Elon Musk and Vivek Ramaswamy have declared war on government bloat. They hope to use the new Department of Government Efficiency, or DOGE, to axe wasteful spending and slash bureaucratic red tape that costs Americans trillions of dollars in foregone economic growth.
One of the best places to start would be the asinine rules that enable hospitals to overcharge Medicare by billions each year.
Under current law, Medicare pays significantly higher reimbursements to outpatient clinics and doctor's offices that are owned by hospital systems -- compared to independently owned facilities -- for the exact same tests, treatments, and procedures.
The higher reimbursements were originally intended to compensate for the unique regulatory requirements and costs associated with maintaining a large hospital campus. And that rationale makes sense for services provided at an actual hospital -- it's reasonable to reimburse more for an x-ray administered in an emergency department than in a doctor's office, which doesn't face nearly the same level of government-mandated overhead costs.
But over the years, hospital administrators have realized that they could game the system -- by extending this preferential billing treatment to smaller, off-campus facilities known as "hospital outpatient departments" (HOPDs) located miles away from an actual hospital.
Under current Medicare payment rules, hospital systems aren't just incentivized to establish new outpatient centers, but also to absorb independent practices that already exist. Hospitals can acquire a community clinic in the morning and begin billing Medicare up to 50% more for the same treatments by day's end.
This twisted incentive structure has fueled consolidation throughout the health care industry and heaped substantial costs onto patients and taxpayers. Studies show that when physician practices are acquired by hospitals, their prices increase by over 14%. This vertical integration also reduces market competition, giving hospitals wide autonomy to dictate prices.
Vertical integration also enables hospitals to increase their abuse of the 340B program, which provides hospitals and outpatient clinics with discounts on prescription drugs while allowing them to bill Medicare for the drugs' original price. When Congress created the 340B program decades ago, lawmakers intended the savings to flow to low-income patients -- but hospitals often simply pocket the savings instead. As hospitals turn more and more physician practices into HOPDs, they become eligible to collect increased profits from 340B with no obligation to redirect that money toward charity care.
Despite the massive rewards that hospitals reap from vertical integration, patients don't see any benefits. Hospital performance and self-reported patient experiences deteriorate following hospital mergers, according to a Harvard study.
The solution to these problems is "site-neutrality" -- reimbursing all health care providers at equal rates, regardless of who owns the facility. A policy of site-neutrality would stem the tide of vertical integration by eliminating incentives for hospitals to buy out physician practices. It would also produce significant budget savings.
The Congressional Budget Office estimates that the government would save $100 billion over the next decade if HOPDs were reimbursed at the same rate as independent physicians. The American public could save even more. By 2030, site-neutrality could eliminate up to $672 billion in total national health expenditures while reducing the federal budget deficit by a quarter trillion dollars, according to the Committee for a Responsible Federal Budget.
Some legislators have begun working toward site-neutrality. The proposed Lower Costs, More Transparency Act (H.R. 5378) would implement site-neutrality for hospital-owned physician offices, saving nearly $4 billion in taxpayer funds per CBO estimates.
Flattening Medicare's reimbursement structure would save taxpayers billions each year -- and spur more competition between healthcare providers, leading to more choices and lower costs for patients and taxpayers.