Ep. 8 Site neutrality, whatever happened there?

In episode 8 Dr. Anthony Paravati and Dr. Amar Rewari explore the concept of "site neutrality" in U.S. healthcare finance, discussing the disparities in reimbursement rates for the same medical services based on the location of care. They delve into the legislative efforts aimed at achieving site neutrality, the implications for healthcare providers and patients, and the unique healthcare model in Maryland. The conversation highlights the complexities of payment systems in American healthcare and the ongoing challenges in maintaining critical infrastructure. Chapters 00:00 Introduction to Site Neutrality in Healthcare 02:10 Understanding Payment Differentials 04:54 Legislative Efforts Towards Site Neutrality 07:00 Impact of Site Neutral Payments on Healthcare Providers 09:52 Patient Perspectives and Financial Implications 12:24 Regional Variations in Healthcare Payment Models 14:55 The Maryland Healthcare System: A Unique Case 17:02 Conclusion and Future Directions.

Introduction to Site Neutrality

Welcome to Value Health Voices, episode eight. I am Dr. Anthony Paravati.

And I'm Dr. Amar Rewari. Today we're diving into one of the fundamental concepts in US Healthcare finance: site neutrality, or better said, the lack thereof. Many people don't know this, but there is still a significant difference in reimbursement for the same medical care, same procedure, depending on where the service is rendered.

Yes, that might seem a little complicated or esoteric, but do not worry. We're going to break it down very simply in a way that will make sense even to those who are not policy experts. This is another episode where we're building a foundation of core concepts in healthcare finance and policy.

So today's topic, site neutral payments, really sits at the intersection of payment policy, healthcare access, and market dynamics. It's a discussion that's been going on for decades. I get many questions about it from people around the country. Let's get into it.

The Payment Differential

Let's start with something that might be a surprise to some of our listeners, maybe a lot of our listeners. When you get any medical procedure test, let's say an echocardiogram in a hospital outpatient department—and we'll define exactly what that is—Medicare pays about 60% more than if you got the exact same test in a freestanding clinic. And we'll define what that is as well.

Exactly. That payment differential has shaped everything from hospital business strategies to physician practice acquisitions. I've seen this firsthand, Anthony. The hospitals around our area are acquiring independent practices all the time, specifically because they want to take advantage of these payment advantages.

I mentioned getting questions about it. Usually the questions I get are from somebody who knows something about this differential and that site neutrality is maybe a direction the government wants to go. So I get the question, "All right, where are we at on site neutrality? Is it happening?" Something of that sort.

Classifying Outpatient Facilities

But in any case, to understand the whole landscape of this payment differential, we need to break down what we can consider three distinct types of facilities that provide outpatient care. The first two are a variation on a similar thing. They are two different kinds of hospital-based departments or clinics. The first type is called an on-campus hospital outpatient department. The second type is a hospital off-campus department.

The distinction between those two has to do with their location. A hospital on-campus department is either within 250 yards of the main hospital or it's connected in some way, which is why you see these sky bridges—what are these things called, these connectors between buildings that are even further away. So if they're not directly attached like that, they have to be really close. You can imagine a clinic that's right next to a main hospital building or right next to the hospital ER.

In terms of the off-campus departments, those are like those satellite clinics you see or you might find in a medical office building or a community location which are still affiliated with the hospital but are further than that 250 yards.

Then there's the third type which is freestanding facilities. These are clinics and doctor's offices that more often than not have no hospital affiliation. So these are oftentimes your private practices. They typically receive the lowest Medicare reimbursement rates.

Rationale for Higher Hospital Payments

Of the three categories we just described, the rationale for this difference in payment for the same services from a hospital perspective, they've always argued, "Well, we've got higher overhead due to obligations and community benefit requirements and even due to building standards." So to be a hospital outpatient department, there's door sizes and hallway sizes and other safety systems that are required that aren't required in the freestanding setting. Obviously, this makes operating those sort of facilities more expensive than operating a freestanding facility.

