Health Economist Explains Why Hospitals Get Paid Double for the Same Services — and What’s Finally Changing
The way Medicare reimburses healthcare providers has quietly shaped one of the most consequential transformations in American medicine over the past two decades: the steady absorption of independent physician practices into large hospital systems and corporate health networks. The financial mechanics behind this consolidation are surprisingly straightforward — and, critics argue, fundamentally distortionary.
When a hospital acquires a previously independent doctor’s office, Medicare often pays roughly twice as much for the exact same medical service that was being delivered at the lower rate just days earlier. The procedure hasn’t changed. The physician performing it may be the same person. The clinical quality is identical. But the billing address now sits under a hospital’s tax identification number — and Medicare’s payment schedule treats that administrative distinction as justification for dramatically higher reimbursement.
This payment gap, which health economists call the “site-of-care differential,” has functioned as one of the most powerful economic engines driving healthcare consolidation in the United States. It has reshaped what it means to practice medicine in America, contributed to rising Medicare expenditures, and inflated costs across the commercial insurance market as well.
Now, after years of incremental policy discussion, federal regulators appear to be taking their most meaningful steps yet toward dismantling this pricing disparity. A recent analysis published in Health Affairs examines what the 2026 Medicare outpatient payment rules get right — and where significant gaps remain.
Christopher M. Whaley, PhD, associate professor of health services, policy and practice at Brown University and co-author of the Health Affairs analysis, spoke with us about the current landscape of Medicare reimbursement reform, the potential impact on physician independence, and whether the momentum toward site-neutral payment can actually reverse decades of healthcare consolidation.
The Fundamental Problem: Same Service, Double the Price
How the Payment Gap Works
At the heart of the site-neutral payment debate lies an anomaly that would seem irrational in virtually any other industry. Medicare — and by extension, many commercial insurers who pattern their reimbursement structures after the federal program — pays substantially different amounts for identical clinical services depending solely on where those services are delivered.
“One of the genuinely peculiar features of our healthcare system is that many payers, starting with Medicare but extending into the commercial insurance market, reimburse dramatically different amounts for the exact same service based on whether it’s performed in a hospital-affiliated setting versus an independent practice,” Whaley explained. “A routine imaging study like an MRI, a standard laboratory test, or even a surgical procedure such as a colonoscopy can be reimbursed at roughly double the rate when performed in a hospital outpatient department compared to a freestanding physician office or ambulatory surgical center.”
The differential is not trivial. For commonly performed procedures, the gap between hospital outpatient and independent office reimbursement can amount to hundreds or even thousands of dollars per service — a margin that, multiplied across millions of Medicare claims annually, translates into billions of dollars in additional program spending.
The Consolidation Engine
This reimbursement structure creates what Whaley describes as a built-in “arbitrage opportunity” within the healthcare system — a term borrowed from financial markets where traders profit from price differences for identical assets across different venues.
“If you’re a hospital or health system, the financial logic is compelling,” he said. “You acquire a physician practice, convert it to a hospital outpatient department on paper, and suddenly you can bill Medicare at roughly double the rate for every service those doctors were already providing. That’s an enormous financial incentive to go out and purchase independent practices.”
The result has been a fundamental restructuring of American medicine’s organizational landscape. Today, more than half of all practicing physicians in the United States work as employees of hospitals or large health systems — a dramatic reversal from previous decades when independent practice was the dominant model. This shift carries implications that extend well beyond billing mechanics:
For physicians: Employment in large systems often means surrendering clinical autonomy, accepting standardized practice protocols, and directing referrals within the employing system’s network — even when patients might receive more appropriate or cost-effective care elsewhere.
For patients: Consolidation has been associated with higher prices, reduced choice of providers, and in some studies, no improvement — or even deterioration — in care quality. When an independent practice is absorbed into a hospital system, patients who previously received care in a convenient, lower-cost office setting may find themselves navigating a larger institutional bureaucracy.
For Medicare: The payment differential drives spending upward without corresponding improvements in clinical outcomes. The same physician performing the same procedure on the same patient generates substantially higher Medicare expenditure simply because the practice now carries a hospital affiliation.
For the commercial market: Private insurers frequently model their own reimbursement structures on Medicare’s framework. The site-of-care differential in Medicare thus propagates across the broader insurance landscape, inflating healthcare costs economy-wide.
What’s Changing in 2026
Drug Administration: A Starting Point
The 2026 Medicare Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) final rule represents what Whaley characterizes as the most significant movement toward site-neutral payment policy in recent memory.
