“Markets function best when competitors play by the same rules,” says health expert Sally Pipes. “Medicare’s payment system should do the same.”
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One of Medicare’s most puzzling rules has nothing to do with the care patients receive. For many routine outpatient services, it pays substantially more when care is delivered in a hospital-owned facility than when the exact same service is performed in an independent physician’s office or ambulatory surgery center.
This payment gap has driven up costs, furnished hospitals with extra cash they’ve used to consolidate local healthcare markets, and left taxpayers footing the bill.
Slowly but surely, the Trump administration is changing that. Earlier this month, the Centers for Medicare and Medicaid Services proposed reducing Medicare’s payment disparities for outpatient imaging services. Medicare estimates that these changes would reduce Medicare spending by roughly $260 million in 2027 and beneficiary cost-sharing by about $70 million.
That follows a change that took effect at the beginning of this year, when Medicare leveled up reimbursement for physician-administered drugs across hospital outpatient departments and ambulatory surgery centers.
The administration deserves credit for moving Medicare toward “site-neutral” reimbursement—paying the same amount for the same service regardless of who owns the facility. Policymakers should treat this proposal as the beginning of a broader reform effort—not the end.
The difference in what Medicare pays hospitals as opposed to independent outpatient providers is often substantial. During an April hearing, Rep. Jason Smith, R-Mo., noted that an ultrasound was $164 when performed in a physician’s office—and $339 when performed in a hospital outpatient department.
A biopsy that Medicare reimburses at $150 in an independent physician’s office can command $800 when performed in a hospital outpatient department.
Hospitals defend their pay premium by pointing to the high cost of maintaining operations 24 hours a day, seven days a week—as well as the fact that they must see all comers in the emergency department, regardless of whether or not they have insurance.
Hospitals are right that maintaining emergency departments and around-the-clock capacity costs money. But overpaying for routine outpatient care is an inefficient way to finance those obligations.
If policymakers believe hospitals deserve additional support, they should provide it directly rather than disguising it through inflated reimbursement for unrelated services.
The pay gap also leaves patients receiving care in hospital outpatient departments with higher cost-sharing than they’d face in independent settings.
The hospital pay premium gives hospitals an unfair competitive advantage over independent physicians and ambulatory surgery centers. Some hospital systems use those extra revenues to acquire independent physician practices.
In many cases, they can reclassify those formerly independent offices as hospital outpatient departments, allowing them to bill Medicare at higher hospital rates for many of the same services.
Even when reclassification isn’t possible, the acquisition still pays dividends. Every physician practice a hospital owns becomes a source of referrals for imaging, outpatient procedures and other lucrative services performed in the hospital’s higher-paying outpatient departments.
The Physicians Advocacy Institute found that hospitals acquired roughly 32,800 physician practices and added more than 181,000 physicians between 2018 and 2026.
The result has been a provider market increasingly dominated by a few large hospital systems. A 2025 National Bureau of Economic Research study found that physician prices rose 15.1% in the two years after a practice was acquired by a hospital, with no evidence of corresponding improvements in quality.
Expanding site-neutral payment reform would help produce substantial savings.
The Congressional Budget Office estimates that applying site-neutral payments to hospital outpatient departments for services commonly supplied in physicians’ offices would reduce Medicare spending by roughly $157 billion over the next decade.
Researchers at the Committee for a Responsible Federal Budget project even larger economy-wide benefits, estimating that comprehensive reform could reduce total national healthcare spending by as much as $672 billion while lowering the federal budget deficit by up to $279 billion.
Markets function best when competitors play by the same rules. Medicare’s payment system should do the same.
Paying different prices for the same care simply because one provider belongs to a hospital system distorts competition, fuels consolidation and raises costs. Site-neutral payments are among the clearest opportunities policymakers have to make the system work better for patients and taxpayers alike.