Two employees get the same knee arthroscopy from the same surgeon in the same city. One has it done in a hospital outpatient department, the other in a freestanding surgery center down the road. The clinical care is identical. The bill your health plan pays is not. For a self-funded employer, that gap is not a rounding error. It is one of the largest sources of waste hiding inside your claims data, and almost none of it shows up on a renewal spreadsheet.
- Medicare already pays 2 to 4 times more for the same outpatient service in a hospital department than in a physician office, according to MedPAC.
- RAND's 2024 study found commercial plans pay 279% of Medicare for outpatient hospital facility care versus 171% at ambulatory surgery centers.
- Steering an eligible procedure from a hospital department to a surgery center can cut the facility charge by roughly 39% before touching physician or drug costs.
- The levers are site-of-service steerage, prior authorization on hospital-based imaging and infusion, reference pricing on facilities, and reading your own transparency files.
What a facility fee actually pays for
When a hospital owns the building where care happens, it bills two separate charges. One is the professional fee, which pays the physician for the work. The other is the facility fee, which pays the hospital for the room, the equipment, the staff, and the overhead of being a hospital. A physician office bills only the professional fee. An ambulatory surgery center bills a facility fee too, but a much smaller one.
The catch is that hospitals have spent the last decade buying up physician practices and outpatient clinics. Once a hospital owns a clinic, that same clinic can bill a facility fee it could not charge the year before. Nothing about the exam room changed. The billing address did. Your plan now pays for a doctor visit plus a hospital, for a service that used to cost one line item.
The premium Medicare already flagged
The Medicare Payment Advisory Commission, the independent body that advises Congress on Medicare, has documented this for years. Medicare itself pays 2 to 4 times more for the identical outpatient service when it happens in a hospital outpatient department instead of a freestanding office or surgery center. In one analysis, a single drug-administration visit cost Medicare about 186% more inside a hospital department than in a physician office. Same drug, same needle, same chair.
This is not a fringe finding. Independent estimates put the ten-year Medicare savings from paying the same rate regardless of site at roughly $18 billion for off-campus hospital departments alone, and far higher when on-campus departments are counted. Congress calls the fix site-neutral payment. The reason it keeps coming back is that the differential is enormous and the clinical justification for it is thin.
Here is why that matters to a private employer plan. Medicare negotiates hard and still pays a large hospital premium for site of service. Your plan negotiates from a weaker position, so your premium is larger.
What commercial plans actually pay
RAND published the fifth edition of its hospital price study in May 2024, using 2022 claims from employers and health plans across the country. The headline number: private plans paid 254% of what Medicare paid for the same care overall. Break it apart and the site problem jumps out.
- Inpatient hospital facility care: 254% of Medicare
- Outpatient hospital facility care: 279% of Medicare
- Physician and professional services: 184% of Medicare
- Ambulatory surgery centers: about 171% of Medicare
Outpatient hospital facility care is the single most marked-up category in the study, and it is exactly the category that has been migrating out of low-cost offices and into hospital-owned departments. RAND also found wild geographic spread. Some states landed under 200% of Medicare. Others ran well past 300%, including large employer markets like California, Florida, Georgia, and New York. Where your employees live changes the size of the penalty.
The compounding math nobody puts on the renewal
Stack the two findings and you get a number most brokers never quantify. MedPAC shows that the site of service alone inflates the facility price. RAND shows how far above Medicare your plan already sits on that inflated base. The penalties multiply.
Take one outpatient procedure. If the facility component runs 279% of the Medicare rate in a hospital outpatient department but 171% at a surgery center, moving an eligible case from the hospital to the surgery center drops the facility price to about 61% of what the hospital charged. That is 171 divided by 279. Call it a 39% cut on the facility line, and you have not touched the surgeon's fee or the cost of any drug involved.
Put real dollars on it. Say a given procedure carries a Medicare facility rate of $1,000. In a hospital department your plan pays around $2,790 for the facility piece. At a surgery center it pays around $1,710. That is $1,080 saved on one case, from a decision about where care happens, not what care happens. Run that across every steerable colonoscopy, cataract removal, injection, MRI, and minor orthopedic procedure your population had last year, and the total is rarely small.
Where the money hides in your own data
Self-funded employers own their claims data, which means the differential is sitting in a file you can already pull. Ask your third-party administrator for a report grouped by procedure code and place-of-service code. Place of service 22 is a hospital outpatient department. Place of service 24 is an ambulatory surgery center. Place of service 11 is a physician office. When you see high-volume outpatient procedures clustering in place of service 22, you are looking at the leak.
