Ex-White House Advisor Explains Rising Health Costs: Medicare’s Physician Payment Disparity

A growing number of American physicians are joining hospital systems, a trend largely driven by government policy distortions in Medicare’s payment structure. This shift is ultimately leading to increased premiums and out-of-pocket expenses for patients.

Data from a recent Government Accountability Office study shows the proportion of doctors employed by or affiliated with a hospital climbed from 29% in 2012 to 47% in 2024.

This consolidation of physician services is a concerning development that fosters less competition, drives up costs, and can result in lower-quality care.

The federal government is exacerbating the issue. For years, Medicare has reimbursed more for identical services performed in a hospital compared to a private physician’s office. This payment gap has financially benefited hospitals and enhanced their capacity to purchase independent practices.

Implementing site-neutral payments—where hospitals and private doctors receive equal payment for the same service—would level the playing field for independent physicians. This increased competition would give patients more choices for their care and reduce their premium and copayment costs over time.

Site-neutral payment promotes the delivery of healthcare in the most cost-effective setting that can safely provide it. Medicare’s current payment differences skew these decisions by offering hospitals a premium simply for their status, irrespective of whether a doctor’s office or surgery center could perform the service equally well or better.

Eliminating these financial incentives would allow the healthcare system to prioritize quality and access, rather than being warped by bureaucratic payment preferences.

Currently, Medicare reimburses private-practice doctors based on the Medicare Physician Fee Schedule. In contrast, hospital-affiliated physicians bill under the Hospital Outpatient Prospective Payment System, receiving both a professional fee and an additional facility fee.

To illustrate, Medicare pays $1,375 for a colonoscopy at a hospital outpatient department, but only $862 for the same procedure at an independent surgery center. A study of 32 common procedures found hospital outpatient reimbursements were between 124% and 861% of the amounts paid in lower-cost settings.

These payment inequalities have produced several adverse outcomes for the medical profession.

Primarily, they place independent doctors at a significant financial disadvantage. Not only are hospital payments higher, but they have also been historically adjusted upward for inflation annually, a benefit not consistently extended to physician reimbursements.

An American Medical Association analysis indicates that between 2001 and 2025, inflation-adjusted Medicare payments to physicians actually decreased by 33%.

This financial pressure has made many independent practices susceptible to buyouts by larger hospital networks. A separate AMA study identified the pursuit of better payment rates as the primary reason physicians sell their practices.

The consequence is a healthcare sector growing less competitive and more consolidated every day, a pattern that increases costs for patients and taxpayers alike.

A 2021 analysis in the journal Inquiry revealed that a “10-percentage-point increase in vertical integration [between hospitals and physician practices] was associated with a 1.0% price increase for primary care, a 0.6% increase for orthopedics, and a 0.5% increase for cardiology.”

As hospitals expand and face less competition from small practices, their incentive to control prices diminishes. This naturally leads to rising healthcare spending and higher insurance premiums for patients.

Site-neutral payments have the potential to fix these market distortions while generating substantial savings. One study estimates that implementing them across Medicare could save the program $202 billion over ten years and reduce beneficiary premiums and cost-sharing by a total of $134 billion.

There is no economic justification for Medicare to pay varying rates for the same care based only on location. The influence of the hospital lobby is likely a major factor in the disparity’s persistence. Adopting site-neutral payments would inject common sense into the program’s design and create a more competitive healthcare market for patients and taxpayers.