Medicare continues to pay more for identical outpatient services when they are delivered in a hospital outpatient department (HOPD) rather than a physician’s office or ambulatory surgery center. This differential is not a minor technicality. It creates a structural incentive for consolidation, raises costs for taxpayers and beneficiaries, and distorts where care is delivered. Private practices and independent clinics are being bought and absorbed by sprawling healthcare systems at an alarming rate.
Ultimately, this means patients pay more for their care.
Outpatient Prospective Payment System For Hospitals
Doctors bill Medicare under the Physician Fee Schedule (PFS). When a physician provides a service in an independent office, Medicare pays a single amount that covers both the doctor’s professional work and the practice’s overhead costs (staffing, rent, equipment, etc.).
Hospitals bill under a different system—the Hospital Outpatient Prospective Payment System (OPPS). When the same service is provided in a hospital outpatient department, two separate bills are submitted:
- The physician still bills under the PFS, but at a lower “facility” rate because the hospital is now covering the overhead.
- The hospital separately bills Medicare a facility fee under OPPS to cover its own costs for staffing, infrastructure, and operations.
Because Medicare pays both the physician’s facility-rate fee and the hospital’s facility fee, the total payment is usually higher than the single payment made for the identical service in an independent physician office. Ambulatory surgery centers generally receive lower total payments than hospital outpatient departments for the same procedures.
A Concrete Back-Pain Example Of Patients Paying More
A 62-year-old Medicare beneficiary presents with six weeks of axial low-back pain, no red-flag symptoms, and no prior advanced imaging. The physician performs a detailed history and physical examination, reviews prior films, discusses conservative management, and orders physical therapy plus non-opioid analgesics. No injection or surgery occurs that day.
This is a common pathology seen by spine professionals.
Independent Physician Office Visit
The encounter is billed as a new-patient visit (CPT 99204) under the non-facility Physician Fee Schedule.
- Approximate national payment to the physician: $193
- Patient coinsurance (20%): roughly $39
- Total Medicare payment for the visit: ~$193
Hospital-Owned Clinic OPPS Billing
The same visit generates two bills:
- The physician bills CPT 99204 at the lower facility rate: approximately $131
- The hospital separately bills a facility fee under OPPS (typically G0463)
- Combined total payment (physician + hospital) is higher than the independent-office rate
- Patient coinsurance rises because the beneficiary pays 20% of both the physician fee and the hospital facility fee
- Combined total frequently lands in the $250–$350+ range for the same visit.
The clinical value delivered is identical. The Medicare payment is not. Multiplied across high volumes of evaluation-and-management services and common musculoskeletal procedures, the excess spending is material.
Overnight Ownership Change, Overnight Price Change
Consider an independent spine and orthopedic group that owns its clinic building near the hospital on its campus and employs its own staff. On Monday the practice is independent. A new Medicare patient with mechanical low-back pain is evaluated. The physician bills a new-patient office visit (CPT 99204) under the non-facility PFS rate. Again, national payment averages ~$193 in the non-facility setting. Exact amounts vary by locality and whether the clinician participates in other Medicare programs. No separate facility fee is charged. Total Medicare payment and patient coinsurance reflect the freestanding office rate.
On Tuesday the hospital system closes the acquisition of the orthopedic group. The surgeons transition from private practice to hospital employees.
The same physicians, same building, same exam rooms, same nurses, and same electronic health record are now designated a provider-based HOPD. The identical new-patient visit is billed differently. The physician submits the professional claim at the lower facility PFS rate. The hospital submits a facility claim under OPPS (typically using G0463 for the clinic visit). The combined payment exceeds the independent-office total. Nothing about the clinical encounter changed—only the ownership designation and the applicable payment rules.
This pattern is not theoretical. Hospital acquisition of physician practices has been driven in part by the ability to bill higher OPPS rates after conversion to provider-based status. The same dynamic influences decisions between freestanding ASCs and hospital outpatient departments.
Hospitals Argue Higher HOPD Payments Are Necessary
Hospitals argue that the higher Medicare payment for services in HOPDs is necessary because these departments carry costs that independent physician offices do not. They must maintain 24/7 emergency standby capacity, meet more stringent licensing and regulatory requirements, treat a higher share of complex and medically vulnerable patients, and remain open to all patients regardless of ability to pay—expenses that are built into the hospital cost structure and supported by outpatient revenues. There is some significant merit to the discussion that hospitals struggle to make direct margin on Medicare patients.
Medicare Reform For Site-Neutral Payment
CMS has taken incremental steps.
Congress first advanced site-neutral payment through Section 603 of the Bipartisan Budget Act of 2015, which generally required that most services furnished in new off-campus hospital outpatient departments (those that began billing after November 2, 2015) be paid under the lower Physician Fee Schedule rather than the higher Outpatient Prospective Payment System rates. In 2019, CMS further expanded the policy by applying site-neutral rates to clinic visits (the most commonly billed service) at all off-campus HOPDs (away from the physical location of the hospital), including previously grandfathered locations, phasing the reduction in over two years so that payments ultimately aligned more closely with physician-office rates.
2026 Developments For Site-Neutral Payment Reform
In the Calendar Year 2026 OPPS/ASC final rule, CMS extended site-neutral payment to drug administration services (such as chemotherapy and related infusions) furnished in excepted off-campus provider-based departments. Beginning January 1, 2026, these services are paid at a Physician Fee Schedule-equivalent rate rather than the full OPPS rate. CMS estimates the change will reduce OPPS spending by approximately $290 million in 2026, with about $220 million in savings to the Medicare program and $70 million in lower coinsurance for beneficiaries. This is separate than 340B which is the acquisition cost and Medicare payment for the drug product.
Site-of-service differentials were never intended as a permanent subsidy for hospital ownership of routine ambulatory care. Expanding site-neutral payment—particularly for evaluation-and-management services, imaging, and procedures predominantly performed in offices or ASCs—would reduce pure consolidation incentives, lower costs for Medicare and beneficiaries, and restore a more level competitive field.
Looking ahead, policymakers and CMS continue to signal interest in expanding site-neutral payment beyond off-campus clinics and drug administration to additional services and potentially on-campus HOPDs. Broader reforms could generate substantial savings for Medicare and beneficiaries, though hospitals warn that further cuts risk undermining emergency readiness and access in vulnerable communities.
