By Linda J. Blumberg and Christine H. Monahan

Policy makers are increasingly turning their attention toward the prices health care providers charge private insurers, employer health plans, and their enrollees, and for good reason: Analyses highlight that private insurers pay nearly 2.5 times Medicare rates for hospital care and 1.2 times Medicare rates for physician care at the median. There is also considerable evidence that the prices providers negotiate with private insurers are increasingly a function of local provider market concentration as opposed to the resources necessary for providing care.

One component of provider pricing growing in prominence is hospitals charging “facility fees” for care provided in outpatient and physician office settings that hospitals own or control. These fees are ostensibly overhead charges, but for the hospitals and health systems that own these practice settings; the fees are not necessarily intended to cover costs specific to the setting or the patient being charged. Facility fee charges are becoming more common as hospital systems have accelerated their purchase of ambulatory settings and practices, leading to higher overall costs for outpatient care. Consumers bear the brunt of this, as they face increased out-of-pocket costs as well as higher premiums from these extra charges. Consumer exposure to these fees, coupled with the fact that these fees often appear unrelated to the level of care received, is contributing to the growing public perception that provider prices are too high.

The federal government, through both congressional and executive action, has begun to tackle these issues in the Medicare program, and policy makers are currently considering proposals to do more. Equal attention must be given to the private sector, where provider prices remain unregulated and subject to the often limited negotiating power and interests of private insurers.

Background On Billing Practices

Typically, insurers and patients receive two separate types of bills for care provided in hospitals. One type—the professional bill—covers the care provided by physicians and other medical professionals (for example, nurse practitioners, physical therapists). The second type—the institutional bill—covers the additional costs of providing that care in the hospital (beyond professionals’ care). However, when professionals provide services outside of hospital, insurers typically require the professional to charge for both their time and for other practice expenses, such as rent and equipment, on the same bill. In that way, insurers could negotiate with physicians for a single combined price for the total episode of outpatient care.

This traditional separation of professional and hospital billing continues today, even in the increasingly common situations where physicians are employees of a hospital or health system. In addition to being split across two separate bills, the total price for care delivered in hospitals has always been higher than the price for the same care provided elsewhere. This reflects the general recognition that keeping hospitals staffed and maintained for emergency and high-intensity care necessarily incurs larger overhead expenditures that could be spread across all patients receiving inpatient care. This justification for overhead charges is more tenuous for outpatient care, however, particularly when the care provided is of low complexity and historically has been provided in a physician office most of the time.

Hospital Consolidation Is Driving Irrational Outpatient Facility Fee Charges

This payment imbalance, in which insurers pay more for the same care provided at a hospital than a physician office or independent outpatient department, has been exacerbated by and has contributed to the financial toll attributable to the explosion of hospital-system purchases of outpatient clinics and physician practices.

As hospitals and health systems have bought and built outpatient departments and physician practices (some on or near hospital campuses, some miles away from hospitals), more care is being provided in these locations, which demand higher prices than independent provider offices. And the prices of these system-owned outpatient facilities appear far from rational, with facility fee charges varying enormously across the country, providers, services, and payers. The size of these fees can range from $0 to thousands, without any relationship to the particular service being provided. Some patients have seen the price of the same type of office visit increase substantially from one year to the next following the purchase of their physician’s practice or varying considerably depending upon which of a physician’s offices they are seen.

Insurers’ Handling Of Facility Fees Varies Across Geographic Areas And Plans

There is insufficient data to provide a comprehensive picture of how different insurers address facility fees in their plan coverage. Early analysis of the issue indicates that some insurers have sufficient leverage to prohibit these fees from being charged in outpatient departments or physician offices—a prohibition that can protect consumers from significant out-of-pocket exposure—but only by agreeing to reimbursement increases in other areas. Other insurers face the concentrated market power of providers in their area and so are unable to limit these charges. Some insurers may refuse to cover facility fees in certain circumstances, such as for care provided in an out-of-network physician’s office. In these circumstances, providers may then “balance bill” the patient for the fees not reimbursed by the insurer.

Separate hospital and professional bills can also lead to separate consumer cost-sharing obligations even when insurers cover outpatient facility fees. Some insurers count the facility fee as hospital care, which may have its own deductible or co-insurance charge, while the professional bill for the same visit is counted as physician care and may come with a separate copayment or other contribution. See this example of a major insurer’s summary of benefits and coverage for 2022. As shown at the bottom of page 2 in the link, for a provider office visit, the insurer imposes two separate cost-sharing responsibilities (for “Provider” and “Hospital Facility” charges) when the provider’s office is considered a “Hospital Facility.”

