Medicare Site-Neutral Payments: A Commonsense, Bipartisan Reform

On Monday, Paragon hosted an event, broadcast live by C-SPAN, with former Health and Human Services (HHS) Secretaries Kathleen Sebelius and Alex Azar that made a strong bipartisan case for the Medicare program to stop overpaying for services in hospitals that can be delivered as safely and effectively in doctors’ offices or ambulatory surgical centers (ASCs). I moderated a discussion with the secretaries, which was followed by policy experts from Paragon, the Brookings Institution, the American Enterprise Institute (AEI), and the Center for American Progress (CAP) agreeing on the importance of ending Medicare’s excessive payments to hospitals. Today’s newsletter contains a summary of the event and a new Paragon Pic that demonstrates the importance of one of our recent Medicaid financing reform proposals.

Before getting to those topics, Paragon is hosting a virtual event at 2:30pm today, Lowering Health Care Costs Through AI: The Possibilities and Barriers with Paragon’s Kev Coleman and Dr. Joel Zinberg. The event will discuss Kev’s new paper about the potential of AI to improve health care and lower patient costs with three of the nation’s top AI leaders. You can register here.

Strong Support for Site Neutral Payments in Medicare

Former HHS Secretaries Azar and Sebelius, as well as policy experts at a diverse set of organizations, strongly believe that Medicare payments should be based on the service, not the building in which it is performed. This would mean equalizing payment for services that can be safely and effectively provided in hospital outpatient departments, ASCs, and physicians’ offices.

In a joint STAT op-ed from April, Secretaries Azar and Sebelius wrote that “One issue that is particularly ripe for bipartisan compromise is site-neutral payments. … Site-neutral payments represent a commonsense policy that will reduce costs for patients and taxpayers…diminish perverse incentives for consolidation, and incentivize care delivery in the right place for the right price. It’s a no-brainer.” During the Obama and Trump administrations, limited site neutral payment policies advanced in Medicare, but hospitals generally still receive far higher payments for identical services provided in ASCs and doctor’s offices.

At Monday’s event, Secretary Azar recounted a story of how, as a patient a decade ago, he personally experienced the problem of a hospital overcharging for a service that could and should have been provided in a much less costly setting. When the question of quality arose, Secretary Sebelius remarked that there is “not an iota of evidence” that outpatient hospitals provide better care than physician offices or ASCs. In fact, she noted that patients are more likely to encounter harm in hospitals than in other settings.

The second panel featured a discussion between Paragon’s Joe Albanese, Brookings’ Loren Adler, AEI’s Ben Ippolito, and CAP’s Andrea Ducas, moderated by STAT’s Rachel Cohrs Zhang.

Adler and Ducas referred to Medicare’s current payment structure as “pretty asinine policy.” Adler remarked that “Medicare is making an active choice at this point, to pay about twice as much on average, for the exact same service to be done in a hospital outpatient department, rather than a physician’s office.” And he referenced a study that found that Medicare paid a physician $140,000 more in 2016 if they worked for a hospital system than if practiced on their own—a huge incentive for consolidation that has only grown since 2016.

Ducas emphasized that without a fix, seniors will continue to face higher out-of-pocket costs in traditional Medicare, where seniors bear 20 percent of the cost for physician and hospital outpatient services. Since Medicare Advantage payments tend to closely mirror traditional Medicare, seniors with MA will also save money from site neutral payments. Albanese reiterated that, while there were many policies that could promote competition to the benefit of patients, site neutrality in Medicare would be a simple way to remove a major distortion in the entire health care system.

Both panels discussed the challenges that rural hospitals might have from moving to site neutral payments. According to Ippolito, “the idea that in order to solve [rural hospital challenges] you need to overpay all hospitals in America is so backwards that we have completely lost the point.” Adler agreed, commenting that “no one would throw a bunch of money at all hospitals to hope that 1 percent of it would flow to hospitals in need.” Numerous panelists made the point that it would be far more efficient to build off existing programs or create new targeted ones in order to direct aid to the hospitals who most need it without producing all the negative effects that Medicare’s current payment policy does. A small fraction of the savings that would accrue from site neutral payments could be used to buttress the financial impact to rural hospitals.

Reducing the Medicaid Financing Disparity that Benefits Wealthy States

Paragon’s new Medicaid financing reform paper contained two proposals. The first would end the current discrimination that favors able-bodied, working-age enrollees over children, pregnant women, seniors, and the disabled on Medicaid. The second, and the subject of this week’s Paragon Pic, would reduce the advantage that wealthy states currently have that causes them to receive far more federal Medicaid money per person in poverty than poorer states receive.

The intent of the Medicaid financing formula—the federal medical assistance percentage (FMAP)—was to deliver greater federal support in poorer states with the federal government reimbursing a greater share of expenses in states with lower per capita income. As shown in this week’s Paragon Pic (below), despite the intent of the FMAP to provide greater federal support in poorer states, federal Medicaid spending per person in poverty is positively correlated (r=0.51) with state per capita income. If the formula was working as intended, the correlation would be negative as poorer states would be receiving more federal money per person in poverty.

Part of the reason wealthy states are advantaged is that the FMAP formula has an arbitrary floor that benefits the wealthiest states and the District of Columbia. The second of our financing reform proposals would reduce the FMAP floor from 50 percent to 40 percent. The only jurisdiction affected by the 40 percent floor would be the District of Columbia, the U.S. jurisdiction with the highest per capita income. States with the highest per capita incomes, such as California, Connecticut, Massachusetts, and New York, would have FMAPs between 45 and 50 percent. This policy would create greater equity in federal support across the country— reducing the gap in federal funding per person in poverty—although wealthy states would still receive more federal funding per person in poverty after our proposal takes full effect

All the best,

Brian Blase
President
Paragon Health Institute