There's all these other services they have to support that can't support themselves. Emergency departments, uncompensated care for charity care patients, maintaining standby capacity for disasters. Another thing in oncology for us, we have all these wraparound services. Which are very low billable now, historically not billable, whether they're social work or nutrition or nurse navigation. So all these things are part of the overhead which oftentimes a physician practice that's a freestanding facility may not have to bear.

The reason people sort of have this on their radar, but they have a lot of misconceptions about it, is because over the years since the establishment of these different facility categories, there have been various attempts from a legislative standpoint, from a regulatory standpoint, to try to eliminate these payment differentials and get to the so-called site neutrality.

History of Site Neutral Legislation

So maybe we should talk about the establishment of this difference and then we'll get in later on to talking about some of the legislation that has sought to eliminate this payment difference.

I think that makes sense. So why don't I kick it off and we'll go back to 2015. The modern era of site neutral payment policy really began with the Bipartisan Budget Act of 2015. There was a section in that legislation that pretty much marked this crucial shift where new off-campus provider departments would no longer be able to receive those higher hospital outpatient rates.

So that we're really specific about it, that law only applied to the hospital off-campus departments, those that were more than 250 yards away or not directly connected to the hospital.

And then just a few years ago, In 2019, CMS went further and created a final rule that extended site neutral payments to clinic visits at all off-campus hospital departments, not just those that were built after 2015, but eliminating this grandfathered-in situation for the older ones.

As you can imagine, the hospital industry is dependent on these higher rates to support the inpatient services. So they fought back hard. The American Hospital Association sued CMS. Now the courts ultimately sided with CMS in what's become a landmark decision. But to this day the hospital associations continue to fight along these battlegrounds of site neutrality.

Recent Legislative Attempts

Getting really recent now, 2023. If I recall correctly, this was getting back on the radar of hospital leaders, department leaders, especially in academics and in hospitals. So from 2023, there was a lot more interest in this topic again because there was the Lower Costs, More Transparency Act of 2023 which originated in the House.

This bill proposed aligning Medicare payments for a host of things including drug administration services across all off-campus facilities. This would have been a major blow to services like chemotherapy, which are reimbursed much higher in these on-campus departments compared to the freestanding.

This bill, however, didn't make it past the finish line. It was passed by the US House of Representatives in late 2023 by a huge margin. The other thing that this legislation would have done is lower costs and increase price transparency, requiring hospitals, insurance companies, labs, ambulatory centers to publicly list prices for everything. There was also a pharmacy benefit manager component to this bill, which I do believe is probably the main reason why the Senate didn't ultimately pass it.

So passed the House, died in the Senate.

Yep, exactly. As you correctly alluded, Anthony, there were measures in there that were mandating health insurers and pharmacy benefit managers to disclose their negotiated drug rebates and discounts they were receiving, which would have revealed the true costs of prescription drugs. That's probably the reason it didn't pass.

The latest development is in 2024, the Senate policy framework, which was from Senators Bill Cassidy and Hassan, probably the most comprehensive attempt yet to standardize payments. But that also didn't make it, as we all know.

Economic Impact and Hospital Finances

So the discussion continues, the paranoia, if you like, continues from the big hospital operators. We thought, why don't we make an episode going through this recent history and providing an update on where things stand. Just to put a little bit more of a price tag on it, analysis done by the Committee for a Responsible Federal Budget estimates that the full implementation of site neutral payments would save Medicare about $150 billion over a decade.

So the question is, are we going to get there? Are we going to get to total site neutral payments either this year or soon? And I don't know to the extent to which it's on the minds of our new, let's say, "new government." That's a little bit of a term you're used to in parliamentary countries, but you know what I'm saying. We've switched over to a new administration where both the Senate and the House both have Republican majorities. We'll see, I guess.

