High hospital costs are a major driver of health care spending in the United States. While the quality of care is often the same in nonhospital and inpatient settings, prices for treatments in hospitals are higher compared to the same categories or types of care in other settings. To address this problem—and reduce pressure on rising health care costs—many policy experts support requiring providers to charge comparable prices for the delivery of treatment regardless of location, a concept known as site neutrality.

What is location neutrality?

Site neutrality refers to the idea that patients should pay the same price for the same services regardless of where the service is provided. In general, treatments provided in a hospital outpatient department (HOPD) are reimbursed more than the same treatment provided in a physician’s office or ambulatory surgical center (ASC). For example, Medicare total rates for HOPDs are nearly twice as high as rates for ASCs. Payment differences can be even more significant depending on the service provided. For example, Medicare pays HOPDs an average of 125 percent more for an examination and treatment visit than a physician’s office. Other services, such as echocardiograms, cost nearly three times as much in a HOPD as in a physician’s office. These differences are also evident in the private sector, as private insurers generally pay more for the same services when they are provided in a HOPD rather than in a physician’s office.

Some site-neutral payment reforms were included in the Bipartisan Budget Act (BBA) of 2015, based on recommendations from the Medicare Payment Advisory Commission (MedPAC). The BBA introduced site-neutral payments for services at off-campus HOPDs (defined as within 250 meters of a hospital’s main campus), but the policy applied only to future HOPDs. All current off-campus HOPDs, as well as those under construction at the time of the BBA’s passage, were included in the site-specific payments. In addition, ASCs, stand-alone emergency departments, and on-campus HOPDs are exempt from the BBA’s site-neutrality rules. Based on data available at the end of calendar year 2022, payments to off-campus hospital sites subject to the site-neutrality policies established in the BBA account for only 2.3 percent of Medicare outpatient spending.

What are the effects of location neutrality?

A central argument for site neutrality is that there is little to no evidence that the quality of care is better in a hospital than in a physician’s office, ASC, or other facility. In many cases, physician practices have been purchased by hospitals and relabeled as part of the HOPD, giving them a higher payment rate. The share of physicians working in practices owned by a hospital or health system was 26 percent in 2012; by 2023, that share had risen to nearly 80 percent and included corporate ownership as more private equity firms, insurers, and other companies began acquiring physician practices. Reducing HOPD payment rates would reduce the incentive for hospitals to buy physician practices and charge the HOPD rate. In addition, the data show that even with comparable volume growth rates across different types of care facilities, average prices at HOPDs increased by 27 percent, compared to 11 percent growth at ASCs and 2 percent at physician practices.

Site-neutral payments would impact Medicare patients’ out-of-pocket and cost-sharing costs in addition to savings for those with private insurance. On average, Part B beneficiaries paid a $9 copayment for a standard clinic visit in a doctor’s office in 2019, but paid 2.5 times as much ($23) for the same service in an HOPD. Site neutrality could make these copayments or other accrued costs less burdensome for patients.

But hospital groups claim that the adoption of site-neutral payments could have negative effects. They argue that reimbursement rates for HOPDs are formulaically higher to account for differences in regulatory burden, complexity of services provided, equipment, and patient mix (the makeup of the patient population based on payment source). In addition, cuts to payment rates for a broader range of services could negatively impact many hospitals’ bottom lines. MedPAC’s recent report found that the aggregate operating margin across all payers (which indicates how much net revenue a hospital generates on each dollar of revenue after deducting operating expenses) remained below pre-pandemic levels in 2023. There is significant variation in margins (-5 percent to plus 10 percent) depending on trends in patient volume, higher labor and material costs, and the end of government COVID-19 funding. For-profit hospitals tended to perform better in cost recovery than nonprofit hospitals.

How much savings could be achieved through location neutrality?

To achieve savings, lawmakers have recently proposed several bills with a site-neutral framework. Specifically, such legislation would reform Medicare payments to ease the burden on the federal budget and support Medicare’s Hospital Insurance Trust Fund. Payments to hospitals currently account for nearly 40 percent of all Medicare payments—the largest single item of Medicare spending.

Site-neutral payment reform has bipartisan support, was recommended by MedPAC, and has been included in several presidential budgets since 2015. Options may be broader or target specific services and therefore may vary based on scope of influence and savings estimates.

A broad-based, site-neutral option would pay HOPDs for certain services at the lower rate for individual physician practices, in addition to paying all hospital-owned off-campus physician practices at the same rate. An analysis prepared for Blue Cross Blue Shield finds that implementing such a policy could save the government $231 billion from 2024 to 2033. Changes to Medicare could also have spillover effects on private sector prices, since private insurers generally use Medicare’s payment system and simply vary their average payments relative to Medicare rates. From this perspective, reducing Medicare fees to hospitals for services typically provided at other facilities would have a corresponding effect on private sector prices for those services. Based on this assumption, the policy could save an additional $152 billion in Medicare beneficiaries’ out-of-pocket payments and $117 billion in private premium savings over the next decade. After taking interactive effects into account, total savings at the federal level, private premiums, and insured co-payments would be estimated at $471 billion between 2024 and 2033.

Another policy proposed by the Committee for a Responsible Federal Budget (CRFB) would require that payment rates for certain services (including clinic visits, imaging, and medication administration) performed in on-campus HOPDs be consistent with the Medicare Physician Fee Schedule (MPFS) applicable to physician offices. In addition, Medicare payments for all services performed in off-campus HOPDs, stand-alone emergency departments, and clinics would be set at the MPFS equivalent rate. The expansion of site-neutral payments for select procedures would also apply to ASCs. Finally, the proposal would authorize the Centers for Medicare and Medicaid Services to identify additional services for application of site-neutral payments as delivery patterns emerge and technology advances. The policy analyzed by the CRFB could save Medicare an estimated $153 billion over 10 years, reduce premiums and cost-sharing for Medicare beneficiaries by $94 billion, and reduce private cost-sharing and premiums by up to $466 billion over 10 years.

There are also more targeted site-neutral options. For example, site-neutral payments for Medicare could apply to all off-campus HOPDs, or limit their scope to certain types of services, such as drug administration or cancer treatments. Another provision that addresses site neutrality from a different angle could require health systems to create and bill for a unique national provider identifier for each off-campus outpatient department and treat them as subdivisions of their parent organization. Legislation could also address spending in the commercial market. One bill caps the prices that HOPDs can charge, capping them at the average price charged by independent physician practices.

Diploma

As health care costs continue to rise and are expected to account for one-fifth of the economy within the decade, it is imperative for lawmakers to look for solutions to reduce the financial burden of these costs on both the federal budget and patients. Implementing site-neutral payments could be an important way to reduce health care spending, lower costs for consumers while maintaining quality of care and putting the country on a stronger and more sustainable fiscal path.

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