I learned about facility fees the hard way during my residency rotations. Same colonoscopy, same physician, same equipment. But when performed in the hospital outpatient department versus the physician's office, the bill was literally double.
Hospital facility fees represent one of healthcare's most perverse incentives—a payment structure that rewards inefficiency while punishing independent practices. They're also a major driver behind physician consolidation trends we're seeing nationwide.
These facility fees create unfair competition that's pushing more doctors to sell their practices to hospital systems. Understanding this payment quirk explains a lot about why healthcare costs keep rising despite technological improvements.
In this article, I'll break down what facility fees actually are, explain how they drive up costs for patients and payers, and discuss why fixing this payment disparity could slow healthcare consolidation.
The Deets: What Are Hospital Facility Fees
Hospital facility fees are additional charges that hospitals can bill when providing outpatient services in hospital-owned facilities, separate from the physician professional fee for the actual medical service.
How Facility Fees Work
When you receive care at a hospital outpatient department, you get two separate bills:
Professional fee: Pays the physician for performing the service
Facility fee: Pays the hospital for providing the space, equipment, and support staff
The identical medical service costs significantly more when performed in a hospital setting versus an independent physician's office due to the facility fee.
Facility fees apply when services are provided:
On hospital campus property
In hospital outpatient departments
In physician offices acquired by hospitals (if located on campus)
Sometimes in off-campus hospital-owned clinics
Why Facility Fees Exist (Theoretically)
Hospitals argue that facility fees compensate for legitimate additional costs:
Higher Overhead: Hospital facilities have higher fixed costs for 24/7 operations, emergency preparedness, and regulatory compliance.
Advanced Equipment: Hospitals maintain more sophisticated equipment and technology than typical physician offices.
Support Services: Hospital settings provide immediate access to lab, imaging, pharmacy, and emergency services.
Standby Capacity: Hospitals must maintain capacity for emergencies and complex cases.
Regulatory Requirements: Hospitals face more stringent accreditation, safety, and quality reporting requirements.
Facility Fees and Physician Consolidation
Facility fees create a powerful economic incentive for hospital-physician consolidation while disadvantaging independent practices.
The Consolidation Incentive
Revenue Multiplication: When hospitals acquire physician practices, they can immediately start billing facility fees for services previously provided at lower cost.
Competitive Advantage: Hospital-employed physicians become more profitable per service, allowing hospitals to offer higher salaries and better benefits.
Market Share Growth: Lower-cost independent practices struggle to compete when hospitals can subsidize physician salaries with facility fee revenue.
Defensive Strategy: Independent physicians face pressure to join hospital systems to access the same facility fee revenue streams.
The Market Distortion
According to a GAO report:
Office visits in hospital outpatient departments grew from 10% to 13% of Medicare visits (2012-2019)
This shift increased Medicare spending by $615 million and beneficiary cost-sharing by $150 million (2015-2019)
Chemotherapy administration in hospital settings rose from 35% to 51% of Medicare treatments
Policy Solutions and Reform Efforts
Multiple stakeholders have proposed solutions to address facility fee distortions:
Site-Neutral Payments
Concept: Pay the same amount for identical services regardless of location.
Congressional Action: Limited site-neutral payment rules for certain hospital outpatient departments (Bipartisan Budget Act of 2015).
Potential Savings: Congressional Budget Office estimates site-neutral payments could save $157 billion from 2025-2034.
Industry Resistance: Hospitals argue site-neutral payments threaten their ability to provide emergency services and maintain safety net care.
Transparency Requirements
Price Disclosure: Require hospitals to clearly communicate facility fees before services.
Bill Clarity: Separate facility fees clearly on patient statements.
Geographic Restrictions
Campus Limitations: Restrict facility fees to on-campus hospital services only.
Distance Rules: Prohibit facility fees for off-campus clinics beyond certain distance from main hospital.
Dashevsky's Dissection
Facility fees represent a classic example of how payment policy shapes market structure in healthcare. What started as a reasonable way to account for hospital overhead has become a tool for market consolidation that raises costs without improving outcomes.
The irony is profound: we're paying more for the same services in the name of supporting hospital infrastructure, while simultaneously destroying the lower-cost independent practice infrastructure.
From a physician's perspective, facility fees create impossible competitive dynamics. Independent practices provide identical services at a lower total cost but can't compete with hospital salaries subsidized by facility fee revenue.
Patients lose twice—higher costs and reduced choice as independent practices disappear.
The consolidation feedback loop is particularly concerning. As more physicians join hospital systems, fewer independent alternatives remain, reducing competitive pressure on facility fees.
Policy solutions exist but face predictable resistance. Hospitals argue facility fees fund safety net services and emergency preparedness. Some of this is true, but much represents rent-seeking behavior in a market with limited transparency and patient choice.
Site-neutral payments offer the most direct solution but require political will to override hospital lobbying. The Congressional Budget Office's $157 billion savings estimate suggests substantial public benefit from reform.
For physicians considering practice options, understanding facility fees illuminates why hospital employment often pays more—it's not necessarily about efficiency or better care, but about payment policy that allows hospitals to charge more for identical services.
The broader healthcare system would benefit from payment structures that reward value and efficiency rather than consolidation and market power.
In summary, hospital facility fees create artificial cost differentials that drive physician consolidation while raising healthcare costs. Addressing this payment disparity through site-neutral policies could reduce consolidation pressure and healthcare spending simultaneously.
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