Milton Friedman Was Right About School Choice

Most people are probably aware that where they receive their healthcare affects the price. For example, treatment in an emergency room costs more than in a primary care physician’s office, even if the diagnosis in both places is a sinus infection.

But perhaps less intuitive is that the payment can change depending on who owns the healthcare facility.

Roughly two-thirds of Americans have private health insurance, typically through their employer. But it is often Medicare, the government health insurance program for those aged 65 and older, that sets the benchmark for how healthcare is paid for in this country.

Medicare has traditionally paid hospitals more than physicians for the same routine care—even when that care isn’t delivered inside the hospital’s four walls. For common procedures like ultrasounds and biopsies, “hospital outpatient departments” are paid more than privately owned physician offices or imaging centers, even though the exact same service is being performed just as safely in each setting.

The difference can be significant. Medicare pays $164 for an ultrasound in a physician’s office, but $339 for the same scan in a hospital outpatient department; a biopsy priced at $150 in an independent office can run $800 in a hospital setting. Rep. Jason Smith, the U.S. House Ways and Means Committee chairman, cited these figures at a congressional hearing in April, as Sally Pipes reported in Forbes.

This isn’t just a Medicare problem, either. According to data compiled by Blue Cross Blue Shield Association and cited by KFF, commercial insurers paid 31% more for clinic visits performed in hospital outpatient departments than in physician offices in 2022. This gap was even more stark for other services, with chest X-rays costing 238% more and prostate biopsies costing 563% more in the hospital setting.

In July, the Centers for Medicare and Medicaid Services (CMS) took action to address this imbalance and proposed a rule that would change how hospitals are reimbursed for these services.

Amid the hundreds of pages in the “Calendar Year 2027 Hospital Outpatient Prospective Payment System proposed rule” is a provision that chips away at exactly this kind of price disparity. CMS is proposing to extend “site-neutral” payment policy to imaging services performed without contrast — ultrasounds, as well as CT scans, MRIs and X-rays that don’t use contrast dye. Imaging that requires contrast is not included in this shift.

Under the proposal, when these imaging services are furnished at an “off-campus” hospital outpatient site, Medicare would pay these facilities using the same fee schedule rate paid to independent physician offices, rather than the higher hospital outpatient rate that is currently applied. CMS estimates the change would save Medicare and its beneficiaries a combined $260 million in the first year alone — including about $70 million in reduced out-of-pocket costs for seniors.

While those savings represent real money, especially for seniors on fixed incomes, they also reflect a much bigger problem.

MedPAC, the independent commission that advises Congress on Medicare payment policy, has estimated that more broadly aligning payment rates towards site neutrality across outpatient settings could could have cut Part B spending by $6 billion and saved Medicare beneficiaries $1.5 billion in out-of-pocket costs in a single year, according to KFF.

Proponents of this tiered reimbursement structure have noted that hospitals and health systems incur costs that independent physician offices and other healthcare facilities do not: primarily the costs of operating 24/7 emergency care, often for those without insurance. Hospitals have also argued that patients treated in their outpatient departments are sicker and more complex to treat.

But these arguments don’t hold up to scrutiny. Nonprofit hospitals are already exempt from taxes in exchange for operating ]emergency services regardless of the patient’s ability to pay. Charging patients with private health insurance more to offset losses elsewhere is an argument for cross-subsidization that has taken root among policymakers, but needs to be reconsidered.

As for the complexity claim, MedPAC’s own analysis, also cited by KFF, found that differences in patient severity between hospital outpatient departments and physician offices are actually small — and that the services typically targeted by such reforms, like ultrasounds, tend to be low-complexity to begin with.

It’s a modest step, and a telling one, when CMS acknowledges that patients shouldn’t be left to pick up the tab based on who happens to own the building where it’s delivered.