Weighing Policy Options for Returning Savings from Site-Neutral Payment Reforms to Hospitals

Congress is currently considering policies that would expand site-neutral payment for ambulatory services in the Medicare program. These policies would reduce hospital revenues, while generating savings for Medicare beneficiaries and the federal government and removing an incentive to shift services out of physician offices and into hospitals. Some policymakers have suggested using a portion of the federal savings to lessen the impact of a site-neutral policy on hospital finances. While we question whether this is the highest-value use of these funds, this paper discusses how policymakers could do this without reintroducing incentives to shift services into the hospital setting, as would occur under some existing proposals.

As background, Medicare payments for ambulatory services vary based on where services are delivered. Payments are generally much higher if a service is delivered in a hospital outpatient department (HOPD) that resides on a hospital’s campus (or, for some services, in certain “grandfathered” off-campus HOPDs) rather than a physician’s office. Payments for services delivered in an ambulatory surgery center (ASC) are also generally higher than those delivered in a physician’s office, albeit to a lesser degree.

As we have previously argued, these payment differences are not necessary to ensure that patients can access appropriate care:

Paying more when a service is delivered in an ASC or HOPD rather than a physician’s office often makes little sense. To ensure appropriate access while containing program costs, Medicare payments should generally reflect an efficient provider’s cost of delivering care. Thus, to justify paying more for a service in facility settings, the clinical needs of the patients treated in facilities must differ in ways that make delivering that service more costly. For the types of services commonly delivered in physician offices (e.g., office visits, imaging, and drug administration), it is hard to see how large cost differences could arise, especially since the differences between patients treated in HOPDs and physician offices appear modest.

But they do have important costs. They impose direct financial costs on Medicare beneficiaries and the federal government, in the form of higher premiums and higher cost-sharing. They also encourage shifts of services out of physician offices and into the hospital setting. Such shifting often involves hospitals buying up physician practices, which makes physician markets less competitive and thereby raises the prices negotiated by commercial insurers. And while it may not be intrinsically more costly to deliver these types of services in the hospital setting, locating as many physicians as possible on hospital campuses (or grandfathered off-campus HOPDs) may increase providers’ costs and make accessing care less convenient for patients.

Congress is currently considering proposals that would remove these payment differences. One notable proposal considered by the House Committee on Energy and Commerce would reduce Medicare payments to HOPDs and ASCs for services that are most commonly delivered in a lower-cost setting (e.g., if a service is most frequently delivered in a physician’s office, then it would be paid at the Physician Fee Schedule rate). This proposal mirrors an approach discussed in June 2022 by the Medicare Payment Advisory Commission.

This policy would generate substantial savings for the federal government, raising the question of how to use these funds. Policymakers may wish to return some of these savings to affected providers. We harbor doubts that this would be the best use of these funds. In general, savings should be directed to where they will generate the most value—whether that be priorities within health care, priorities in other domains, or deficit reduction. It would be a surprising coincidence if the highest-value use of these funds—even within the health care sector—happened to be returning them to the precise group of providers they came from. Moreover, we believe that concerns from hospitals that these changes will threaten access and quality of care are of questionable merit. The services targeted by this proposal are, by design, services that are most often provided in lower-paid settings, which implies that those lower payment rates will be adequate to ensure continued access to these services, whether in the HOPD or ASC setting or elsewhere. A more plausible concern is that this reform will broadly reduce hospitals’ revenues, which could force some providers to take steps to cut costs, but this may or may not have inappropriate effects on quality of care.

Nevertheless, we recognize that returning some of the savings to affected providers could lessen political resistance to the policy and address access or quality concerns that do exist. However, if policymakers take this approach, they should avoid reintroducing incentives to shift services out of physician offices and into HOPDs. More generally, they should favor options that foster efficient, high-quality care delivery.

The Energy and Commerce proposal discussed above included a provision that was designed to mitigate policy-induced revenue reductions for certain hospitals. Specifically, revenue reductions would be capped at 4.1% of total Medicare revenue for hospitals with an above-median share of low-income patients (as measured using methods for determining Medicare disproportionate share payments to hospitals).

Unfortunately, this policy would partially reintroduce incentives to shift services into HOPDs. Once a hospital’s revenue loss reached the 4.1% cap, the compensatory payments it received would grow with each additional service it delivered in the HOPD setting—and by the precise amount of the difference between the HOPD and physician office payment rate. As a result, such a hospital would still face the same incentive to shift services into the hospital setting that it faces under current law. For this reason, we recommend against this policy. However, there are other options to achieve similar goals while retaining improved incentives.

Option 1: Mitigate financial losses for the most-affected providers

Congress could limit the revenue reductions for affected hospitals, as envisioned in the Energy and Commerce proposal, but in a way that does not reintroduce incentives to shift services into HOPDs. One way to do that would be to tie the amount of compensatory funding each hospital received to the volume of affected services that the hospital delivered in a reference year prior to enactment rather than the current year.

