At a hearing convened this week by the House Ways and Means Committee, Chairman Jason Smith criticized the assembled hospital executives for blocking a relatively straightforward Medicare payment adjustment that could lower program expenditures dramatically and possibly induce lower costs in the private market. He was right to make this point, and he should follow it up by preparing legislation to approve the cut in question and several more besides.
The hearing was one in a series the House GOP majority is holding to publicize its concern with the high costs of health care and health insurance. The prices charged by hospitals are certainly more than fair game in such a conversation.
In 2024, the US spent a total of $1.6 trillion on hospital care when taking into account payments from all sources (the government, private insurers, and consumers). Hospitals account for the largest slice of total national health expenditures, with a 31 percent share in 2024. Over the past decade, the average annual growth rate for spending on hospital services was 5.9 percent. Relative to GDP, hospital spending in 2024 was 5.6 percent, up from 4.0 percent in 2000. With so much of the total bill going to hospitals, it would be illogical to exempt them from a review of potential cost-cutting initiatives.
The Medicare adjustment that prompted Smith’s comments is known as the “site-neutral policy.” Under current law, Medicare pays more for certain ambulatory services when they are provided in hospital-owned facilities as compared with unaffiliated physician offices.
The Congressional Budget Office (CBO) has estimated that moving toward a full site-neutral policy, with one payment rate for specified outpatient services, would lower Medicare costs by $157 billion over ten years. Outside analysts also note that Medicare beneficiaries would pay lower Part B premiums and less cost-sharing, too.
Medicare’s policies often influence the private market, and that might occur in this case as well. Private insurers could follow the government’s lead and make adjustments to their negotiated rates, which would lower costs for millions of additional consumers.
The policy might also disincentivize further industry consolidation. Under current law, physicians and others can get paid more if they affiliate with major hospital systems and thereby qualify for higher payments for some of the services they already provide. There are other powerful forces pushing toward consolidation that a site-neutral policy would not mitigate, but even a small effect might boost competition in some markets.
Smith and others might be getting frustrated that changing any aspect of existing health care policy seems to meet with some resistance from powerful interests. Most House members have large hospitals located in their district that are not only highly valued by the patients who have received care through them but are also often major sources of employment and economic activity. Financially consequential reductions are not possible in this environment without pushing past the opposition of entrenched interests, which is the reason the site-neutral debate has been ongoing for more than a decade.
Despite the difficulty, however, Congress has little choice but to press ahead with a renewed push to slow the rate of growth in Medicare. The federal budget outlook continues to deteriorate, and rising expenditures for health care are a major cause of this expected trend.
Beyond the site-neutral policy, House and Senate members should look to trim excessive subsidies for highly-capitalized academic hospitals and move Medicare Advantage (MA) payments toward a competitive bidding model. Both policies would save multiple billions of dollars over the coming decade.
The challenge of codifying a site-neutral policy in Medicare points to a larger problem, which is that Congress is not well-suited to referee highly technical Medicare payment disputes. It is always possible for the industry to offer politically effective arguments against proposed changes, usually by referencing the potential for unintended harm to patients or the need to have higher payments for some services to compensate for unjustifiably low payments they are forced to accept in other contexts.
The long-term solution is for Congress to establish a top-line discipline within Medicare, which forces those providing services to patients to cut out needless expenses based on their more complete knowledge of what works and what does not. The House Ways and Means Committee could then stop trying to calculate appropriate outpatient rates based on the location of the clinics and instead force the MA plans or Accountable Care Organizations (ACOs) to make those decisions. In other words, it would be up to the industry that is closest to the patients to determine how to allocate the available resources, which by necessity must be limited, in a manner that maximizes the health benefits for patients.