From a hospital perspective, even the limited changes in the Lower Costs, More Transparency Act of 2023 that you talked about would have reduced hospital payments by 4.1 billion over 10 years. That's according to the American Hospital Association.

Hospitals are already under so much pressure with expenses rising from staffing needs and managing the revenue cycle, having to deal with Medicare Advantage and other payers to collect on payments. So having hospital payments reduced by 4.1 billion over 10 years could put a lot of hospitals out of business.

It really would. And I do think that the effect of this would be really wide ranging. The thoughts go first of all to smaller facilities, smaller hospitals, hospitals operating in rural settings. They are always the first to really feel the tightening of the finances when there's big cuts for this or that reason. These facilities rely to an extremely high degree on outpatient payment differentials to sustain the essential services they provide.

It's not even just the rural markets. I've noticed similar things in my suburban market where I practice where outpatient services, particularly around imaging and specialty clinics, labs and what have you, are essentially subsidizing the emergency department's annual losses.

Absolutely true. In my role—which is what would be called in some hospital systems, cancer center director, overseeing the cancer program and all of its divisions—I think it's easy within our world of oncology for departments, let's say one of the divisions in our oncology program, to say, "Well look, our department has such high margins. Why can't we have X, Y or Z?"

The reality of providing services to patients is that to successfully provide all of the care, let's say for a colon cancer patient or a pancreas cancer patient—I have GI on my mind—there's all sorts of other services in there besides just the oncologic services that are part of the entire suite of services the patient needs. So this reality is a cross-subsidization of radiotherapy and systemic therapy administration, which are both margin quite positive, to other services that the patients need that are margin negative perhaps.

Exactly. So you were talking, Amar, about the American Hospital Association's data. From a high level, one more specific element from those data is that emergency departments on average across the country lose 15% or so on the services they provide to Medicare patients. So once again, concretely, the outpatient services provided in the hospital on-campus departments and off-campus departments help offset those losses.

Exactly the same thing is seen in regional markets too, specifically like, let's look at Boston, same thing. The hospital systems acquiring these physician practices, converting them to hospital outpatient departments, drive up Medicare costs by about 15%.

Another region that's worth looking at and a little bit different is out west in California. There are a lot of physician-owned outpatient centers there, even now, and they provide services at a lower cost than at the hospital-owned facilities. But they face significant pressure because the hospital-owned facilities, with the margins that they can earn, can obviously invest more in services and in people than the freestanding facilities. It's really had an impact on the competitiveness of those physician-owned organizations.

Stakeholder Perspectives

In preparation for this episode, you and I both had reached out to some key stakeholders, some physicians, administrators, and tried to get some of their input. I'd spoken to some independent physicians, particularly one physician who runs a freestanding cardiology practice in Texas. He made a compelling point that they provide identical services with the same quality metrics at 40% lower cost. However, they're struggling to compete because the hospital-owned practices can negotiate higher commercial rates.

This is a perfect lead-in. I forgot that we had this right next to each other as points to go through, but from the health plan perspective, it's the exact mirror image of what your colleague in Texas was saying. The health plan executive reminded me that since commercial rates—and this is the reason for what you just said—since commercial rates are often negotiated as a percentage of Medicare rates, even now, these higher hospital outpatient payments by consequence drive up costs across the board for all major payer types.

A third stakeholder that's affected by this are patients. Patient advocacy groups have raised concerns about this because when hospitals acquire physician practices and convert them to outpatient departments, it's the patients who often face higher copayments for the same services. Which is why that was going to be introduced in the previous legislation—that you have to disclose other sites of service near you that could potentially be cheaper.

This is an important tie into one of our previous episodes, at least two actually, where we talked about the basics of Medicare and the patient's responsibility under the parts of the Medicare program. So yeah, if the overall cost of services are higher, there are higher copayments for those patients. That is true across the board, whether it's a Medicare Advantage plan or commercial plans, because in general there is some copayment or coinsurance responsibility in most health plans.

