When the House of Representatives overwhelmingly passed the Lower Costs, More Transparency Act last December, it seemed like one significant step toward fixing a piece of our nation’s broken healthcare model may have finally gotten some momentum. Now, it looks like that’s stalled.
A few weeks ago, the Senate stripped the Act of the very provisions designed to enforce site-neutral payments which would have benefited the patient-consumer and saved Medicare billions of dollars. Site-neutral payments ensure reimbursement is tied to a given procedure or service rather than to the site where care is delivered. The controversial policy has been vehemently opposed by the American Hospital Association for years and its removal from the Act largely reflects a win for hospitals.
The decision to cut site-neutral payments came partly in response to the AHA’s argument that higher overhead costs for hospitals necessitate higher fees, warning that site-neutral payments might decrease access to care by further shaving hospitals’ operating margins. While that may be true, the root of the issue isn’t with site-neutral payments, but with the misaligned incentives and band-aid solutions in the current fee-for-service model that have led us here.
Unfortunately, this is just the latest example of a decades-old story—stakeholders resisting changes that would lower healthcare costs, improve outcomes, and improve the experience for patients and providers. But they are swimming against an increasingly powerful tide. As I’ve written about before, the current model is undeniably on its way out. Ultimately, healthcare systems will need to embrace the changes to come or follow the old model out.
Instituting site-neutral payments is an overdue reform to the current payment model that some may be surprised to learn isn’t the case already. My previous columns explain how, under the current model, a particular procedure that can be performed at a variety of sites—such as a physician’s office, outpatient clinic or hospital—costs significantly different amounts depending on the location of care. But if it’s the same procedure, then why the price difference?
Under the existing fee-for-service system, healthcare delivery organizations and many physicians are incentivized to have procedures done in the setting with the highest reimbursement. Typically, that is in the hospital, not in an ambulatory care setting or a physician’s office.
As I outlined in Bringing Value to Healthcare, the changes we’re seeing today in where care is delivered have evolved over decades. With advances in technology, care has migrated out of the traditional hospital setting for many procedures and can be delivered safely in less intensive settings. For instance, total knee and hip arthroplasty is now a minimally invasive procedure, and a recent National Institute of Health report found that outpatient surgeries for this procedure actually have comparable or better clinical outcomes than inpatient operations. Some healthcare stakeholders, including the AHA which represents hospitals, however, have continued to push for these procedures to be done in hospitals, where the consumer pays a higher co-pay reflecting the higher price allowed to cover overhead, facility and other associated costs.
For example, my book details how “when outpatient surgical centers became more prevalent, hospitals bemoaned that the ‘easy patients’—those needing endoscopy, cataract surgery, etc.—were being ‘picked off.’” These procedures were associated with good reimbursement and few complications, so it’s no wonder that healthcare delivery organizations, embedded in a fee-for-service transactional mindset, wanted to perform as many of them as possible in inpatient hospital settings.
Outpatient reimbursement is typically less than inpatient reimbursement. Hospitals must be staffed and equipped for more complex (and expensive) care, and those costs have historically been factored into charges for inpatient procedures. But if they are truly patient-centered, healthcare delivery organizations should provide the right care for a given patient in the right setting, without regard for profitability based on where the procedure is performed.
Site-neutral payment mandates one price for a procedure, wherever it is performed. This removes the incentive for healthcare delivery organizations to exploit the differential by pushing patients into the most expensive locations for every procedure. For those organizations committed to a capitated payment model that ties payment to outcomes that matter, site-neutral payment makes sense. For stakeholders who are wedded to the existing fee-for-service system and focused on maximizing short-term revenues, their resistance is understandable.
In the long term, however, this is not a winning strategy. Hospital systems have engaged in a variety of contortions to adapt to a dying fee-for-service business model rather than embrace a new one. To keep up with increasing regulations, decreasing reimbursement, and rising costs, hospitals have tried to maintain profitability through consolidation. Between 1998 and 2022, there were more than 1,800 hospital mergers in the U.S. This isn’t limited to just hospitals—large hospital systems have been buying up small independent physicians’ offices and clinics for many years. This keeps costs steadily increasing for patients while only putting off the changes that must ultimately happen.
Today, more than half of physicians are employed by hospitals and health systems. As I warned, this significantly affects patients who have fewer options than ever before. They are increasingly being forced into large hospital systems where they are suddenly paying more money for the same services. When a physician’s office is acquired by a hospital system, costs increase by an average of 14.1%, with no corresponding increase in quality.
Imagine going to the same restaurant every week for years and getting the same bottle of wine. One day, the restaurant is bought out by a bigger franchise. The next time you order your usual bottle of wine, it’s suddenly significantly more expensive. The decor is the same, you have the same server as you did last week, and the wine is the same label and vintage as always. So, what are you paying more for? Unfortunately, this is exactly the situation patient-consumers find themselves in going to the same doctor but being charged more when they leave because it’s been acquired. Site-neutral payment policies would protect them from this.
Had healthcare stakeholders changed their business model even several years ago, they would have done well financially during the Covid-19 pandemic when elective surgeries dried up and associated revenues evaporated. Given that these surgeries drove revenue, there was finally proof that the fee-for-service model as currently conceptualized was associated with enormous risk. Unfortunately, many of these systems were bailed out and have continued to cling to the old model rather than embrace a new one. Site-neutral payments are an element of this new model.
Cutting the site-neutral payment provisions from this Act is just the latest symptom of an illness that has plagued healthcare for decades. What is so badly needed is a value-based approach, and site-neutral payments would be a step in the right direction. It’s time the AHA stopped blocking the road to progress and worked with its stakeholders to embrace a new model.