The federal transparency rules give you a second flashlight. Hospitals and health plans must publish machine-readable files listing negotiated rates. Your carrier's file shows what it agreed to pay each facility for each code. The gag-clause attestation your plan signs every year certifies you are allowed to see this. Most employers never open the files. The ones who do can compare, site by site, what a hospital department charges against the surgery center two miles away.
Five levers a self-funded employer can pull
Steer to the lower-cost site
Build a short list of high-volume, shoppable procedures that are clinically safe in a surgery center or office: routine imaging, colonoscopies, cataract surgery, many orthopedic scopes, and drug infusions. Then make the low-cost site the default path through your care-navigation vendor or nurse line, with the hospital reserved for cases that genuinely need it.
Require prior authorization on hospital-based imaging and infusion
Advanced imaging and specialty-drug infusions are two of the biggest facility-fee offenders. Requiring a quick prior-authorization step for those services performed in a hospital department, while approving the freestanding site automatically, redirects volume without denying anyone care.
Put a reference price on the facility
Reference-based pricing caps what the plan pays for a facility at a defined multiple of Medicare. Applied to outpatient facility charges, it turns the 279% problem into a number you set. Employees who choose a site that bills above the cap can be shown the difference before they book, not after.
Use incentives, not just rules
A waived copay or a small cash reward for choosing the surgery center changes behavior faster than a policy memo. When the employee keeps some of the savings, the steerage runs itself.
Design the network and centers of excellence around price and quality
Narrowing to sites that price fairly and perform well, and routing complex cases to a center of excellence, aligns cost and outcomes at the same time. This is where a self-funded plan can act like a purchaser instead of a passive payer.
What this looks like for a 200-employee plan
Consider a self-funded employer with 200 enrolled employees and a few hundred covered lives. In a typical year that population generates dozens of shoppable outpatient procedures: imaging studies, scopes, minor surgeries, and recurring infusions. If even half of those currently land in hospital outpatient departments and could safely move to freestanding sites, the facility-fee reduction on those cases alone can return five and sometimes six figures a year to the plan. The exact figure depends on your mix, your geography, and your contracts, which is why the first step is reading your own data rather than trusting a market average.
None of this asks employees to accept worse care. It asks the plan to stop paying a hospital premium for care that does not require a hospital. For a fully insured employer, the carrier keeps that saving. For a self-funded employer, it is yours to capture.
Related Reading
For more on the mechanics behind these strategies, explore these Benefitra articles:
- Healthcare Price Transparency: What Employers Are Required to Do
- High-Cost Claimants: Protecting a Self-Funded Plan From Outlier Claims
- Level-Funded vs Reference-Based Pricing for Mid-Size Employers
- Network Adequacy: A Mid-Market Employer Guide
Frequently Asked Questions
What is a hospital facility fee?
A facility fee is a separate charge a hospital bills for the use of its building, equipment, and staff, on top of the physician's professional fee. Physician offices do not bill it. Ambulatory surgery centers bill a smaller version. When a hospital buys a clinic, that clinic can start billing a facility fee for the same visit it provided before without one.
Why does the same procedure cost more in a hospital than a surgery center?
The clinical work can be identical, but the site bills differently. MedPAC has found Medicare pays 2 to 4 times more for the same outpatient service in a hospital department than in an office or surgery center. RAND's 2024 study found commercial plans pay 279% of Medicare for outpatient hospital facility care versus about 171% at surgery centers.
How can a self-funded employer find these charges in its own data?
Ask your third-party administrator for a claims report grouped by procedure code and place-of-service code. Place of service 22 marks a hospital outpatient department, 24 marks an ambulatory surgery center, and 11 marks a physician office. High-volume procedures clustering in place of service 22 point to where the facility-fee spend is concentrated.
Does steering employees to lower-cost sites reduce their quality of care?
No. Steerage targets procedures that are clinically safe in a freestanding setting, such as routine imaging, colonoscopies, cataract surgery, and many infusions. Complex cases still go to the hospital or a center of excellence. The goal is to stop paying a hospital premium for care that does not require a hospital.
What is site-neutral payment?
Site-neutral payment means paying the same rate for a service regardless of where it is delivered. Medicare has debated it for years because the hospital premium is large and hard to justify clinically. A self-funded employer can apply the same logic through plan design, using reference pricing and site steerage to cap what the plan pays for facility charges.