Expanding Medicare’s Site-Neutral Payment Policy Could Save $170 Billion

The Congressional Research Service has released a report revealing that expanding Medicare's site-neutral payment policy could potentially save over $170 billion in federal expenditures over the next decade. This insight comes amidst Congressional efforts to identify cost-saving measures to support broader tax legislation.

Currently, Medicare's payment structure leads to significant cost disparities for identical medical services, depending on the setting. Hospital outpatient departments generally incur higher costs than independent physician offices due to differing reimbursement systems, with hospitals using the Outpatient Prospective Payment System and physician offices following the Medicare Physician Fee Schedule.

The site-neutral payment policy aims to standardize reimbursement rates across various settings for equivalent services, beginning with the Bipartisan Budget Act of 2015. This mandate required new off-campus hospital outpatient departments to adopt the lower physician fee schedule, excluding those operational before November 2, 2015.

The Centers for Medicare & Medicaid Services (CMS) has furthered this policy through rulemaking. The 2019 Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) Final Rule extended site-neutral rates to specific clinic visits at grandfathered facilities. More recently, the 2026 OPPS and ASC Final Rule has expanded these rates to drug administration services.

The rationale for expanding site-neutral payments includes cost control and market dynamics. Financially, reducing reliance on more expensive outpatient payments can ease fiscal pressures on the Supplementary Medical Insurance Trust Fund. This fund significantly finances Medicare Part B through general revenues. Additionally, market structure changes, prompted by financial incentives under current payment disparities, highlight increased consolidation between physicians and hospital systems.

The Medicare Payment Advisory Commission (MedPAC) has advocated for harmonizing payments across different service settings, identifying payment discrepancies as a consolidation trend driver. Despite this, some proposed expansions, such as between inpatient rehabilitation facilities and skilled nursing facilities, remain unadopted due to non-comparable patient populations.

The American Hospital Association challenged the 2019 rule regarding clinic visits, although the D.C. Circuit upheld this under the now-overturned Chevron deference doctrine. The U.S. Supreme Court's decision in Loper Bright Enterprises v. Raimondo eliminates this deference, complicating future legal challenges involving CMS policies. As the current administration supports further expanding site-neutral payments, it aligns with goals to enhance competition and control healthcare costs.

A Congressional Budget Office analysis projects substantial savings if site-neutral rates broadly apply to hospital outpatient services, drug administrations, and imaging. This possibility is critical amid budget discussions and tax legislation considerations.

While reducing outpatient setting payments would decrease coinsurance costs for Medicare beneficiaries, concerns persist from hospitals about potential adverse financial impacts, especially in rural areas. The site-neutral payment policy offers a significant strategy for Congress to reduce healthcare expenditures, yet future implementation may face legal challenges post-Supreme Court decision. Legislative and regulatory discussions will be pivotal in determining whether these savings become law or remain contentious regulatory issues.