Why does the same medical procedure or diagnostic test come with dramatically different price tags depending on where a patient receives it?
Across Michigan, that’s not a theoretical question. It’s a daily reality ― and a major reason health care has become so expensive.
A routine outpatient service performed in a hospital-owned facility can cost double, triple, or even more than the exact same service delivered in an independent physician’s office or independent surgery center.
The hospital premium doesn’t buy better outcomes or cover the cost of more complex care. It stems from how Medicare ― and many private insurers ― pay for services.
That payment imbalance is doing more than inflating bills. It is reshaping Michigan’s healthcare market.
Across the state, consolidation has accelerated. Large systems like Beacon Health System, University of Michigan Health and Henry Ford Health have expanded their footprints through mergers and acquisitions of physician practices, leaving fewer independent practices competing in many regions.
Nearly half of Michigan hospitals now operate in highly concentrated markets, where competition is limited and dominant systems have greater leverage over pricing.
The connection between these trends is not coincidental.
Higher reimbursement gives hospital systems a built-in financial advantage. When they acquire independent medical practices, those practices can be converted into hospital outpatient departments and bill at higher rates ― even if the care itself, or the clinician providing it, does not change.
Federal data show what happens next. A Government Accountability Office analysis found that when hospitals acquire physician practices, Medicare spending per patient increases, in part because services shift from physician offices to hospital outpatient departments, where payment rates are higher.
In other words, the payment system is not just reflecting consolidation; it is helping drive it.
The consequences for patients are significant.
Because Medicare requires beneficiaries to cover a percentage of total costs, higher prices in hospital settings translate directly into higher out-of-pocket expenses. Private insurance premiums also rise as overall health costs increase.
At the same time, independent practices face growing financial pressure. Medicare payments to physician practices have declined by roughly 33% in inflation-adjusted terms since 2001, even as operating costs have climbed substantially. That makes it increasingly difficult for independent physicians to remain viable, and accelerates the cycle of acquisition and consolidation.
There is a better approach.
Policymakers should focus on site-of-care optimization ― that is, ensuring that patients receive care in the most appropriate, cost-effective setting.
In practical terms, that means paying the same amount for the same service, regardless of where it is performed. Physicians should decide on where to deliver care based on what’s best for their patients, not on which setting commands the highest reimbursement.
The potential savings are substantial. In my specialty, urology, Medicare’s total reimbursement for a cystourethroscopy ― a common, often outpatient, procedure a physician uses to examine the urethra and bladder ― is three times higher in the hospital outpatient department than in the medical office.
Aligning payments for all sorts of procedures and diagnostic tests across sites of care could yield savings across the healthcare system of more than $470 billion over 10 years, according to a Blue Cross Blue Shield analysis. Medicare beneficiaries would see their Part B premiums and out-of-pocket costs each decline by about $67 billion.
Private insurance premiums, meanwhile, would go down by more than $100 billion.
Encouragingly, federal officials have begun moving in this direction by expanding site-neutral payment policies for some drug administration services provided in off-campus hospital outpatient departments as of this year. But they need to go further.
A broader commitment to site-of-care optimization would do more than reduce costs. It would begin to unwind a payment system quietly steering care into the most expensive settings, and using public dollars to do it.
During my quarter-century of medical practice, I saw how those dynamics affected patients every day. Patients do not choose higher-cost care. The system chooses it for them.
That’s something policymakers can fix. And they should.
Dr. Mitchell B. Hollander is president and chairman of the Michigan Institute of Urology and president of the Michigan Independent Physician Practice Association.
This article originally appeared on The Detroit News: Michigan’s health care pricing system needs reform | Opinion
Reporting by Mitchell Hollander / The Detroit News
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