The Importance of Commercial Site-Neutral Payments in Combating Healthcare Inflation

This post is part of our healthcare series examining the macroeconomic impacts of various healthcare policies. The introduction to the series is available here, our first research report examining the impact of healthcare policies on the 1990s macroeconomic story is available here, and all other healthcare pieces are available here.

Introduction

In a previous piece, we argued that site neutrality in Medicare payments could reduce core Personal Consumption Expenditures (PCE) inflation. The reduction in inflation came from two sources: a direct effect, by reducing the prices paid by Medicare for medical services, and an indirect effect, by reducing the prices paid by private-sector payers (such as private insurers and patients) through a “pass-through” effect of Medicare prices on commercial market prices.

One takeaway from that analysis was that the indirect effect played a large role in the overall reduction in inflation. While the magnitude of the indirect effect is uncertain and depends on the extent of pass-through from Medicare prices to private prices, even a 30% passthrough of Medicare prices to private prices means that the indirect effect is larger than the direct effect.

In this piece, we take a closer look at reducing inflation in the commercial market for healthcare services. While public spending is a substantial part of the healthcare sector, a significant amount of healthcare spending from private insurers, businesses, and households still occurs in the commercial market. For healthcare policy to meaningfully impact healthcare spending and, by extension, overall PCE inflation, it is necessary to reduce inflation in commercial healthcare prices.

Commercial Payments for Hospital Services

In general, commercial health insurance tends to pay more to providers than public insurance programs like Medicare or Medicaid. Since 2008, per-enrollee spending by private insurers has grown at a much faster rate than Medicare. While research supports that Medicare reimbursement rates can influence private prices, the commercial market still charges higher prices, especially in hospital care. Hospital care is the largest share of healthcare spending by type of service, and while utilization rates and administrative costs contribute to hospital spending, prices paid by people with private insurance are the most significant factor. 

In 2022, employers and commercial insurers paid more than double the rate that Medicare pays across hospital services, with outpatient services averaging at 289% of the Medicare rate. While hospitals are known for inpatient services, where a patient stays overnight and can receive surgery or intensive treatment, the volume of outpatient services provided at hospitals has increased over time. Outpatient services are classified as medical procedures that do not require an overnight hospital stay and can include services like imaging, injections, labs, radiation treatment, and colonoscopies. Outpatient services have seen a significant increase in volume and revenue. The number of outpatient visits at general medical and surgical hospitals increased 18% from 2015-2021, and hospital outpatient revenue year-over-year was more than double inpatient revenue in 2023. A key driver in hospitals’ profit margins for outpatient services is their ability to add on ‘facility fees.’ When receiving care at a hospital, patients and insurers are charged for the physician's time and the institutional costs associated with the hospital. While this is typical and expected for inpatient services where the treatment can include complex medical interventions that require the use of hospital facilities, outpatient services are often less intricate and can be delivered in a physician’s office or clinic without the use of hospital infrastructure. For instance, on average, a biopsy will cost $146 at a physician's office compared to $791 when performed at a hospital or HOPD that charges a facility fee. The ability to charge an additional fee incentivizes hospital consolidation and vertical integration, encouraging hospitals to purchase physician offices and clinics and convert them to HOPDs. Where Medicare sets reimbursement rates based on payment formulas, the commercial market is set through price negotiations with providers and payers. When hospitals gain market share through consolidation, private insurers lose leverage during negotiations, and providers can demand higher prices. Higher prices inflate overall healthcare costs throughout the market, putting upward pressure on employers and patients due to larger cost shares, premiums, and out-of-pocket expenses. 

Site-Neutral Policy for the Commercial Market

While a handful of state governments have taken the initiative to limit the ability of hospitals to add on facility fees for medical services, the federal government has yet to address the price differentials in the commercial market. The Committee for a Responsible Federal Budget (CRFB) developed a three-step solution for the federal government to implement a comprehensive site-neutral payment policy for healthcare services in the commercial market. First, CRFB proposes that Congress take steps to eliminate the facility fees that off-campus HOPDs charge. By removing the ability to charge an additional fee, payers and providers would re-negotiate the allowable fee. As such, CRFB’s second step proposes full site-neutrality to limit the new fee by capping off-campus HOPD payments at the median price paid for the same service when it’s performed at a physician’s office. The last step of CRFB’s proposal is to extend the payment caps to on-campus HOPDs. The medical services that are subject to the capped price would only be low-complexity services and procedures that are commonly and safely performed in a physician’s office. Specifically, CRFB proposes following the MedPac recommendation for 57 specific medical services that are primarily provided in physician offices and involve low patient complexity to ensure the services can be performed regardless of the location.^[1]

