We should scrap Medicare site neutrality

We should scrap Medicare site neutrality
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This past week the U.S. District Court in D.C. refused to modify its September decision that found CMS’ 2019 expansion of its Medicare site neutral payment policy illegal. Instead of appealing the decision, CMS should rethink how the Medicare program can become a prudent purchaser of health-care services.  

The Medicare site-neutral payments were based on a 2012 MedPAC recommendation that CMS make payments the same between higher paid hospital outpatient departments (HOPDs) and lesser-paid freestanding physician offices.

MedPAC rationalized its recommendation by arguing, “if the same service can be safely provided in different settings, it may be undesirable for a prudent purchaser to pay more for that service in one setting than in another.”


In 2015, Congress largely adopted MedPAC’s recommendation under Section 603 of the 2015 Bipartisan Budget Act (BBA).  

Since 2015, MedPAC, presidential executive orders, the president’s budget and various think tanks have all called for expanding site neutrality beyond off-campus to on-campus outpatient departments, and beyond. With such unanimity of opinion, site neutrality has become a sine qua non payment policy.

As a result, last year CMS chose to expand site neutral payments to include HOPDs the Congress grandfathered in 2015 by using a different Medicare statute and do so in a manner that produces Medicare savings.

MedPAC’s 2012 recommendation was based on the assumption that the payment differential caused hospitals to hire more primary care physicians led to unnecessary increases in HOPD volume.

CMS reflected this reasoning in its final 2019 outpatient rule stating, “we believe that this [HOPD] volume growth . . . is unnecessary because it appears to have been incentivized by the difference in payment for each setting rather than patient acuity.” The policy is problematic for six reasons. 

First, it constitutes circular reasoning.     

Second, policymakers presented no convincing supportive evidence. The use of over 20 “we believe” statements in CMS’ 2019 final out patient rule’s site neutral-related discussion made this evident. CMS did cite a 2015 GAO study to support its expanded policy. Though CMS presented GAO’s study as determinative, it was inconclusive. 

For example, the GAO found that while the median number of office visits per 100 beneficiaries performed in HOPDs was higher in high vertical consolidated counties compared to low consolidated counties, the median number of total office visits per 100 beneficiaries was lower in higher vertical consolidated counties. In addition, the GAO admitted the report did not include “a full analysis of the causes or the appropriateness of vertical consolidation between hospitals and physicians.”  

Third, while CMS presented no clear evidence for site neutrality, there is evidence against. For example, in a 2015 study published by the Healthcare Financial Management Association researchers identified high, mid and low-value or spending efficient on- and off-campus HOPDs. 

Using MedPAC’s 2012 model for equalizing payments, they concluded 186 high-impact hospitals, 10 percent of all hospitals studied, would assume 56 percent of total payment reductions. The researchers also found high impact hospitals also disproportionately treated indigent or underserved patients.

They concluded, “If the outpatient payment equalization policy were enacted, hospitals with a high percentage of uncompensated care would be disproportionately affected and could be forced to change their business model.” That is, the policy would not only lead to disproportionately distributing payment cuts but also effectively lead to a reverse Robin Hood effect.  

Fourth, concerning patient acuity, while the GAO found beneficiaries in counties with high levels of vertical consolidation were not comparatively sicker, the GAO made clear this did not mean HOPD-treated patients were not sicker than those freestanding physician offices treated.

There is evidence to support that they are. An April, KNG Health Consulting report found when compared to ambulatory surgical centers, HOPD patients were more likely to be dual eligible, from lower income areas, minorities, suffer higher acuity or burdened with more severe chronic conditions and more likely to be previously hospitalized. 

Fifth, even MedPAC admitted in 2012 hospitals were likely acquiring physician practices for unrelated reasons including, as MedPAC noted, “positioning themselves to establish ACOs.” MedPAC also recognized site neutral payments “would fail to account for some important differences between physician offices and [H]OPDs” such as the latter maintaining standby emergency capacity and complying with additional regulatory requirements such as EMTALA.

 Recently, MedPAC in its September response to CMS’ proposed 2020 outpatient rule, largely unwound its 2012 recommendation by arguing HOPD site neutral payments first meet five criteria including: patient severity is no greater in HOPDs than in freestanding offices; and, the HOPD visit is not frequently associated with an emergency department visit. 

Sixth, in its recent March report to Congress, MedPAC stated, “Medicare’s goal should be to obtain the greatest possible value for the program’s expenditures.” “Managing payment rates,” MedPAC wrote, ”will not address the Medicare FFS system’s key challenge . . . [that providers] are usually not held accountable for outcomes.” “The Congress and the Secretary . . . [must] move the Medicare program beyond just blindly paying FFS rates.”

Instead of persisting with site neutrality that does nothing to hold Medicare providers accountable for outcomes and epitomizes “blindly paying FFS rates,” policymakers should work to rapidly expand nascent efforts to pay for value or spending efficiency — defined as outcomes achieved relative to spending. 

Driving spending efficiency is not lost on CMS as made evident by the agency’s recent proposal to create MIPS Value Pathways that would measure — and reward — quality as related to cost. Policymakers should know site neutrality payments are incapable of moving the Medicare program in this direction because the policy does nothing to eradicate suboptimal value.


If Medicare policymakers want to control for unnecessary service volume, reduce spending growth, spur competition and redress market consolidation, payments should incentivize  providers to compete for spending efficiency.  


David Introcaso, Ph.D., is the vice president of regulatory policy at Strategic Health Care. He spent several years working in the U.S. Department of Health and Human Services as the evaluation officer for the Agency for Healthcare Research and Quality (AHRQ) and as a public health analyst at DHHS in the Office of Assistant Secretary for Planning and Evaluation (ASPE).