Opportunities for Medicare Site Neutrality in 2025

In general, Medicare should pay the same amount for the same services, even if delivered in different settings of care. Paying more for care that is better quality or that is for patients with greater needs may be understandable, but care setting alone is not a good proxy for these factors. Routine, low-acuity services that do not typically require hospital-level care have become a larger driver of outpatient hospital revenue over time.⁴ In some cases, patients may be unaware that they are even receiving care in hospitals—as they may not know that their physician practices were acquired by hospital systems—or whether they are seeking care from urgent care facilities or emergency departments.⁵ It makes little sense to pay more than needed for hospital services, particularly because such spending accounts for about 60 percent of per capita health care costs in the United States, and per capita outpatient hospital spending in Medicare is projected to surge 155 percent between 2023 and 2034, compared to73 percent for Medicare benefits overall.⁶

At the same time, lawmakers may be sensitive to the importance of hospital systems in their local communities and wish to mitigate the impact of policies that reduce their revenue. Critics of site neutrality have particularly highlighted financial challenges faced by rural hospitals—given their lower revenue and the lack of alternative providers in those communities—as a major objection to implementing such policies. However, these concerns do not justify maintaining an unfair, inefficient payment system that inflates the costs borne by those communities.

Site-neutral payment reform should align with certain principles. Table 1 applies these principles to each proposal discussed in this brief. It is worth noting that more far-reaching proposals may be desirable, but also may be more challenging to align with these principles.

These policy principles are:

1. Site neutrality should simplify payment policy by eliminating differentials and not create new exemptions, such as by carving out certain providers as exceptions to the policy.
2. Medicare should equalize payments by lowering, not raising, existing rates.
3. Policies to support rural providers should avoid unintended consequences. For example, policymakers should not tolerate harmful payment differentials, create excessively complex incentive structures, or expand existing distortionary policies, such as the many cost-based rural hospital payment methods (see Table 2).
4. Policymakers should not direct an excessive level of site neutrality savings to new Medicare spending given the program’s large fiscal challenges. It would be prudent to make new hospital spending temporary and subject to evaluation. Lawmakers should not assume that preserving hospital-centric models of care delivery is the best approach.
5. Site neutrality should apply to health programs where the government already sets payment rates, but it should not dictate rates in the private market. While site neutrality is a commonsense way to reduce costs to patients and taxpayers and to reduce distortions from government payment policy, policymakers should allow for flexibility of approaches in the private market. (For example, employers could insist on site-neutral payments in their health plans.) Enacting site neutrality should not preclude future improvements to the accuracy of health care prices that align them with the value of care.

1. Removing Exceptions to Past Site Neutrality Policies
Numerous proposals would build upon past site neutrality policies for off-campus HOPDs. In the Bipartisan Budget Act of 2015, Congress established that Medicare payment for services delivered in such settings would be at the physician-office-equivalent rate. However, it exempted existing facilities and therefore does not apply to most of them.

The Congressional Budget Office (CBO) previously estimated that removing these exceptions would reduce Medicare spending by about $39 billion over 10 years.⁷ The Site-based Invoicing and Transparency Enhancement (SITE) Act would remove the exemptions for off-campus HOPDs but would maintain other exceptions for dedicated emergency departments while reducing their payment rates by 30 percent. It would also require an off-campus HOPD to report a unique health identifier separate from that of the parent hospital, making it easier for payers (both private insurers and government programs) to differentiate them for billing purposes.⁸ Congress considered, but did not adopt, a policy requiring these separate identifiers at the end of 2024.⁹

Other bills—such as the Health Care Fairness for All Act, which included other non-site neutrality policies, and the Prevent Hospital Overbilling of Medicare Act—would also remove exceptions to off-campus site neutrality and require unique identifiers for these facilities, except these bills would also remove exceptions for emergency departments and clarify the Health and Human Services Secretary’s authority to promote site-neutral payments administratively.¹⁰ The latter bill would also apply requirements for health identifiers to claims from private payers.

The benefit of these proposals is that they build on existing policy by removing significant exceptions to site neutrality and requiring identification of the site of service, which ensures more accurate payments. Including emergency department services in these policies helps to increase health care savings and remove future opportunities for hospitals to unnecessarily direct patients to such departments to maximize their future revenue, although it could also reduce their compensation when there are genuinely higher costs due to greater patient acuity.

