At first glance, “site-neutral” payment proposals seem like common sense—pay the same rate for a medical service regardless of whether it’s delivered in a hospital setting or a physician’s office. Supporters say this will reduce costs for Medicare and patients, but the financial reality is far more complex.
A one-size-fits-all payment scheme ignores critical differences between the two treatment settings and threatens access to care at a time when hospitals are already under severe strain. Instead of squeezing hospitals with further cuts to already insufficient reimbursement rates, lawmakers should address structural underpayments in Medicare and Medicaid and tackle fraud and waste in the Medicare Advantage program to find cost savings. Here’s why.
Hospitals are Facing Financial Headwinds
Hospitals are grappling with unprecedented financial challenges, with recent margins a razor-thin 3.8% -- far below historic norms. Part of this is due to the fact that Medicare only pays about 83 cents on the dollar of actual hospital costs, and that Medicaid underpaid hospitals by nearly $130 billion in 2023 – reimbursements far below the cost of care.
To help stabilize the system, the Medicare Payment Advisory Commission (MedPAC) recommended a significant hospital payment increase for FY 2025. But even as reimbursements lag, hospitals are grappling with rising labor and medical supply costs. From 2014 to 2023, hospital labor compensation rose 45%, far outpacing inflation. Nearly a quarter of nonprofit hospitals carried negative credit outlooks into 2024, with the situation is particularly dire for rural and underserved communities.
Rural and Urban Hospitals Face Closure Risks
Since 2010, 190 rural hospitals have closed or stopped inpatient care. Over 700 rural hospitals are at risk of closure if financial trends continue. Urban safety-net hospitals are also suffering.
In 2022, Atlanta Medical Center, a 460-bed facility serving predominantly minority neighborhoods, shut down after $100 million in losses. Its closure left Grady Memorial as Atlanta’s only Level I trauma center, straining care access citywide. These closures underscore the need to understand what hospitals uniquely provide—especially in outpatient settings—before making blunt payment policy changes.
Hospital Out-Patient Departments Are Not the Same as Physician Offices
An important distinction to make is that hospital outpatient departments (HOPDs) provide more complex and regulated care than physician offices, which accounts for the higher rates that HOPDs charge. For starters, 72% of Medicare patients treated in HOPDs have complications or comorbidities, whereas only 64% have these challenges in physician offices, meaning the patients they treat are generally sicker. HOPDs disproportionately serve dual-eligible (patients who qualify for both Medicare and Medicaid) and low-income patients, which usually results in a greater financial burden for the provider.
Hospitals must also maintain 24/7 emergency departments, ICU beds, and trauma centers, while meeting strict safety and quality regulations that physician offices are not required to follow. These responsibilities impose significant fixed costs, even for outpatient care, that site-neutral payment models fails to reflect.
New Legislation Threatens Critical Hospital Funding
President Trump’s recently passed “One Big Beautiful Bill” expands site-neutral payment cuts and threatens core funding streams. It applies site-neutral payments across nearly all outpatient services and rolls back Medicaid Disproportionate Share Hospital (DSH) payments for hospitals serving large numbers of uninsured or low-income patients. It also eliminates state Medicaid supplemental funding tools and caps provider tax allowances—removing over $150 billionfrom hospitals over ten years.
In anticipation of these cuts, hospitals have frozen capital projects and reduced staff. Some safety-net systems are even preparing to close clinics or scale back outpatient services, all of which will negatively impact patients.
Better Options: Tackle Waste and Fraud
Rather than cutting payments to rural and safety net hospitals, policymakers should begin by addressing the enormous and well-documented waste within federal health programs—especially in programs like Medicare Advantage.
A 2021 audit found $9.2 billion in suspicious Medicare Advantage payments, including more than $200 million in overpayments to just one insurer, Humana. From 2018 to 2021, meanwhile, inflated diagnoses submitted by Medicare Advantage plans led to more than $50 billion in excessive payments. Even the use of in-home assessments to identify additional diagnoses—often with questionable clinical relevance—resulted in $15 billion in dubious reimbursements over a three-year period.
All told there were nearly $100 billion in improper payments across Medicare and Medicaid in 2023 alone—accounting for almost half of all federal waste. If lawmakers are serious about cutting costs without compromising care, cracking down on waste and abuse is a far more responsible starting point than imposing deep cuts on struggling hospitals.
The Bottom Line
Site-neutral payments are not truly “neutral.” They impose steep, damaging cuts on hospitals already grappling with financial strain, rising costs, and increasingly complex patient needs. They also ignore the vital role that HOPDs play in serving vulnerable populations.
The math behind site-neutral payments simply doesn’t add up. Instead of weakening hospitals, policymakers should pursue reforms that strengthen America’s healthcare safety net and ensure continued access to high-quality care for all patients.
Jack Yoest is an Associate Professor at The Catholic University of America in the Busch School of Business in Washington, DC. He is a former Assistant Secretary of Health and Human Resources in the Commonwealth of Virginia. He is the author of The Memo: How the Classified Military Document That Helped the U.S. Win WWII Can Help You Succeed in Business.
