Hospitals across the United States are preparing for a significant financial battle with the federal government over a proposed change to Medicare reimbursement. The new policy, known as "site-neutral" payments, aims to standardize what Medicare pays for certain outpatient services, a move that could cost health systems billions of dollars annually.
The Centers for Medicare and Medicaid Services (CMS) is championing the change as a way to control rising healthcare costs. However, major industry groups like the American Hospital Association argue the proposal is an overreach of administrative authority and are signaling a potential legal challenge.
Key Takeaways
- The federal government has proposed expanding "site-neutral" payment policies for Medicare.
- This policy would pay the same rate for certain services regardless of whether they are performed in a hospital outpatient department or a physician's office.
- Hospitals currently receive higher reimbursement rates and could lose billions of dollars if the rule is finalized.
- The American Hospital Association (AHA) has formally opposed the plan, suggesting it may sue the administration.
- A final decision on the proposed rule is anticipated from CMS around November 1.
Understanding the Site-Neutral Payment Proposal
The core of the dispute lies in how Medicare currently compensates healthcare providers. For many years, the program has paid a higher rate for services delivered in a hospital outpatient department compared to the same service performed in a standalone doctor's office. Hospitals argue this higher rate is justified because they have greater overhead costs, including 24/7 emergency room readiness, stricter regulatory compliance, and the care of more complex patients.
However, the government and other policy advocates see this payment difference as a loophole. They argue it incentivizes hospitals to acquire physician practices and rebrand them as outpatient departments, which allows them to bill Medicare at the higher hospital rate without a significant change in the care provided. This practice, they contend, drives up overall Medicare spending and increases costs for beneficiaries.
What Are Site-Neutral Payments?
Site-neutral payments are a reimbursement model where the payment for a healthcare service is the same regardless of the location where it is provided. The goal is to base payment on the service itself, not the setting, thereby removing financial incentives for providing care in more expensive locations when a lower-cost setting is safe and appropriate.
The latest proposal from CMS, issued in July, seeks to address this by equalizing payments for specific services. One of the most significant changes targets the administration of drugs, such as chemotherapy, in hospital-owned outpatient clinics. By reducing the payment to match the rate paid to independent clinics, CMS hopes to curb what it sees as an unnecessary inflation of healthcare costs.
The Financial Stakes for Health Systems
The financial implications for the hospital industry are substantial. Health systems have invested heavily in building outpatient networks, and a sudden reduction in reimbursement rates for these facilities would directly impact their revenue streams. The American Hospital Association (AHA) and other industry groups warn that these cuts could have severe consequences.
According to hospital advocates, the proposed changes could force some facilities, particularly those in rural or underserved areas, to scale back services or even close. They maintain that the higher outpatient payments are essential for subsidizing other crucial but often unprofitable hospital functions, such as trauma care and emergency preparedness.
Billions on the Line
While exact figures depend on the final rule, industry analysts project that the expansion of site-neutral policies could reduce hospital payments by several billion dollars over the next decade. This financial pressure comes at a time when many hospitals are already dealing with tight operating margins.
The AHA's official comment letter to CMS outlines these concerns in detail. The organization argues that CMS does not have the legal authority to enact such broad payment changes without explicit direction from Congress. This position sets the stage for a likely legal battle if the administration finalizes the rule as proposed.
"CMS continues to finalize unlawful and inappropriate payment policies that will result in significant reimbursement reductions for hospital outpatient departments," the AHA has stated in previous challenges to similar policies.
A History of Legal and Legislative Battles
This is not the first time hospitals have clashed with the government over site-neutral payments. The concept has been debated in Washington for years as a potential tool for controlling federal spending. Congress has previously taken limited steps in this direction, but broader legislative efforts have stalled.
The AHA has a track record of suing the administration over payment adjustments. In a previous case, a court initially sided with the hospitals, but the decision was later overturned on appeal, with judges giving deference to the administrative agency's interpretation of its authority. The AHA appears to be banking on a different judicial outcome this time, arguing the current proposal represents an even greater executive overreach.
Last year, Congress came close to passing a more limited site-neutral policy, but the language was ultimately removed from a year-end government funding package after intense lobbying from the hospital industry. The administration's current push through regulatory channels is seen as an attempt to achieve its policy goals without needing to go through a divided Congress.
Broad Support Outside the Hospital Industry
While hospitals are unified in their opposition, the CMS proposal has garnered significant support from a diverse coalition of other groups. Consumer advocates, insurers, and employer groups have long argued that the current payment disparity is unfair and inflates costs for everyone.
These proponents of site-neutrality believe that standardizing payments will:
- Lower out-of-pocket costs for Medicare beneficiaries.
- Reduce overall Medicare program spending, benefiting taxpayers.
- Promote competition among healthcare providers based on quality and efficiency, not billing location.
- Discourage further consolidation in the healthcare market, where hospitals acquire smaller practices.
Even organizations that frequently disagree with the current administration on other health policy issues have found common ground in supporting this specific measure. They view it as a common-sense reform that addresses a clear inefficiency in the healthcare system.
Expanding Outpatient Options
In a related move, CMS is also proposing to expand the types of procedures that can be safely performed in ambulatory surgical centers (ASCs). These are standalone facilities that typically offer services at a lower cost than hospital outpatient departments. By broadening the list of approved procedures for ASCs, CMS aims to give patients more affordable options for care.
Furthermore, the agency has proposed eliminating its "inpatient only" list, a collection of procedures that Medicare would only pay for when performed in a hospital inpatient setting. Phasing out this list would give doctors more discretion to decide the appropriate setting for care based on a patient's individual condition, potentially shifting more procedures to less expensive outpatient sites.
What to Watch Next
The healthcare industry is now awaiting the final rule from CMS, which is expected to be published on or around November 1. The final language of the rule will determine the precise financial impact on hospitals and clarify the administration's definitive stance.
If CMS moves forward with the proposal largely unchanged, a lawsuit from the American Hospital Association is widely expected to follow shortly after. The outcome of that legal challenge could set a major precedent for the future of Medicare reimbursement and the balance of power between federal agencies and the healthcare providers they regulate.
The decision will have far-reaching effects, influencing hospital revenue, patient costs, and the ongoing trend of consolidation within the U.S. healthcare landscape.
