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Under Medicare, many health care services can be provided in a range of ambulatory settings, and improvements in technology and delivery mean that many services no longer require an inpatient hospital stay. Medicare's payment for physician work and malpractice liability expenses is the same regardless of where a service is provided. However, payment differentials exist between settings for the facility-related components of care, such as nursing and other staff salaries, equipment, buildings, and supplies. A three-phase RAND study examined the available data on various procedure costs and payment differentials and the bundling or packaging of services offered to Medicare beneficiaries in physician offices, ambulatory surgical centers, and hospital outpatient departments. Building on exploratory analyses conducted in the first two phases of the study, this report documents findings from the third phase, which sought to identify options for modifying Medicare payment policies to improve the value of services and address the differential in the amount that Medicare pays for similar facility-related services in various settings. The findings confirm that payments tend to be highest for services provided in hospitals, but they also indicate that payment differentials generally exceed cost differentials and vary by procedure. The proposed policy options offer solutions to standardize these differentials and potentially reduce Medicare spending.

The research described in this report was sponsored by the Assistant Secretary of Planning and Evaluation in the U.S. Department of Health and Human Services and was conducted in RAND Health, a division of the RAND Corporation.

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