Medicare goes after hospital markup you’ve paid for years | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

There is a rule about money most of us learn early. You pay for the thing, not for the room the thing happened in.

A gallon of milk costs what it costs whether you buy it at a corner store or a warehouse club. If the corner store charges triple, you notice, you complain, and eventually you stop going.

Health care in this country runs on the opposite principle. The same X-ray, taken on the same machine and read by the same radiologist, can carry two very different prices depending on which corporate entity owns the sign above the door.

That gap did not appear by accident. It was written into the payment rules, and hospitals responded the way any business responds to a pricing loophole. They bought the independent practices, hung a new sign, and started billing at the higher rate.

Nobody voted for that. It happened one acquisition at a time, and it ended up inside your premium and your coinsurance.

Now Medicare wants to close part of the gap. The Centers for Medicare and Medicaid Services, or CMS, released its proposed calendar year 2027 outpatient payment rule on July 2, and hospitals responded within hours.

Why the same X-ray costs more inside a hospital

Medicare pays for outpatient care through two systems that do not agree with each other. Services delivered in a Hospital Outpatient Department, known as an HOPD, are paid under one fee schedule. Identical services in an independent physician’s office are paid under another, and the hospital version pays more.

That differential raises costs for the government and for beneficiaries and “encourages excessive hospital consolidation,” according to the Committee for a Responsible Federal Budget.

The fix has a name that has floated around Washington for close to a decade. Site-neutral payment means Medicare pays the same amount for the same service regardless of where it happens. Applied across all of Medicare, it could save the federal government almost $200 billion over ten years, per the same budget watchdog.

I have read a lot of Medicare proposals, and this is the rare one where the underlying logic is not seriously contested. An X-ray does not become a better X-ray because it was taken in a building with a cafeteria.

What has always blocked reform is that hospital revenue is a real thing in real congressional districts, and there is no painless way to pull several billion dollars out of it.

What the 340B drug payment cut would do to hospital revenue

The bigger number in this rule is not imaging. It sits inside a drug discount program created in 1992 called 340B, which requires manufacturers to sell drugs at steep discounts to hospitals serving low-income communities.

Here is the mechanic that matters: Hospitals buy those drugs at a deep discount, then bill Medicare at the Average Sales Price, or ASP, plus 6%. The spread between what they pay and what they collect has become one of the most dependable revenue lines in American health care.

CMS wants to end it. The proposal would pay for 340B drugs at ASP minus 33.4%, starting in 2027. This would cut Original Medicare drug payments by $4.55 billion and beneficiary drug payments by $1.15 billion in the first year, according to CMS.

More Medicare/Medicaid:

Hospitals are not treating this as a technical adjustment. The cut “will make drugs less affordable for America’s most vulnerable patients,” said Ashley Thompson, senior vice president of public policy analysis and development, per the American Hospital Association.

A second blow lies underneath. CMS also proposes to accelerate its clawback of earlier 340B overpayments by cutting the outpatient conversion factor 3% a year instead of 0.5%, finishing recovery by 2029 rather than 2041.

The rule “delivers multiple blows to hospitals already operating under immense financial strain,” Premier advocacy vice president John Knapp said in a statement, as reported by HFMA.

Here is how the savings math breaks down across the two site-neutral policies now in play:

Site-neutral payment for outpatient imaging would save Medicare roughly $7 billion over ten years, according to CMS estimates cited by the Committee for a Responsible Federal Budget.
That same policy would save closer to $10 billion while cutting beneficiary premiums and cost sharing by another $7 billion, based on scoring from the Congressional Budget Office.
The 2026 final rule’s site-neutral policy for drug administration saves about $7 billion federally and $5 billion for beneficiaries over a decade, per the Congressional Budget Office.
Together, the two policies would cut national health spending by almost $20 billion over ten years, according to the Committee for a Responsible Federal Budget.

Proposed 2027 Medicare rule cuts 340B drug pay 40% and expands site-neutral imaging.

FS Productions / Getty Images

What the Medicare outpatient proposal means for your costs

This is where my analysis turns less cheerful than the headline numbers suggest.

Statute requires most of these changes to be budget neutral, so the roughly $4.85 billion pulled out of 340B drug payments does not reach the Treasury or the Medicare trust fund. It goes back to hospitals as an 8.44% bump in payments for non-drug outpatient services.

Savings get recycled into Part B payments instead of shoring up a program facing rapid cost growth, the Committee for a Responsible Federal Budget noted, which is why the group wants Congress to codify the change rather than leave it with regulators.

So what actually reaches you? Two things, and neither is small.

Your Part B coinsurance is 20% of whatever Medicare allows. When the allowed amount on an infused drug drops by nearly 40%, your share drops with it. That is the $1.15 billion, and it lands hardest on people receiving chemotherapy and biologic infusions.

The imaging change works the same way for anyone who has had a scan at a hospital-owned clinic, and it feeds into premiums, the quiet lever that decides how much of your check the government takes back each January.

None of this is settled. Comments close Aug. 31, a final rule is expected later this year, and the last time CMS attempted a 340B cut like this, hospitals sued and won at the Supreme Court in 2022. This version rests on a survey of actual hospital acquisition costs, which is precisely the evidentiary gap the justices flagged, according to the Federal Register notice.

Watch two things between now and January. First, whether CMS carves out children’s hospitals, cancer hospitals, and rural sole community hospitals, all of which it has flagged for comment.

Second, whether the roughly 618 procedures being added to the ambulatory surgery center list start pulling volume off hospital campuses, which would matter for investor-owned operators including Tenet Healthcare (THC) and HCA Healthcare (HCA), according to Holland & Knight.

The site-neutral argument has been running since 2015 without resolution. This is the first version that arrives with a survey attached, and that changes who has to prove what.