The most notable concrete step involves drug administration services — the clinical work of preparing and administering medications, including infusions and injections, in outpatient settings. Beginning in 2026, Medicare will move toward a single payment rate for these services regardless of whether they are performed in a hospital outpatient department or a freestanding physician office.
“This is certainly a step in the right direction,” Whaley acknowledged. “Drug administration is a category where the site-of-care differential was particularly difficult to justify clinically. The same nurse or medical assistant is performing essentially the same procedure whether the infusion chair sits inside a hospital’s walls or in an independent oncology practice across the street.”
However, he was careful to contextualize the significance. Drug administration represents only a fraction of the services for which Medicare maintains site-differential pricing. Imaging studies, laboratory tests, evaluation and management visits, and numerous surgical procedures continue to be reimbursed at substantially higher rates when performed in hospital outpatient settings.
“While it’s an encouraging first move, there is a much broader universe of services where the same site-neutral logic applies,” Whaley noted. “The question now is whether this initial step generates sufficient momentum for CMS to extend the principle across additional service categories in subsequent rulemaking cycles.”
The Inpatient-Only List: Expanding Where Care Can Happen
Perhaps equally significant is the ongoing phase-out of Medicare’s Inpatient-Only (IPO) list — a regulatory catalog that historically designated certain procedures as so complex or risky that they could only be performed and reimbursed in full inpatient hospital settings.
Advances in surgical technique, anesthesia, pain management, and post-operative care protocols have rendered many of these inpatient designations clinically obsolete. Procedures that once required multi-day hospital admissions can now be performed safely and effectively in hospital outpatient departments or freestanding ambulatory surgical centers — often with same-day discharge.
“The most familiar example is probably total joint replacement — hip and knee replacements,” Whaley explained. “A decade ago, these were intensive procedures requiring several days of inpatient hospitalization. Today, thanks to minimally invasive surgical approaches, improved pain management, and accelerated rehabilitation protocols, many patients undergo joint replacement as a same-day outpatient procedure. The clinical outcomes are equivalent or superior, recovery times are faster, infection risks are lower, and the cost to Medicare and patients is dramatically reduced.”
The three-year phase-out of the IPO list allows more of these procedures to migrate to less expensive care settings, simultaneously reducing Medicare spending and expanding patient choice. Beneficiaries who previously had no option but to undergo surgery in a full hospital setting — with its associated costs, infection exposure, and institutional overhead — can now select ambulatory settings that may be more convenient, comfortable, and cost-effective.
“Removing procedures from the IPO list doesn’t prevent hospitals from performing them,” Whaley clarified. “It simply opens the door for ASCs and other outpatient facilities to offer these services as well, creating competitive alternatives that benefit patients and taxpayers.”
A Breakthrough Year — But With Caveats
Strongest Progress in Memory
Asked whether 2026 qualifies as a breakthrough year for site-neutral payment, Whaley offered a measured but affirmative assessment.
“I think it represents the strongest year we’ve had on this front, at least within my professional memory,” he said. “There are always additional steps that could be taken — the reforms announced so far address a subset of the services where site differentials exist. But the direction is clearly established, and the regulatory momentum appears to be building.”
The convergence of several policy threads — CMS rulemaking, Medicare Payment Advisory Commission (MedPAC) recommendations, bipartisan congressional interest, and the Trump administration’s stated commitment to healthcare market reforms — creates a more favorable environment for site-neutral policy than has existed in previous years.
MedPAC, the independent congressional advisory body that analyzes Medicare payment policy, has recommended site-neutral payments for years, consistently finding that the differential drives unnecessary spending without improving quality. Internal CMS analyses have reached similar conclusions. The challenge has always been translating analytical consensus into regulatory action against intense lobbying opposition from hospital systems that stand to lose substantial revenue.
The Remaining Gap
Despite the 2026 progress, significant categories of site-differential pricing remain untouched. The analysis by Whaley and his Brown University colleagues — co-authors Corrie Mook and Roslyn Murray, PhD, MPP — identifies several service areas where extending site-neutral payment could yield substantial additional savings:
- Advanced imaging (MRI, CT scans, PET scans): Hospital outpatient reimbursement for these studies typically exceeds freestanding center rates by 50 to 100 percent or more
- Laboratory services: Routine blood work and pathology testing billed through hospital outpatient departments commands significantly higher reimbursement than identical testing performed at independent laboratories
- Evaluation and management visits: The basic physician office visit — the most common Medicare service — is reimbursed at different rates depending on institutional affiliation
- Minor surgical procedures: Many procedures performed in hospital outpatient departments could be safely and effectively delivered in lower-cost settings
Each of these categories represents billions of dollars in annual Medicare spending that could potentially be reduced through site-neutral payment policies without any diminishment in clinical quality.