Another set of stakeholders—talking to a hospital CFO I spoke to recently, she mentioned that the outpatient margins in their hospital clearly are necessary to fund their level one trauma center, their burn unit, psychiatric services, and emergency services as well. None of those services in that particular health system are profitable on their own.

The Maryland All-Payer Model

Absolutely. One of the other things I wanted to bring up, Anthony, is that while this is the case in the majority of the U.S., I practice in Maryland. Maryland is unique because we have an all-payer system. In Maryland, the way the experiment works—we have our own payment model through CMS—is to control costs. Hospitals get a fixed payment. So no matter what you do as a hospital, you can't increase payments just by seeing more patients or doing more procedures. You have to show that this is actual growth from new growth.

In our state, many times the freestanding centers actually can get higher payments for some services than the hospitals because it's overall under a global budget. There's pressures to maintain that. So in our state, sometimes you'll see hospitals unloading services to freestanding settings to capture more reimbursement. It's interesting how it's precisely the other way.

This is great that you brought this up because of the uniqueness of the Maryland approach. It's certainly not unique in the world. It's unique in the United States. Maybe not completely unique, because there's other states like Vermont that has their system which may be of the same style. I could be completely getting that wrong. But I remember that they often were exempt from some of the compulsory payment models that CMMI was putting out, just like Maryland would have been for a model that was going to affect radiation oncology that Medicare put forward a few years ago.

So the question I have for you since you brought it up is, does it get to a point in the year where there's no more money for services and then how does that impact what hospitals do?

That's a good question. It's more like you have to budget very effectively. Cost accounting is very important in our hospital system because everything has to be budgeted very well so there's no surprises. It also makes investments in any new technology—modernize, let's say, your equipment for your MRI suite or your radiation therapy suite—much more difficult to do because there's this cost containment pressure. They're not going to see the financial rewards of those investments the same way you could in other markets.

Everyone's under similar pressure in Maryland. While it does control costs, definitely the criticism is that it can stifle innovation.

Do you think—since Maryland, geographically speaking, isn't huge, even though it's important and in a key location—since you have other states nearby, do the Maryland health systems have to essentially muddle through, get past this sort of headwind that they face, and innovate anyway because of their proximity to other states?

And this is why the margins in Maryland from many hospitals are flat or negative. It's very hard to have these high margins like you see in Florida and Texas because there are competitive pressures from markets like Washington D.C. and others. There's obviously plenty of leakage from these systems, so they have to still compete. We're dealing with the same pressures as everybody else with revenue cycle management and staffing costs and what have you.

So it makes things very challenging, and you have to really fight for those investments and which service lines really get to be invested in. They truly have to be profitable service lines like orthopedics or gastroenterology or oncology, and those were oftentimes where investments go.

That is really tremendously interesting. I think actually we should make an episode on the Maryland experience. It would be similar to doing an episode from a health system, essentially a national health service outside of the United States. It's so different in how you all do things in Maryland that I think it's interesting for its own merits.

I think that'd be great. We could bring on a guest who is an expert on that, because I'm definitely no expert. But it would be great to have a conversation with somebody who is maybe at the HSCRC, which is how our global budgets are set in Maryland. Good idea for a new episode, Anthony.

Conclusion

Going back to site neutrality, this debate really is fundamental to the features, as you've been hearing through our episodes, about the complexities in payment systems and in American health care. It highlights the constant tension between efficiency and access and the challenge of maintaining critical infrastructure.

I think you said it well. I think that brings us to a close. As you tipped your hand a minute ago, we're working on some compelling content for future episodes, including our first episodes with guests other than just the two of us as talking heads. So please continue to follow us, activate notifications wherever you listen so that you'll be alerted when our new episodes come out.

And with that, again, I'm Dr. Anthony Paravati.

For Dr. Amar Rewari, this is Value Health Voices.