However, a plan’s cost sharing is structured, the addition of a hospital facility fee on top of a physician’s fee for care that can be safely provided in a physician’s office leads to higher out-of-pocket costs for patients and frequently higher costs for insurers than is necessary. This, in turn, results in higher premiums for all consumers and greater government spending to subsidize this premium growth.

What Can The Federal Government Do?

Federal policy options are available to address the consumer and systemwide cost concerns created by the growing prevalence of outpatient facility fees. At a minimum, federal requirements that would allow analysts and regulators reviewing claims to match a professional claim to any institutional claim for the same service and identify the location in which the service is being provided, including whether it is a physician’s office, on-campus hospital outpatient department, or off-campus hospital outpatient department, would clarify the magnitude of the facility fee issue. Amazingly, current billing practices make it difficult, if not impossible, for many insurers to identify the total prices they are paying providers on behalf of their enrollees for particular services.

Several bipartisan bills along these lines are currently being considered in Congress, such as the SITE Act (S. 1869). Such proposals would also allow more insurers to see the total payments made for particular services in each specific care setting, giving insurers the information necessary to negotiate with providers over the total price of care. However, the negotiation leverage of many insurers operating in highly consolidated provider markets would continue to be limited even with more complete information.

Another approach would be to prohibit facility fees for certain types of services or provider settings, such as off-campus locations or physician offices. Providers, instead, would need to bill for these services on a single, professional form. Several states, including Connecticut, Indiana, and Maine, have begun to move in this direction. This approach would eliminate the problem of patients being charged two different types of cost sharing or, in some cases, facing the full facility fee bill themselves. Still, this type of approach could lead to increases in charges for professional fees or other hospital services, depending upon negotiated relationships between professionals and hospitals and the balance of market leverage between providers and insurers. For example, prohibitions on facility fees could lead hospital-owned physician practices to increase their professional charges, designate a portion to the hospital or health system, leaving insurers with limited negotiating power to reimburse them at the same higher prices as today for outpatient services that could be delivered safely at significantly lower costs. Alternatively, a hospital may simply increase its rates across the board to make up for the lost revenue from outpatient facility fees.

A still more comprehensive approach would require providers to accept private insurer payments for specified services at levels below a designated limit, for example, the median of prices paid to independent physician offices in the same geographic area, or 120 percent of the rates Medicare pays physicians for the same care. These price limits could apply to a defined set of services that are routinely done in physician offices without additional patient risk, updated by the Department of Health and Human Services as technology and practice patterns change. As a starting point, the Medicare Payment Advisory Commission has identified dozens of services that are low risk and could safely be provided in a physician office in its recommendations for site neutral payments under Medicare. The price limits could be applied just to off-campus outpatient locations or to both on- and off -campus outpatient departments. Such a site-neutral payments approach would significantly reduce the variation in prices for the same service provided in different locations outside of hospitals themselves, eliminating the highest ones charged.

A site-neutral payment strategy applied to those providing medical services to the privately insured could reduce overall costs or be cost neutral, depending upon how the payment rate limits are determined. For example, setting the price limits at levels typical of those paid for the services when delivered in a physician office would be cost reducing. Setting them at levels that average the pre-reform prices across settings would likely not be.

Looking Forward

The federal government could act to limit outpatient facility fee billing in the commercial market as it takes similar action with respect to Medicare. Current federal and state proposals to increase billing transparency and prohibit facility fees in certain circumstances would be significant steps forward. These efforts will help shed light on and protect consumers from a particularly egregious example of irrational pricing behavior in the commercial health care market. Nonetheless, effectively reducing the high and variable costs associated with care provided in hospital-owned outpatient departments and physician offices nationally will require further federal legislative steps, including a site-neutrality strategy.

This post is part of the ongoing Health Affairs Forefront series, Provider Prices in the Commercial Sector, supported by Arnold Ventures.

Linda J. Blumberg and Christine H. Monahan, “Facility Fees 101: What is all the Fuss About?,” Health Affairs Forefront, August 4, 2023, https://www.healthaffairs.org/content/forefront/facility-fees-101-all-fuss. Copyright © 2023 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.