Can Consolidation Be Reversed?
The Central Policy Question
The most provocative question surrounding site-neutral payment is whether it can actually reverse the consolidation trend that site-differential pricing helped create — or whether the transformation of American medicine’s organizational structure has become permanent.
“That’s perhaps the most important policy question in this entire discussion,” Whaley reflected. “The site-of-care payment differential has functioned as the primary arbitrage opportunity in healthcare. If you’re a hospital system, you can acquire independent practices and immediately double your Medicare revenue for every service those physicians provide. That’s an extraordinarily powerful financial incentive, and it’s a central reason why more than half of American doctors now work as hospital employees.”
“The critical question is whether the genie can be put back in the bottle,” he continued. “Can we actually restore conditions that support independent physician practice after decades of consolidation?”
Whaley expressed cautious optimism that removing the financial incentive could, over time, begin unwinding some of the acquisitions that were motivated primarily by billing advantages rather than clinical integration.
“If the payment differential disappears — if a hospital system can no longer generate additional revenue simply by owning a physician practice and billing under its tax ID — then the financial rationale for many of these acquisitions evaporates,” he reasoned. “Some hospital-physician relationships are clinically integrated in meaningful ways, and those will likely persist regardless of payment policy. But acquisitions that were driven purely by the billing arbitrage opportunity might actually unwind if that arbitrage no longer exists. At a minimum, eliminating the differential would level the competitive playing field between independent physicians and hospital-employed physicians.”
Counterarguments and Complications
Not everyone shares this optimism. Hospital industry representatives argue that site-differential payments reflect genuine differences in the costs hospitals bear — regulatory compliance obligations, emergency department standby requirements, uncompensated care for uninsured patients, graduate medical education expenses, and the overhead of maintaining 24/7 operational readiness.
From this perspective, reducing hospital outpatient payments to match independent office rates would unfairly penalize institutions that serve broader community functions beyond the specific procedures being repriced.
Critics of this argument counter that these institutional costs are already addressed through other Medicare payment mechanisms — including disproportionate share hospital (DSH) payments, indirect medical education adjustments, and various supplementary payment streams — and should not be cross-subsidized through inflated procedure-level reimbursement.
The practical dynamics of unwinding consolidation are also complex. Even if the financial incentive to acquire practices disappears going forward, divesting already-acquired practices involves contractual complications, workforce disruption, real estate considerations, and the challenge of recreating independent practice infrastructure that has been dismantled.
The Trump Administration’s Healthcare Agenda
The Great Healthcare Plan
President Trump’s announcement of a “Great Healthcare Plan” has generated considerable interest — and considerable ambiguity — across the healthcare policy community.
“Like many people in the field, I’ve had the opportunity to review what’s been released so far,” Whaley said. “At this stage, the proposal is relatively light on specific details, so the ultimate impact will depend heavily on how the broad principles are translated into concrete regulatory and legislative actions.”
He identified one dimension of the administration’s stated priorities as particularly relevant to the site-neutral payment discussion: the emphasis on transparency in healthcare markets.
“Pushes toward greater transparency — not just in pricing, but in organizational structure — could be very significant,” Whaley observed. “Understanding who owns what in healthcare, which physician practices are hospital-affiliated, and how those affiliations affect the prices patients and insurers pay is foundational information for making markets function more effectively.”
Why Price Transparency Remains Elusive
Despite years of regulatory effort under both Democratic and Republican administrations — including hospital price transparency rules finalized during Trump’s first term and expanded under Biden — meaningful price transparency in healthcare remains frustratingly incomplete.
“The core obstacle is institutional inertia,” Whaley explained. “The healthcare industry in the United States simply has not evolved with the kind of price visibility that characterizes virtually every other sector of the economy. There are deeply entrenched interests — on the provider side, the insurer side, and the intermediary side — that have benefited from opacity and resist disruption of that status quo.”
However, he sees the trajectory bending toward greater openness, driven by new data availability, regulatory pressure, and growing demand from employers, consumers, and policymakers.
“The question is less whether price transparency will eventually arrive and more about what its most productive applications will be,” he said. “Will individual patients routinely comparison-shop for medical procedures? That’s probably unlikely for most services. But will employers use transparent pricing data to audit the rates their insurers negotiate? Will regulators use it to identify anticompetitive pricing patterns? Will researchers use it to evaluate whether consolidation is actually raising costs? Absolutely — and that’s where the transformative potential lies.”
