capacity subject to EMTALA. Despite some disagreements concerning these specific matters, MedPAC acknowledges that there are certain differences between operating hospital ambulatory settings and independent physician practices. Therefore, MedPAC does not suggest that site-neutral payments be implemented across all services, even as it recommends hospital ambulatory payments and independent physician practice payments under Medicare being more closely aligned in general. Either way, this debate will continue to generate controversy for the foreseeable future.