As the 119th Congress convenes, the House Budget Committee is considering several policies to cut federal spending by more than $5 trillion. One reported proposal is a potential site-neutral Medicare payment reform that is estimated to save Medicare $146 billion over ten years. The details on how House Republicans plan to reach these savings have yet to be released, but the scale and scope of the proposal appear to be sufficiently large to deliver substantial macroeconomic benefits.
Currently, both Medicare and private insurance groups frequently pay hospital-owned facilities like hospital outpatient departments (HOPDs) higher reimbursement rates than they do at freestanding physician offices and ambulatory surgical centers for the same services. This discrepancy exists even though many of these services could be safely provided outside of the hospital system without adverse effects on patient care. By eliminating payment discrepancies between HOPDs, independent physician offices, and ambulatory surgical centers, site-neutral Medicare payments promote equitable cost control in reimbursement rates without impacting patient health results or the standard of care. A MedPac report recommended that Medicare payment rates for dozens of services be equalized across sites of care. Building on work by the Committee for a Responsible Federal Budget, we found that implementing MedPAC’s recommendations could significantly reduce healthcare—and overall—inflation.
Inflation is a top concern for both policymakers and the public. Many worry that inflation could remain stubbornly high, making it harder for the Federal Reserve to achieve its 2% target. Lowering inflation in the healthcare sector can have a meaningful effect on aggregate inflation because of healthcare’s outsized share of the economy. Implementing site-neutral Medicare payments can lower broader healthcare inflation because of Medicare’s influence on private sector prices. Reducing the cost of healthcare is also a boon for the labor market because healthcare costs contribute to the cost of hiring workers.
The House Budget Committee’s reported proposal to save $146 billion is significantly larger than other site-neutral Medicare proposals. In the past two years, we have seen bipartisan proposals like the Site-based Invoicing and Transparency Enhancement (SITE) Act and Lower Costs, More Transparency Act offer site-neutral reform for off-campus HOPDs, propose savings that are only a portion of the Budget Committee’s estimate. The SITE Act proposed savings of roughly $30 - $40 billion over ten years, while the Lower Costs, More Transparency Act, which limited site-neutral payments for physician-administered drugs, saw proposed savings of almost $4 billion over ten years. It’s unclear what exactly House Republicans are proposing under the site-neutral reform to achieve $146 billion in Medicare savings, but the proposal seems to be on the same magnitude as CRFB’s estimates, which saw $153 billion in Medicare savings over ten years. Based on CRFB’s estimates, we found that site-neutral Medicare payments could reduce the Core Personal Consumption Expenditures Price Index by 15 to 32 basis points, depending on the extent of passthrough to private sector prices. Assuming the House Budget proposal is aligned with MedPac’s recommendations, it should have a similar effect on inflation.
Site-neutral Medicare payments are a common-sense policy solution that receives broad bipartisan support from a wide coalition of supporters. Unlike other policies that cut healthcare costs by limiting eligibility for public healthcare programs or by denying certain benefits, site-neutral reforms are an equitable way to reduce federal healthcare expenditures and cost growth without adversely affecting patient outcomes or the quality of care received. Both President Obama and President Trump have proposed a form of site-neutral Medicare payments in their previous budgets.
Congress first passed site-neutral Medicare payments in the Bipartisan Budget Act (BBA) of 2015, but this proposal was limited in its scope as it only applied to a small number of newly established off-campus HOPDs. Given the scale of the House Budget’s proposal, it appears likely that it will go further than the BBA and include medical services performed at both on-campus and off-campus HOPDs, potentially targeting a much larger percentage of Medicare expenditures without impacting patient outcomes–though the exact details of the proposal remain unclear. Notably, in President Trump’s first term, his FY 2020 and FY 2021 budget proposals mirrored MedPac’s recommendation and included site-neutral payments at both on-campus and off-campus HOPDs.
Site-neutral Medicare payments represent a responsible, efficient, and broadly supported approach to fiscal reform. If implemented, this policy could lower healthcare costs and contribute to broader economic stability by alleviating inflationary pressures in the healthcare sector.
