Health system CEOs are navigating a growing list of financial pressures, including Medicaid coverage and reimbursement changes under HR 1 and ongoing payment and policy challenges surrounding the federal 340B drug discount program. Site-neutral payment adds another consideration as health systems weigh where to invest and deliver care.
At Winchester, Va.-based Valley Health, concerns about site-neutral payment are already influencing where the system adds outpatient capacity. President and CEO Mark Nantz said Valley Health is keeping new outpatient sites on its hospital campuses in part to preserve hospital outpatient department rates. Peter Slavin, MD, president and CEO of Los Angeles-based Cedars-Sinai, said eliminating the outpatient payment differential entirely could cost Cedars-Sinai Medical Center about $200 million annually. J. Stephen Jones, MD, president and CEO of Fairfax, Va.-based Inova, said the policy has not changed where the system invests, but it has prompted greater focus on site of care when evaluating projects.
“It disrupts the financial model that includes things like 340B, hospital outpatient department rates and Medicare disproportionate share,” Mr. Nantz told Becker’s. “All of those things together help us cobble together a pretty fragile financial model. And so if any part of that financial model, somebody starts pulling the string on it, it unravels pretty fast.”
CMS’ proposed 2027 outpatient rule, released July 2, would extend site-neutral payment, which pays the same rate for the same service across care settings, to imaging without contrast, including most X-rays and MRIs, furnished in excepted off-campus provider-based departments. CMS estimates the change would reduce Medicare Part B spending by about $260 million in the first year, with rural sole community hospitals exempt. The proposal follows the 2026 rule, which extended site-neutral payment to drug administration. Comments are due Aug. 31.
Dr. Slavin said 340B is at or near the top of the financial headwinds he is tracking. But he also sees substantial risk from site-neutral payment. If the payment differential were eliminated entirely, he said, Cedars-Sinai Medical Center could lose about $200 million annually. He estimated the medical center has already absorbed about $12 million in cuts over the last five to 10 years.
“I don’t think it could come at a worse time for hospitals,” Dr. Slavin said. “Everyone is bracing for the impact of HR 1 and the financial headwinds that that will inevitably create, is already creating and will create even more of after the midterms, and then the shakiness around 340B as well. So you just add this to the list, and it could have a very significant impact on hospitals.”
He acknowledged the payment difference can be difficult to explain because a hospital outpatient practice may look similar to an independent physician practice. He pointed to differences in patient populations and regulatory requirements as reasons hospital practices can be more costly to operate.
“No. 1, the patients that are cared for in hospital practices are sicker, they come from more disadvantaged backgrounds. So the cost of caring for the patients is higher,” Dr. Slavin said. “Secondly, hospital practices are subject to a whole bunch of regulatory requirements that physician practices are not subject to. And those regulatory requirements have cost implications as well.”
Cedars-Sinai has been moving lower-acuity care away from its academic medical center, including establishing clinical programs at Huntington Hospital in Pasadena, Calif., and in Torrance, Calif. Dr. Slavin said the strategy is intended in part to keep patients closer to home in lower-cost settings. The system has also moved care to outpatient settings when appropriate.
“But I think one of the perverse impacts that these site-neutral payments could have would be for hospitals to keep more of what they’re doing in house, rather than move it to an outpatient setting where the reimbursement won’t be that attractive,” he said. “And I worry that cuts in these payments could backfire in some ways as hospitals are forced to keep care that could be delivered in an outpatient setting as inpatient instead.”
At Valley Health, site-neutral payment risk is already influencing where the system adds capacity. Mr. Nantz said Valley Health has deliberately kept hospital outpatient sites within 750 feet of its hospitals rather than pursuing off-campus provider-based departments.
“So our strategy has been to be conservative in getting our hospital outpatient rates by keeping them within 750 feet of a hospital,” he said. “So we haven’t embarked on a strategy where you go 25 miles away and set up a hospital-based department that’s not kind of on the campus, because we saw that as being pretty risky.”
The approach means Valley Health is not expanding surgery centers or imaging centers off campus, even when doing so could put services closer to patients.
“So that means that instead of taking things out in the community, maybe closer to patients, to preserve the hospital outpatient department rates, we’re putting those things on the campuses,” Mr. Nantz said. “Instead of expanding out and taking that risk, we’re kind of staying put and increasing the size of our footprints and the capacity. We’re doing it in place on the six campuses of our hospitals.”
Valley Health is also preparing for potential losses of 340B eligibility as Medicaid coverage changes affect hospitals’ Medicare disproportionate share percentages.
Against that backdrop, Mr. Nantz said further expansion of site-neutral payment could put additional pressure on hospitals, particularly in rural markets where they provide much of the available care.
“And the biggest problem with that is, if that were to happen, access to care, because we provide 90% of the care in our community, the physicians couldn’t provide it at scale at that cost,” he said. “So it’s going to impact access to care. I think rural healthcare will be disproportionately impacted.”
Mr. Nantz said the pressures will not change Valley Health’s commitment to investing in its communities, though he expects health systems to face more difficult decisions once Virginia’s directed payment program begins to change in 2028.
“We’re still going to take care of our community,” he said. “We’re still going to invest in our community. We’re still going to invest in services and access for as long as it makes sense.”
Dr. Jones said site-neutral policy has not changed where Inova invests its capital.
“At Inova, those decisions start with patient need, community access, and the clinical model, not with a reimbursement scenario,” he said. “We invest where care belongs. We monitor payment policy, of course, but we do not plan backward from it.”
What has changed, Dr. Jones said, is how early the system considers site of care when evaluating projects. Clinical, operational and finance leaders address that question at the beginning of the process rather than after a setting has been selected.
“Our job is not to force care into one setting or another,” he said. “Our job is to be clear about which care belongs where, and then invest Inova’s nonprofit resources, which are ultimately our community’s resources, accordingly.”
Cedars-Sinai, meanwhile, began preparing for broader financial pressures more than a year ago through Accelerating Excellence, an organizationwide initiative focused on increasing revenue and reducing expenses. The effort includes improving operating room efficiency, reducing hospital length of stay, expanding outpatient access, increasing philanthropy and pursuing opportunities to commercialize intellectual property from the system’s research enterprise.
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