David Johnson: Site-neutral payment and the battle for healthcare’s soul

In  a remarkable and surprising show of bipartisanship, the U.S. House of Representatives passed the Lower Costs, More Transparency Act on Dec. 11, 2023, by an overwhelming 320-71 vote. Avoiding hyperbole, the act lives up to its name. It seeks to equalize Medicare payment for the same drugs administered in the same way, whether in hospitals or in physicians’ offices. That seems reasonable, but not everyone agrees.

Medicare pays two-to-three times more for administering the same drugs in hospital-owned facilities (including physician offices) than in independent physician offices.^a This practice creates financial incentives for hospitals to acquire physician practices.

And so they have. The Medicare Payment Advisory Commission (MedPAC) reports that Medicare paid hospital-based prices for more than half of all chemotherapy drugs administered in 2021, up from one-third in 2012.^b

The Congressional Budget Office estimates that site-neutral payment will save Medicare more than $3.7 billion over 10 years.^c

It also would generate significant savings for private health insurers. According to Kaiser Family Foundation research, private insurers pay hospitals nearly twice as much as Medicare does for the same services.^d

Let’s not forget consumers. The act reduces copays for Medicare beneficiaries by $40.

Saving money by eliminating irrational pricing variation is elemental to good policy creation. That’s why the Lower Costs, More Transparency Act is receiving such widespread support. Of course, creating savings in one pocket creates a hole in another. Aggrieved hospitals depend upon irrational payment policies to sustain their stagnant business practices. And many are appealing Congress to protect the status quo.

Healthcare’s mindset against innovation

In a blistering letter to Congressional leaders, the American Hospital Association (AHA) blasted site-neutral payments for administering drugs.^e The AHA insists that the House bill ignores core operating realities and will inflict grave harm on hospitals. Its analysis suggests site-neutral payment might put American consumers in danger, saying “Congressional action on this issue, along with the continued government underfunding of hospital and health systems, puts patient care at risk, particularly in rural and undeserved areas.”

The AHA’s further emphasized its position in response to a March 14, 2024, editorial in The Washington Post, which endorsed the act. In a blog post, AHA President and CEO Rick Pollack described the editorial as “deeply flawed and poorly-timed.”^f

The AHA is most concerned that Congress will broadly apply site-neutral payment to treatment activities beyond drug administration. MedPAC has identified 57 potential applications for site-neutral payment that would save Medicare $150 billion over 10 years.^g

Counter to the AHA’s position, there are sound reasons for supporting this change. Paying more for identical service provision is the antithesis of innovation and value creation. I would suggest that gaming payment formularies is a value-depleting activity. Hospitals and health systems aren’t innovating on service delivery because we’re paying them not to innovate.

Disruption 101

Harvard Business School professor Clayton Christensen is the undisputed guru of disruptive innovation. Christensen’s pathbreaking work explains how disruptive innovations create value by finding new and better ways to solve customers’ “jobs to be done.” Resisting innovation is like resisting gravity. It takes enormous effort and ultimately comes crashing down to Earth. No one innovates by charging more for existing services.

In 2009, with two colleagues, Christensen published The innovator’s prescription: A disruptive solution for health care, which applies his theories on disruptive innovation to the healthcare industry.^h Christensen’s analytic brilliance lies in his ability to see patterns within chaotic and tumultuous markets, distill their implications and apply them proactively. A consistent theme in Christensen’s work is the interplay between centralization and decentralization as industries grow and mature:

[I]n the beginning stages of nearly every advanced industry, the initial products and services are complicated and expensive. Disruption then “democratizes” these, by making products and services that are simpler and more affordable.

Christensen’s centralization-decentralization framing unfolds in stages and what could be described as growth waves, where new technologies bring quantum improvements in the quality, cost and speed of production. Based on this premise, with the adoption of a new technology, industries move from healthcare’s first stage (stage zero) to an initial growth wave. The investment in technology and expertise to achieve such quantum-level improvements is high. Consequently, it is more efficient and cost-effective to centralize production.

Christensen suggests that industry products and services standardize, even commoditize, over time. Disruptive innovators attack the high costs and inconvenience of centralized operations. In subsequent growth waves, industries begin to decentralize to lower costs and improve efficiency and the customer experience.

In applying these ideas to medical care, we can see how disruptive innovations are fueling decentralized delivery of healthcare:

• Stage zero. Physicians, nurses and family take care of the sick in homes.
• Growth wave 1. Patients go to general hospitals where physicians and nurses provide care.
• Growth wave 2. Procedures that once required hospitalization can be performed in ambulatory surgery centers (ASCs).
• Growth wave 3 and beyond. Procedures that once required going to an ASC can be performed in physicians’ offices.

What’s unusual about healthcare is the extent to which the industry’s business strategies have stalled in growth wave one, which emphasizes centralized service delivery. In healthcare, disruptive innovations haven’t led to lower prices as they have in other industries such as retail shopping, hospitality, banking and transportation. Healthcare’s strategic stagnation occurs because health systems insist on receiving higher hospital-based payments for procedures delivered in lower-cost settings, including ASCs and physicians’ offices.

A much-needed better approach

Amid today’s realities, fighting against innovation, value creation and transparency is a futile endeavor. The world is inexorably moving forward despite industry protests, as demonstrated by the House passage of the Lower Costs, More Transparency Act.

Although it is daunting to contemplate, there is a compelling reason for providers to accept that the right response for them is to embrace site-neutral payment and use innovation to spur growth waves that deliver better outcomes at lower costs with great customer service. They should ride the wave to achieve better outcomes and happier customers. That is a soul-enriching endeavor.

Do health systems really have another choice? 

Footnotes

a. Bulat, T., and Brake, R., “Potential impacts of Medicare site neutrality on off-campus drug administration costs, Actuarial Research Corporation, Oct. 18, 2023.
b. MedPAC, “Aligning fee-for-service payment rates across ambulatory settings,” Chapter 8, Report to the Congress: Medicare and the Health Care Delivery System, June 2023.
c. Congressional Budget Office, Cost Estimate, “Estimated Direct Spending and Revenue Effects of H.R. 5378, the Lower Costs, More Transparency Act,” Dec. 8, 2023.
d. Lopez, E., et al., “How much more than Medicare do private insurers pay? A review of the literature,” Kaiser Family Foundation, April 15, 2020.
e. Hughes, S., “AHA responds to the Lower Costs, More Transparency Act (H.R. 5378),” letter/comment, AHA, Dec. 6. 2023.
f. Pollack, R., “Setting the record straight: Washington Post editorial on site-neutral deeply flawed and poorly-timed,” AHA, March 15, 2024.
g. Committee for a Responsible Federal Budget, “Equalizing Medicare payments regardless of site-of-care,” Feb. 23, 2021.
h. Christensen, C.M., Grossman, J.H., and Hwang, J., The innovator’s prescription: A disruptive solution for health care, McGraw-Hill, 2009.