Paying the 2025 Tax Bill: Site Neutrality in Medicare Payment

According to current Congressional Budget Office (CBO) estimates, Medicare pays, on average, 2.5 times more for many identical outpatient procedures when they are performed in a hospital outpatient department (HOPD) instead of a physician’s office.

Medicare has historically paid HOPDs more because, as advocates argue, they have higher overhead costs and treat more high-acuity cases more commonly associated with hospital settings.

However, critics–including many physicians, insurers, employers, and consumer groups– argue that while this rationale may indeed apply to genuinely complex cases, it is not true of lower-complexity services such as basic imaging, laboratory tests, and routine procedures. These services account for most outpatient billing, regardless of setting, and research has not shown a decline in care quality between physician offices and HOPDs for such services.

The policy views discussed here, while not representing BPC endorsements, highlight the tradeoffs inherent in achieving fiscally responsible tax reform. Below we consider one option: aligning payments for outpatient services commonly performed in physician offices at a site-neutral rate across ambulatory settings.

Current Law and Its Challenges

According to CBO, the current law Medicare Part B payment differential between HOPDs and physician practices could—if not addressed—cost taxpayers as much as $157 billion over 10 years. The biggest impact of closing this differential would be on HOPDs, which would see lower reimbursement rates. Hospitals and health systems, which have expanded their investments in HOPDs in recent years, would feel the financial impact most acutely.

Medicare beneficiaries are also directly affected by the current policy of overpaying HOPDs, because beneficiary cost-sharing is tied to billed amounts. For services covered by Medicare Part B, beneficiaries typically pay 20% of the cost for each service after they meet their deductible. This means that when the rate for a service is higher, seniors dependent on Medicare pay more.

Another challenge is that current Part B payment differentials also incentivize certain provider arrangements that drive up overall health system costs. These include hospitals acquiring more physician practices, consolidating physician offices within hospitals, or increasing hospital direct employment of physicians—all of which shift more billing from the lower independent physician office rate to higher HOPD rates.

Site Neutrality Reform

In 2023, following more than a decade of partial measures and continuing stakeholder disagreement, the nonpartisan Medicare Payment Advisory Commission (MedPAC) issued a comprehensive analysis of Medicare site neutrality and offered a set of reforms that now shape most policy discussions.

MedPAC identified services most commonly delivered in physician offices—such as clinic visits, imaging, and drug administration—and proposed aligning payments for these services with the physician fee schedule rate, rather than the higher HOPD rate. It also identified services suitable for ambulatory surgery centers (ASCs) where HOPD rates could be lowered to align with ASC rates.

Please note that BPC’s comprehensive December 2023 report, Sustaining and Improving Medicare, also discussed similar site neutrality reforms.

Congress and presidents from both parties have also been moving in this direction. In 2023, the House Energy and Commerce Committee issued a bipartisan site neutrality proposal, parts of which it revisited in 2024. Meanwhile, administration budget proposals from both presidents Obama and Trump (first term) also argued for site neutrality reform. More recently, in November 2024, a proposed framework for site neutrality was put forward in the Senate by Senators Bill Cassidy (R-LA) and Maggie Hassan (D-NH).

Potential Concerns

Opposition to Medicare site neutrality is strongest among hospitals.  The American Hospital Association (AHA) and others argue that hospitals already face significant fiscal challenges and thus that lowering HOPD payment rates would further threaten their ability to provide the 24/7 comprehensive support that communities demand. Hospitals also contend that HOPDs have more expensive licensing, accreditation, and regulatory requirements than independent physician offices.

Another concern is that expanding site neutral payments could, if not mitigated, threaten access to care for the most vulnerable and medically complex beneficiaries, who often live in rural or medically underserved communities.

In line with BPC’s recommendations, some advocates propose that this challenge be addressed by reinvesting a portion of the savings gained through site neutrality into additional payments to safety net hospitals, particularly in rural or other underserved areas.

Alternatives

Although policy opinion has largely coalesced around MedPAC’s 2023 site neutrality recommendations, some variations could also be considered. However, most—if not all—could have the effect of lessening the impact on market behavior and on potential federal budget savings.

Such alternatives could include: 1) narrowing, rather than eliminating, the payment differential between HOPDs and physician practices, 2) applying site neutral payment to a smaller subset of Part B procedures, 3) narrowing the definition of HOPD so that fewer institutions would be impacted, and 4) extending the implementation timeline.

Outlook

Medicare Part B site neutrality is a relatively mature political issue, with clear lines drawn between hospitals and HOPDs on one side, and an array of physician groups, insurers, consumers, and employers on the other. Analysis from the Paragon Institute and others suggests that any near-term congressional action on site neutrality, if any, could be incremental.

Nevertheless, support for site neutrality is today more unified and bipartisan than ever. Importantly, proponents can point to a compelling CBO savings score of $157 billion, strengthening their case.

Whether Congress enacts meaningful Medicare site neutrality reform in the near term may depend on whether these substantial budget savings are enough to galvanize congressional action to overcome continuing hospital sector opposition and legislative inertia.

Conclusion

Implementing Medicare Part B site neutrality between physician offices and hospital-affiliated HOPDs would provide clear benefits to beneficiaries (through reduced cost sharing and premiums) and taxpayers (through lower Medicare spending). Importantly, a portion of the revenue generated by any site neutrality reform could be directed to assist institutions serving rural and other underserved communities.

With potential savings of up to $157 billion over 10 years, site neutrality also remains a significant opportunity for fiscal and health policy reform.

Read BPC’s full set of offset options here and find all of BPC’s tax policy work at https://bipartisanpolicy.org/tax/.