Former White House advisor on the real reason your health care costs are going up: Medicare’s doctor pay gap

According to a new study from the Government Accountability Office, the share of the country’s doctors employed by or affiliated with a hospital system rose from 29% in 2012 to 47% in 2024.

It’s a troubling trend. Greater consolidation of physician services is a recipe for less competition, higher costs, and lower-quality care. 

The federal government is only making the problem worse. For years, Medicare has paid more for services and procedures provided in a hospital than in a physician practice. This discrepancy has enriched hospitals and strengthened their ability to acquire physician practices.

Adopting site-neutral payments — that is, paying hospitals and private physician offices the same amount for the same care — would allow independent physicians to compete on equal terms with hospital-affiliated doctors. Such competition will ensure that patients have choices in where they can seek care and cut premiums and copays in the long term.

Site-neutral payment enables healthcare services to be delivered in the lowest-cost setting that can safely and effectively provide them. Medicare’s payment disparities distort those decisions by rewarding hospitals simply for being hospitals, regardless of whether a service could be delivered just as well — or better — in a physician office or ambulatory surgery center. 

Removing those financial incentives would allow care to be organized around quality and access rather than distorting care into forms most favored by bureaucrats.

Under current law, the amount Medicare reimburses doctors in private practice is based on something called the Medicare Physician Fee Schedule. Hospital-affiliated physicians bill Medicare under the Hospital Outpatient Prospective Payment System, collecting both a professional fee based on the Physician Fee Schedule and a separate hospital-based fee.

For example, Medicare reimburses $1,375 for a colonoscopy performed in a hospital outpatient department — and $862 for one performed in an independent ambulatory surgery center. One study of 32 common procedures found that total Medicare reimbursement for the hospital outpatient department was anywhere from 124% to 861% of total reimbursement for the lower-cost physician office or ambulatory surgery center setting.

These payment disparities have yielded a host of negative consequences for the physician market.

For starters, they put independent physicians at an enormous financial disadvantage. Hospital reimbursement isn’t just higher — it’s also historically been ratcheted up on a yearly basis to account for inflation. The same cannot be said for physician reimbursement.

Between 2001 and 2025, Medicare physician reimbursement actually fell by 33% after adjusting for inflation, according to a recent analysis by the American Medical Association.

This has left a growing number of physician practices vulnerable to acquisition by larger hospital systems. In a separate study by the AMA, the need to negotiate higher payment rates was named as the top reason doctors sold their practices.

The result is a health sector that is becoming less competitive and more consolidated by the day — a trend that is raising costs for both patients and taxpayers. 

A 2021 analysis in the journal Inquiry found 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.” 

When hospitals become larger and compete less with smaller physician offices they have less incentive to keep prices down. The result is of course an increase in healthcare spending and higher insurance premiums for patients.

Site-neutral payments can correct these market distortions — and deliver significant savings in the process. According to one study, adopting site-neutral payments across Medicare could save the program $202 billion over a decade — and cut beneficiaries’ premiums and cost-sharing by a combined $134 billion.

There’s no economic reason Medicare should pay different amounts for the same care based solely on where it’s delivered. The hospital lobby may be the most important reason this disparity exists. Site-neutral payments would restore some common sense to the entitlement’s structure — and bring about a more competitive healthcare market for both patients and taxpayers.

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