Former White House advisor on the real reason your health care costs are going up: Medicare’s doctor pay gap

Physician employment by or affiliation with hospital systems rose from 29% in 2012 to 47% in 2024, driven in part by Medicare payment differentials that reimburse hospital outpatient departments far more than independent physician offices (examples: $1,375 vs. $862 for a colonoscopy; hospital OPD reimbursements 124%–861% of lower-cost settings across 32 procedures). Inflation-adjusted Medicare physician pay fell ~33% between 2001 and 2025, prompting practice sales and vertical integration that studies link to price increases (e.g., a 10-percentage-point rise in integration associated with a ~1.0% primary care price increase). Adopting site-neutral payments is proposed to restore competition and could save Medicare an estimated $202 billion over a decade while reducing beneficiaries' premiums and cost-sharing by about $134 billion.

Analysis

Market structure: Hospitals and health systems (HCA, UHS, CYH) are clear near-term winners because Medicare’s site-based add-on pays 30–100%+ more for identical services (example: colonoscopy $1,375 vs $862), which subsidizes physician acquisitions and drives physician-employment from 29% (2012) to 47% (2024). Insurers (UNH, HUM) face higher claim costs but can pass through premiums over time; independent physician practices and standalone ASCs are the direct losers absent policy change. Consolidation materially increases hospital pricing power—academic estimates show a 10ppt vertical integration ≈ 0.5–1.0% price uplift in specialties—implying persistent margin tailwinds for large systems in next 6–24 months.

Risk assessment: Tail risks include rapid CMS/site-neutral rule adoption or favorable legislation that could remove hospital add-ons, producing mid-single-digit to high-single-digit revenue hits to outpatient-focused hospitals over 12–36 months and compressing EV/EBITDA multiples by 10–25% in stressed scenarios. Near-term (days–weeks) risks are M&A headlines and earnings guidance; short-term (months) is CMS rulemaking and lobbying; long-term (years) is structural rebalancing of site economics. Hidden dependencies: payer contract resets, state Medicaid reforms, and hospital REIT covenants can amplify financial stress.

Trade implications: Tactical relative-value: favor public ASC/operator exposure (Surgery Partners, SGH) and outpatient-focused PE-like platforms while hedging large hospital operators (HCA) with put spreads. Options can express conviction: buy 9–12 month calls on ASCs and collar/put-spreads on hospitals to cap capital at risk. Rotate 2–4% portfolio weight from general hospital REITs/hospital-equity into insurers (UNH) and ASCs if regulatory signals (see catalysts) turn positive within 6–12 months.

Contrarian angles: Consensus assumes either permanent hospital victory or immediate site-neutral adoption; reality likely is staggered, partial policy change over 12–36 months with carve-outs—this creates mispricings. Hospitals’ current valuations already price consolidation benefits; therefore small, hedged shorts (or put spreads) capture skew without overexposure. Historical parallel: 2010s site-neutral attempts stalled—so active catalyst-watching and staged sizing (scale into positions upon rule milestones) is superior to blunt long/short bets.

Key Decisions for Investors

• Establish a 2–3% long position in Surgery Partners (SGH) via stock or buy 12-month at-the-money calls (target +25–40% if site-neutral momentum builds within 12 months); size to 2–3% of portfolio, take profits at +30% or if CMS explicitly rejects site-neutral measures.
• Hedge hospital exposure by initiating a 1–2% short-protection position on HCA Healthcare (HCA) using a 3–6 month put spread (buy 10–15% OTM put, sell 5% OTM put) to limit capital while targeting a 5–15% downside if site-neutral cuts materialize within 12–24 months.
• Add a 2% long in UnitedHealth Group (UNH) via 12–24 month calls or stock to capture potential medical-cost tailwinds if site-neutral reforms advance; increase to 4% allocation if a bipartisan bill reaches >150 co-sponsors or CMS proposes >3% aggregate outpatient payment reductions.
• If within the next 90–365 days CMS OPPS proposed/final rule language includes explicit HOPD payment parity or a Congressional bill achieves >200 co-sponsors, reallocate up to 50% of hospital/healthcare-equity exposure into ASCs and large insurers over a 30-day window (scale in 25% increments).