2. Equalizing Rates for Specific Services
Another set of proposals would equalize payment rates for specific services and settings. The most prominent is the Lower Costs, More Transparency Act, which passed the House of Representatives at the end of 2023. Besides other health care provisions, the bill would pay for outpatient drug administration services delivered in excepted off-campus HOPDs at physician rates (with a one-year delay in rural areas) and require unique identifiers for off-campus HOPDs.¹¹ CBO estimated it would save $3.7 billion over 10 years. ¹²

Another bill, the Medicare Patient Access to Cancer Treatment Act would establish site-neutral rates for cancer care services across outpatient settings.¹³

Finally, a proposal by the Medicare Payment Advisory Commission (MedPAC) in its June 2023 report to Congress would set payment rates for ambulatory services based on the settings of care where they are most performed, with some exceptions for services that have significant differences in bundled payments across settings.¹⁴ This system would be designed to lower spending, so services mostly performed in physician offices would be paid at the lower physician rate regardless of their settings, while those mostly performed in hospitals would remain at the outpatient hospital rate when delivered in the hospital setting and at the physician rate when delivered in a physician’s office. MedPAC estimated that this proposal would have reduced Medicare spending by $6.0 billion and beneficiary cost sharing by $1.5 billion in 2021.

Adjusting payment for particular services case-by-case may better target those that are good candidates for payment parity. The MedPAC proposal is not as straightforward as the others, as it creates an entirely new process for setting payment, but it provides a more systematic approach to addressing payment differentials by allowing for continued updates depending on changes in the volume of services.

3. Incorporating Rural Hospital Spending
Although MedPAC argues that a drop in Medicare revenue would not harm access to care in rural areas, it acknowledges that the effect of payment changes to rural hospitals is a concern for some. Two recent proposals address this by redirecting some portion of the savings to new spending, coupled with more comprehensive site neutrality reforms.

A proposal from the health care consulting firm Leavitt Partners includes several detailed provisions.¹⁵ The Leavitt proposal suggests creating a new unified ambulatory payment system in Medicare for common, non-complex services at the physician or ASC payment rate and removing existing off-campus HOPD site neutrality exceptions, which it together estimates would save about $98 billion in Medicare spending and $24 billion in patient cost-sharing over 10 years. It would then increase Medicare rates for inpatient services by 1 percent for three years, provide hospital funds to states based on the proportion of payment reductions they face under the site neutrality provisions—which they would distribute to hospitals in rural areas and those with high shares of low-income patients or uncompensated care—extend the Acute Hospital Care at Home Program for five years and COVID-19 telehealth flexibilities permanently, and expand government-funded medical education programs (with 15 percent going to rural hospitals versus 10 percent under current law). Leavitt estimates that these provisions would cost about $85 billion over 10 years, resulting in about $13 billion in net government savings.

Senators Bill Cassidy (R-LA) and Maggie Hassan (DNH) also proposed a site neutrality framework.¹⁶ It would remove off-campus HOPD exceptions and requiring the Secretary of Health and Human Services to modify payment for ambulatory procedures based on the site where they are most commonly performed, similar to the MedPAC proposal. It would then spend some portion of those savings in rural and what they define as high-needs hospitals.¹⁷ It outlines two potential mechanisms for this goal: (1) creating a new Medicare add-on payment for hospitals that operate certain types of facilities (for example, trauma centers and neonatal intensive care units) or (2) encouraging hospital participation in two-sided financial risk models, either through a bonus for participating in advanced alternative payment models or creating a new accountable care model for rural and safety net hospitals with a phase-in of two-sided risk, similar to the Medicare Shared Savings Program.

As these proposals make clear, what to do with the savings from site neutrality policies will be a key question for policymakers. For example, past Paragon research has suggested that such savings can help reduce spending in Medicare Part B even when coupled with other policies, such as physician payment reform.¹⁸ But redirecting too much of these savings toward new health care spending undermines the benefits of site neutrality for Medicare’s finances and the goal of putting the program on a sustainable fiscal trajectory.

While policymakers’ desire to maintain access to health care services in rural communities is understandable— especially without simply exempting hospitals from site neutrality policies—such arrangements may pose other policy risks. First, redirecting spending back toward hospitals may perpetuate existing financing problems. Second, the mechanisms for financially supporting hospitals could have unintended consequences. For example, past experience has shown that federal funding for medical education and state payments to health care providers are ineffective and produce greater politicization and waste in the health care system.¹⁹ And while requiring health care providers to bear more financial risk is a good way to reduce costs, advanced alternative payment models and accountable care initiatives (particularly hospital-focused ones) have had limited success.²⁰

While there is political wisdom in mitigating the concerns of hospitals, policymakers should not forget that site neutrality has broad-based benefits. The significant cost of hospital care in the U.S. health care system reflects the fact that hospitals have many funding streams across government health programs. It does not make sense for patients and taxpayers to bear the cost of higher payment rates that do not result from better or more intensive care and that only benefit hospitals. Whether there is significant or incremental progress in advancing site neutrality in Medicare, it will be important not to water down its benefits with new spending, new complexities, or new bad incentives.