Transparency as Policy Infrastructure
Rather than viewing price transparency primarily as a consumer-facing tool — enabling patients to shop for the cheapest MRI or colonoscopy — Whaley frames it as foundational infrastructure that enables a range of downstream policy innovations.
“Think of transparency data as a hub that supports many different spokes of reform,” he suggested. “Employers and large purchasers can use it to make more informed decisions about network design and insurance carrier selection. Regulators can use it to evaluate the competitive effects of proposed mergers and acquisitions. Researchers can use it to measure the real-world impacts of consolidation on pricing and quality. All of these applications are already emerging, and they’ll accelerate as data availability and quality improve.”
This perspective suggests that even if individual patients rarely engage directly with pricing information, the systemic effects of transparency — through its influence on employer purchasing decisions, regulatory oversight, and academic research — could meaningfully reshape healthcare market dynamics over time.
The Broader Reimbursement Landscape
Beyond Site Neutrality
While site-neutral payment represents one of the most discussed reimbursement reforms, it exists within a broader landscape of Medicare payment policy changes that collectively influence the financial viability of different practice models:
Physician Fee Schedule Pressures: Medicare’s physician fee schedule, governed by the Resource-Based Relative Value Scale (RBRVS), has faced chronic underfunding relative to inflation. The conversion factor that translates relative value units into dollar payments has been essentially flat or declining in real terms for years, squeezing independent practices that rely primarily on Part B reimbursement. This chronic payment stagnation, paradoxically, makes hospital employment more attractive to physicians — the very consolidation that site-neutral policy aims to counteract.
Value-Based Payment Models: CMS continues to expand alternative payment models (APMs) that shift reimbursement away from traditional fee-for-service toward outcomes-based arrangements. These models — including accountable care organizations (ACOs), bundled payments, and quality-linked bonuses — can create either opportunities or challenges for independent practices, depending on their design and scale requirements.
Prior Authorization Reform: Both the Trump and Biden administrations have pursued regulations to streamline and reduce prior authorization requirements, particularly in Medicare Advantage. To the extent that prior authorization burdens fall disproportionately on independent practices (which lack the administrative infrastructure of large systems), reform in this area could modestly improve the competitive position of smaller providers.
Telehealth Flexibilities: The pandemic-era expansion of telehealth reimbursement under Medicare has been partially extended, creating new service delivery options that may benefit smaller, more nimble practices. However, the long-term status of Medicare telehealth coverage remains uncertain and subject to ongoing congressional action.
What Independent Physicians Should Watch
Key Developments on the Horizon
For physicians weighing the future viability of independent practice — or considering whether to remain in or return to independent settings — several near-term developments merit close attention:
- CMS rulemaking for 2027 and beyond: Whether the agency extends site-neutral payment to additional service categories will signal the trajectory of reform. Aggressive expansion would strengthen the business case for independence; stagnation would suggest the 2026 changes represent an isolated step rather than a sustained commitment.
- Congressional action on site-neutral legislation: Several bills proposing broader site-neutral payment mandates have been introduced in recent congressional sessions with bipartisan sponsorship. Legislative codification of site neutrality would be more durable than regulatory action alone, which can be modified or reversed by future administrations.
- Physician fee schedule updates: Whether Congress and CMS address the chronic underfunding of physician reimbursement — independent of site-neutral considerations — will significantly affect whether small practices can remain financially viable even with a leveled competitive playing field.
- Antitrust enforcement: The Federal Trade Commission’s approach to healthcare mergers and acquisitions under the current administration could either accelerate or decelerate the consolidation trend independently of payment policy changes.
- State-level policy: Several states have enacted or are considering legislation addressing facility fees, out-of-network billing for hospital-affiliated physician practices, and other policies that target the economic advantages of consolidation at the state level.
The Stakes for American Medicine
The site-neutral payment debate is fundamentally a question about what kind of healthcare system the United States wants to have. A system dominated by large hospital-employed physician networks operates very differently from one that preserves a meaningful role for independent medical practice — in terms of clinical autonomy, patient choice, competitive dynamics, and overall cost.
The 2026 reforms represent genuine progress toward eliminating a pricing distortion that has fueled consolidation, inflated Medicare spending, and tilted the playing field against independent physicians for decades. Whether this progress accelerates into a transformative restructuring of healthcare delivery — or stalls as an isolated policy adjustment overwhelmed by entrenched institutional interests — will depend on sustained regulatory commitment, legislative action, and the willingness of policymakers to confront the financial interests that benefit from the status quo.
For the more than 65 million Americans who rely on Medicare, and for the physicians who provide their care, the outcome of this debate will shape both the cost and character of American medicine for decades to come.
