Traditional Medicare Beneficiary Coinsurance for Hospital Outpatient Services

Medicare hospital outpatient services are paid under Part B. Thus, they are subject to 20 percent coinsurance, as are most other Part B services.

The Medicare Payment Advisory Commission and the Centers for Medicare & Medicaid Services have noted a rise in the number and length of hospital “observation” stays. Patients in observation status are classified as hospital outpatients, not inpatients, even if they are in a hospital setting for more than 24 hours and are using a hospital bed. The consequences and costs of this classification can be significant. For an observation stay, beneficiaries must pay a percentage of the allowed charge for each outpatient service, including the observation. There is no cap on how much they may owe for multiple outpatient services. As an inpatient, their costs would be limited to the inpatient deductible amount.

Additionally, because oral medications and other self-administered drugs are not covered under Part B (but rather Part D), beneficiaries under observation are often responsible for the full hospital charges for these drugs and must retroactively seek reimbursement from their Part D plan or other coverage, if applicable. The cost of these drugs in this setting can be many times the cost of buying the same drugs in a nonhospital pharmacy.  

These out-of-pocket costs can quickly add up, in particular for beneficiaries on fixed incomes. Finally, time spent under observation does not count toward the three-day prior inpatient stay generally required for Medicare to cover subsequent skilled-nursing facility services. Therefore, someone who needs this postacute care may not qualify for coverage, despite spending more than three days in the hospital under observation (see also Traditional Medicare Provider Payment—Postacute Care).

In 2015, the Bipartisan Budget Act mandated that Medicare pay providers a rate equivalent to the physician office rate for all hospital outpatient care provided in sites located outside of hospital grounds (off-campus HOPDs) established after passage of the bill. However, the law exempted existing (grandfathered) off-campus HOPDs and did not apply to on-campus HOPDs. In both those sites, outpatient care providers receive a facility fee in addition to the physician office rate. Additionally, the law created a loophole wherein a hospital could purchase a physician’s office, relabel it as an HOPD by adding it to a grandfathered off-campus HOPD, and receive higher payments for services provided in former physician offices. As a result, beneficiary coinsurance for outpatient services provided in grandfathered off-campus HOPDs, previously freestanding health care provider offices relabeled as off-campus HOPDs, and on-campus HOPDs, is generally higher than the coinsurance under the physician fee-schedule rate.

These site-based payments have contributed to the yearslong trend in hospital or health system acquisition of physician practices. In some cases, physician practices that have been purchased or acquired by hospital outpatient departments miles away may bill Medicare these higher rates as “off campus” hospital outpatient departments (see also Transparency and Competition). 

Paying more for the same service based on the setting can have significant implications for how much consumers pay out-of-pocket for outpatient care. Those implications are both direct and indirect. When payment rates to providers are higher, as they are in hospital outpatient departments, beneficiaries’ pay more out-of-pocket. Moreover, Medicare’s site-based payments may also translate into greater costs for taxpayers who fund the Medicare program and higher Part B premiums for everybody with Medicare, including those with Medicare Advantage, Medicare’s private plan option.

In addition to their effects on consumers’ out-of-pocket costs, Medicare’s site-based payments increase the program’s overall spending and spending across the health care system.