The mantra ‘location, location, location’ in property purchases was supposedly emphasized by Lord Harold Samuel, a British real estate tycoon. Location is also important when Medicare pays for some health care services. Depending on whether services are provided in Hospital Outpatient Departments (HOPDs), which describes the type of department and payment system used for the services provided there versus an independent physician’s office, the difference in reimbursement for the same service could be thousands of dollars.
Congress passed the Bipartisan Budget Act in 2015, “grandfathering” reimbursement to offices that billed as “off-campus provider-based departments” (PBDs) used by the Centers for Medicare and Medicaid Services (CMS) indicating a facility’s status relative to the hospital’s ownership and Medicare certification. In 2019, CMS authorized and phased in the site-neutral policy over two years. It reduced the payment differential based upon the site-of-service to control unnecessary increases in the volume of the clinic visit service furnished in PBDs. The Congressional Budget Office (CBO) suggested that the Medicare Part B payment differential between PBDs and physician practices could cost taxpayers as much as $157 billion over 10 years. CMS agreed that changes in the differential would save the Medicare program $380 million in 2019 and $760 million in 2020.
Proponents of eliminating the higher payment for services at PBDs contend that site-neutral payments incentivized hospitals to acquire physician practices — known as vertical integration (VI) — driving up taxpayer and beneficiary spending, resulting in financial strain on Medicare over time. They also argue that VI enables the hospital to bill at higher rates to take advantage of the payment differential between physician office visits and PBDs. The VI system then refers patients to its own PBDs or Ambulatory Surgery Centers (ASCs), which have expanded dramatically, and take up an increasing share of Medicare outpatient spending. Consistent with an increase in VI, spending on PBDs has jumped by 73% from 2012 to 2022.
In 2021, Post was the first to estimate the dollar value of Medicare’s site-based reimbursement. In VI models, the average physician’s workload would have produced $114,000 in additional revenue per year if billed from a PBD compared to not being in VI models and the revenue would have been more than 2.5 times higher for employed surgeons. The evidence indicates that if a surgeon with an average workload were to be part of VI, additional Medicare revenue of about $150,000 annually, or a 224% increase, would be billed in a PBD. From 2010 to 2016, the differential between PBD and office-based private practice payments from Medicare increased significantly from 80% higher to 99% higher.
Furthermore, the CBO estimates that “Medicare pays, on average, 2.5 times more for many identical outpatient procedures” when they are performed in a PBD instead of a physician’s office.”
In response, the American Hospital Association (AHA) filed a suit against the legality of this payment rule. Hospitals see the site differential payment issue almost as an existential threat and argue that their PBDs deserve a premium due to the acuity of services required for clinically complex care and low-income patients compared to physician offices or ASCs. Hospitals point to expensive regulatory, accreditation and licensing requirements as the cause of low operating margins since 2015, which could hurt safety net rural and other areas. They also dispute CMS’s assertion that there was “unnecessary growth” in utilization due to vertical integration (VI) and instead faulted burnout and rising costs to explain why physicians were leaving private practice for hospital employment.
The D.C. Circuit court ruled against the AHA.
Hospitals then suggested that the grandfathering rules in 2015 further increased spending by driving up the acquisition of accelerated health systems. Mark Miller, a former executive director of MedPAC, advised eliminating the “grandfather” clause, saving about $30 billion over a decade. Examples cited are MRI’s and colonoscopies, where Medicare’s hospital payment was 62% and 67% higher compared to ASCs, respectively.
Consider a Vascular Surgeon who provides outpatient care in three different locations: an independent office, an ASC, and a PBD. Under the Physician Fee Schedule (PFS), the first site visit is paid at the “in-office” rate. However, the reimbursement in the two other locations, which are classified as “facilities,” is covered by the Outpatient Prospective Payment System (OPPS). Confusing?
With this complexity, MedPAC has recommended common physician office services, such as patient visits, drugs and imaging, as well as services suitable for ASC coverage, be covered under the PFS rather than the more expensive PBD rate. MedPAC has also proposed some modest compromises such as narrowing, “rather than eliminating, the payment differential between PBDs and physician practices,” using site neutral payment for fewer Part B procedures, redesigning PBDs so that fewer hospitals are impacted, and incremental implementation of the new rules.
With bipartisan political support, the Trump administration, like previous ones, is looking to curtail health care spending in several areas by paying less for the same services, including site-neutral-based reimbursement for more services including drug administration and imaging. Furthermore, for many services performed in ASCs, there’s little or no evidence that with proper patient selection, the same procedures performed in ASCs pose a higher risk compared to a hospital or PBD setting. A recent study confirmed that appropriate patient selection is happening and found that the “initial baseline risk in PBD patients was much higher than the baseline risk for the same procedures performed at the ASC,” and that “the rates of revisits and complications for ASC patients were far lower than for closely matched HOPD patients.”
It is likely that with safety protocols in place, CMS will continue to gradually increase the Medicare-approved list of procedures at ASCs each year and lessen the disparity between PBD and non-facility services.
Will there be winners and losers? In November 2025, CMS released the calendar year 2026 Medicare Physician Fee Schedule Final Rule and confirmed changes to the methodology for allocating indirect practice expense or the PE part of relative value units (RVUs) based on the site of service. For services furnished in facility (hospital) settings, CMS will reduce the portion of indirect PE RVUs tied to half the amount used for hospital or non-facility or hospital services. This results in increased reimbursement for office-based specialties while reducing payments for hospital-based specialties.
Does the new epoch imply less VI? Will elimination of the differential payments boost physician specialty or multi-specialty consolidation? Maybe. For now, hospital employed physicians may be at a disadvantage indirectly due to pressure on hospitals to make up for the loss of significant revenue from more procedures shifting to ASCs and OBLs. However, despite our systematic review suggesting that VI has not “resulted in consistent and significant improvements in price, cost or spending, or quality associated with healthcare delivery,” VI does not appear to be taking a breather. Regardless, health systems are entering into more ASC partnerships and do provide significant value beyond monies.