Implementing this site-neutral payment policy is a common-sense approach to reducing healthcare costs for patients and employers while mitigating overall inflationary pressures in the commercial market. By capping payments for less complex services at the same level as those provided in physician offices, the policy targets price discrepancies that currently inflate costs without improving patient outcomes. Since these services are already performed safely and frequently in standalone physician offices, eliminating the ability of off-campus and on-campus HOPDs to add unnecessary facility fees contains healthcare costs and removes the incentive for hospital consolidation.

PCE Inflation Effects of Site-Neutral Commercial Payment Policies

As with our estimates of the inflation effects of site-neutral Medicare payments, we use CRFB’s estimates on the reduction in healthcare expenditures from these policies and translate them into reductions in the core PCE price index. The details of our calculations are in the Appendix. The table shows our estimates of how commercial site-neutral policies would have affected the core PCE price index if implemented in 2022.

We find that aligning total fees charged at off-campus HOPDs to fees charged at physician offices would result in a 4 bp reduction in the core PCE price index. Extending this policy to on-campus HOPDs would be more impactful, reducing the core PCE price index by 21 bp. This is likely because the majority of office visits in HOPDs take place in on-campus HOPDs rather than off-campus HOPDs. 

For context, in September 2024, the 12-month growth rate of the core PCE price index was 2.65%. Implementing site-neutral payments in the commercial market could therefore resolve between 6% vs 32% of the overshoot of core PCE price inflation over the Fed’s 2% target, depending on whether the policy affects on-campus HOPDs.

Implementation of these policies would translate into a “one-time” reduction in PCE inflation as payment rates for procedures at HOPDs are reduced to align with payments at physician’s offices. However, implementing site neutrality in commercial payments could yield lasting disinflationary benefits. A Blue Health Intelligence report compared the growth rate of payment to HOPDs and physicians’ offices for the procedures identified by MedPAC. Between 2017 and 2022, payment rates to HOPDs grew by 27% while payment rates to physician offices grew by only 2%. Aligning HOPD reimbursement rates to the slower-growing physician offices reimbursement rates would slow hospital services inflation. In addition, reducing the price differential between HOPDs and physician offices would combat industry consolidation by reducing the incentive for hospitals to acquire physician offices for conversion to HOPDs.

Conclusion

When it comes to site-neutral payments, most of the attention is placed on Medicare payments. While aligning payments in the Medicare system is a natural place to start and has more significant implications for the budget and deficit, from an inflation perspective, the commercial market is far more important due to the relative size of the private sector. If policy is to have a significant impact on medical services inflation, and by extension aggregate inflation, it is not enough to only tackle costs in the public sector. Policy needs to ensure cost control in the private sector as well.

As our previous research shows, implementing site-neutral payments in Medicare has the potential to influence private sector prices due to Medicare’s role as a price-setter in the overall market. However, the extent to which private sector prices will respond to site-neutral payments in Medicare is uncertain, and partial pass-through will likely leave some price misalignment in the private sector. Further legislation, by either federal or state governments, may be needed to ensure price alignment in the commercial market.

Appendix

The PCE price index is a Fisher-ideal price index, which is a geometric average of Laspeyres and Paasche Price indices. Laspeyre and Paasche price indices are both fixed-quantity price indices, which measure the change in the cost of purchasing a fixed basket of goods. Since the CRFB methodology assumes fixed quantities, the overall PCE price index reduction is well-approximated by the percent reduction in overall nominal personal consumption expenditures resulting from implementing site-neutral payments.

CRFB estimates that the dollar reductions in health care expenditures from implementing site-neutral payments in 2022 are $5.7 Billion for off-campus procedures only, and $32.4 Billion for both on- and off-campus procedures. These estimates were based on projections of 2022 spending from the March 2022 national health expenditure projections from the actuaries at the Centers for Medicare and Medicaid Services. Since NHE projections for concurrent and past years are typically close to realized expenditures, we make no adjustment to those figures.

Notes

^[1] CRFB’s proposal suggests aligning payments to the physician office rate for the 57 medical services at on-campus HOPDs while including additional services for off-campus HOPDs.

**Correction: An original version of this post referred to CRFB as the "Center for a Responsible Federal Budget," rather than the correct name, the "Committee for a Responsible Federal Budget." We regret the error.