Introduction

Ongoing increase in health care costs in the U.S. is attributed not only to the Medicare reimbursement of hospitals and physicians but also to a less obvious factor. The widening gap between hospital and independent physician practices payments is progressively changing the health care market, thus, the patients, insurers, and taxpayers' cost is getting higher.

Medicare’s Payment System and Its Flaws

Medicare, a federal program that covers health care expenses for persons aged 65 and above and certain younger individuals with disabilities, operates different payment systems for the providers. The Medicare Physician Fee Schedule is applied for independent doctors, whereas the hospitals get the combined payments of the higher amount through the Hospital Outpatient Prospective Payment System. These two methods of payment result in huge variations in the amounts paid for the same procedure when it takes place in diverse locations.

In one instance, the hospital might get around $1,375 from Medicare for a colonoscopy, whereas a free-standing surgery center or a doctor's office offers the same service at a much lower cost of $862. The whole arrangement benefits the hospital systems and thus, makes it reasonable for them to acquire physician practices and curb competition through financial means.

Consequences for Physician Practices

Independent physician practices have been gradually losing their position for the last ten years. Around 29% of American doctors were either working for or connected to hospital systems in 2012. That percentage skyrocketed to almost 47% by 2024. The independent practices are finding it difficult to stay afloat due to the low reimbursement rates and as a result, many are opting to sell or align with hospitals for that matter.

The merging of health care providers has led to a situation where competition is lessened in the local markets. As there are fewer independent doctors, hospitals have more power to dictate prices, medical services often become more expensive and as a result, patients have to pay higher insurance premiums and co-pays.

Impact on Health Care Costs and Patients

The distortions in the market caused by the gap in Medicare payment not only change the ownership structure of providers but also result in increased overall spending for health care. The study mentioned in the article indicates that a greater degree of vertical integration—where hospitals take over doctor practices—often leads to higher prices for services like primary care, orthopedics, and cardiology. Hospitals located in areas with fewer competitors feel less compelled to maintain lower prices.

In the end, this often results in patients having to pay more for their premiums, copayments, and deductibles. The insurance companies transfer the rising costs of providers to consumers, and employers incur higher costs for the health plans covering their employees. Such cost increases may not only negatively impact household budgets but also make access to health care difficult for everybody.

A Potential Solution: Site-Neutral Payments

One of the possible solutions that have been talked about is the site neutral payment policy, which, in the case of Medicare, would be paying the same amount for a service no matter where the service was rendered. Supporters claim this would give a level playing field where independent doctors and hospitals could be competing, thus providing patients with more options and curbing cost increase in the long run. Research indicates that if the site-neutral payments were to be applied to the entire Medicare program, it would result in a savings of several hundred billion dollars over ten years and would enable the reduction of both premiums and cost-sharing for the users.

Conclusion

The discrepancy in Medicare physician remuneration is not just a matter of bookkeeping; it is changing the whole scenario of health care provision and pricing in the U.S. If payments are aligned in a way that hospitals and independent practices are on the same footing, then the competition may be increased, costs reduced, and patients provided with better options in the long run.