Concretely, policymakers could direct CMS to do the following:

• Compute the percentage reduction in total Medicare revenue that each hospital would have experienced due to an unconstrained version of the site-neutral policy in some reference year (e.g., the final year before the policy change was enacted).
• For each hospital, calculate the difference between this unconstrained loss and a specified maximum allowable percentage revenue loss.
• For hospitals with revenue reductions larger than the maximum allowable loss, compute the dollar amount that would have been required to return the hospital’s revenue to the target level in the reference year.
• In each future year, the hospital would receive a lump-sum transfer in that amount, perhaps adjusted for factors like inflation or market-wide volume trends.

As an alternative, policymakers could direct CMS to compute the percentage increase in rates for inpatient prospective payment system (IPPS) services and non-site-neutral outpatient prospective payment system (OPPS) services that would have been required to return each hospital’s revenue to the target level in the reference year.[1] (Here, we use the term non-site-neutral OPPS services to refer to OPPS services that would not be subject to site-neutral payment under the proposal.) The hospital’s payment rates for IPPS and non-site-neutral OPPS services would then be increased by that percentage in future years.

This second approach could have advantages and disadvantages relative to the first approach. Unlike the first approach, the second would increase hospitals’ marginal return to delivering IPPS and non-site-neutral OPPS services, which is an advantage if policymakers are concerned about beneficiary access (and a disadvantage if they are concerned about overutilization). A downside of the second approach is that some non-site-neutral OPPS services can, in fact, be delivered in non-hospital settings; thus, this approach would modestly strengthen incentives for hospitals to shift these types of services into HOPDs. If they wished, policymakers could avoid this problem by increasing prices only for IPPS services; the relative merits of an IPPS-only approach would also depend on the relative adequacy of Medicare’s payments for inpatient versus outpatient hospital care under current law.

Like the existing Energy and Commerce policy, this policy could be targeted to particular hospitals (e.g., hospitals that serve a large proportion of low-income patients), either by limiting it solely to those hospitals or by varying the maximum allowable percentage revenue loss. One could also structure this type of policy to allow for a phase-in that limits revenue reductions more aggressively in early years than in the long run.

Option 2: Mitigate financial losses for the hospital industry more generally

Rather than targeting funds to hospitals based on which ones would lose the most revenue from the shift to site-neutral payments, policymakers could return money to hospitals by broadly increasing rates for IPPS and non-site-neutral OPPS services (or some subset thereof).[2] Like Option 1, this option would also largely avoid reintroducing incentives to shift services into HOPDs, subject to the caveat discussed above that increasing payment rates for non-site-neutral OPPS services would modestly strengthen incentives for hospitals to shift these services into HOPDs. As with Option 1, policymakers could specify larger increases for certain types of hospitals if there are specific concerns about beneficiary access or quality of care for those hospitals, and they could consider phasing such a policy down over time.

Option 3: Increase Physician Fee Schedule payment rates

Finally, policymakers could consider using some savings to increase payment rates under the Physician Fee Schedule. This could take the form of a direct increase in rates and/or changing how rates are updated over time (e.g., by restoring some linkage between rates and a price index). This change would directly offset some of the revenue losses to hospitals that would now be paid under the Physician Fee Schedule for many ambulatory services, with larger benefits for hospitals that deliver more such services, while also benefiting physicians who deliver ambulatory services in the physician office setting. Like the other two options, this option would avoid reintroducing incentives for hospitals to shift services from physician offices into HOPDs. This policy may also have the political benefit of expanding the constituency for site-neutral payment reforms to include physician groups.

Conclusion

If policymakers choose to use some of the federal savings from expanding site-neutral payment to lessen financial impacts on hospitals, they should avoid reintroducing incentives to shift services out of physician offices and into HOPDs. This analysis presents three approaches that would meet that standard.

Among the three options that we consider here, we would generally encourage policymakers to avoid Option 1 since it would provide more assistance to hospitals that were more aggressive in shifting physician services into HOPDs. There is no clear reason to believe that funds given to these hospitals would do more to benefit Medicare beneficiaries, and there are downsides to giving these hospitals a permanent competitive advantage over their peers. (A caveat is that Option 1 could be worth considering if it helped policymakers more tightly limit the total amount of funds returned to hospitals.) We do not have a clear view on the choice between Option 2 and Option 3, but this choice should hinge on one’s views about the relative adequacy of Medicare’s payments for the relevant categories of services under current law.

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[1] If policymakers increased IPPS rates, they might wish to transfer some of the savings under the site-neutrality policy to the Hospital Insurance Trust Fund in order to avoid accelerating its insolvency.

[2] MedPAC has recently considered a similar policy that would increase prices only for non-site-neutral OPPS services. The relative merits of these approaches depend on the relative adequacy of payments for the various services at baseline.