Reducing Overpayments Is an Easy First Step for Medicare Reform

C ongress has finally concluded its monthslong saga to raise the debt ceiling. Whatever one thinks of the deal struck, the overall outlook for our nation’s fiscal health remains grim. Lawmakers explicitly took the most expensive items — federal health and entitlement programs — off the table. At some point, Congress will be forced to deal with this core problem. When it does, it should look to reducing overpayments in the Medicare program. Taxpayers and seniors would both benefit.

As the largest single payer of medical services, Medicare greatly influences the rest of the health-care system. Sometimes these effects are hard to detect, but one very concrete example is “site-of-service differentials” in reimbursement. Simply put, this is when Medicare pays higher amounts for the same service based just on where it was provided.

For example, seniors can often receive the same service in an outpatient hospital department as in a doctor’s office. However, Medicare pays an average of 222 percent more for the service provided in the hospital, even if the underlying health needs are the same. Hospitals say these differentials are justified because they see sicker patients, provide more intensive services, and have more regulatory requirements than doctor’s offices do. But Medicare already provides add-on payments for intensive services and for factors like rural status. Thus, there is no need to set prices higher for simple clinic visits or imaging services just because they are done in a hospital.

Taxpayers clearly lose when Medicare pays more than it should, but so do seniors who receive the care. This is because the co-payments that seniors pay are a percentage of the Medicare payment, so higher Medicare rates translate into higher out-of-pocket costs.

Some hospitals respond to this feature of Medicare’s payment systems by buying out independent physician practices and rebranding them as off-campus hospital outpatient departments. In essence, the same service provided by the same team of doctors and nurses becomes much more expensive, just from the new designation as a hospital outpatient department.

Policy-makers have nibbled around the edges and enacted some “site neutral” policies to pay the same for a service regardless of where it is performed. In 2015, Congress required Medicare to pay future off-campus hospital outpatient departments at a rate equivalent to those of physicians’ offices. A 2018 Trump-administration regulation required similar payment rates for clinic visits in off-campus departments that were exempted from that law. Leaders from both parties have sought to go further: for example, budget proposals from both Presidents Obama and Trump recommendedextending site-neutral payments to off-campus hospitals and post-acute-care facilities.

Implementing these policies could reduce federal spending as well as seniors’ premiums and out-of-pocket costs by hundreds of billions of dollars. It also would not necessitate any changes to seniors’ Medicare benefits.

Site neutrality is a slam dunk from a policy perspective; the problem is straightforward, the payoff is significant, and the interest is bipartisan. Lawmakers simply need to resist the fervent pressure campaign from the big hospital systems and other provider groups that financially benefit.

Of course, some politicians may still be wary of making any changes to a program that is broadly popular among seniors. Unfortunately, there is little choice. According to the Congressional Budget Office, deficits over the next ten years will exceed $20 trillion, and the debt-ceiling bill will reduce that by only about $185 billion over the next few years. (Larger savings require Congress to stick with spending caps until 2033.) The biggest drivers of spending in the next 30 years, along with interest payments on existing debt, are federal health programs, particularly Medicare benefits for the growing number of retirees. Medicare spending is expected to double from roughly $830 billion to $1.67 trillion between 2023 and 2033, and its unfunded liabilities over the next 75 years exceed $50 trillion. Policy-makers have some flexibility now, but waiting too long would require increasingly severe benefit cuts or tax hikes.

There will be no shortage of hard choices to make to reform Medicare over the coming years. Getting off on the right foot can help set the stage for bigger reforms down the line. Cracking down on Medicare overpayments through site neutrality would be a great place to start.