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Hospitals Would Get Modest Rate Increase Under Draft MedPAC Proposal

By Rebecca Adams, CQ HealthBeat Associate Editor

December 2, 2010 -- Hospitals would receive a 1 percent net increase in inpatient and outpatient payment rates in fiscal 2012 under a draft recommendation issued by the influential Medicare Payment Advisory Commission (MedPAC).

The draft language could change before the commission votes in January on final recommendations to send to Congress. After the final recommendations are released, Congress would then have to clear legislation approving the changes. Lawmakers have a mixed record of accepting MedPAC's suggestions.

Officials for the American Hospital Association (AHA) expressed concern about the impact of the proposal, particularly on outpatient departments whose costs to treat Medicare patients significantly outpace the funding they get from the program.

"We disagree with the update," said Joanna Kim, AHA senior associate director for policy. In remarks to commissioners, Kim urged the panel to reconsider both the inpatient and outpatient rates. She emphasized that hospital outpatient centers need a full update reflecting increases in costs, which commission staff estimated would be about 2.6 percent.

Commission staff estimated that hospital margins were negative in 2009, meaning that payments from Medicare were less than treatment costs. Payments were 5.2 percent less than costs in 2009, an improvement from 7.1 percent in 2008 and 6.0 percent in 2007. Just for inpatient care, the margins were –2.4 percent while the outpatient margins were –10.8 percent.

Before Kim gave the hospital industry's objections, commissioners appeared supportive of the draft recommendation, although several expressed concerns about the factors used to arrive at the recommendation.

MedPAC Chairman Glenn Hackbarth came up with the proposal after studying hospitals' estimated margins. He said he believed it was important to give hospitals a modest rate increase and decided on the 1 percent number. He said he then looked for factors to support the decision, factoring in such issues as payment changes tied to coding problems, productivity and the overall hospital margins.

Commissioners spent a good deal of time discussing details of those components.

Hospitals were overpaid in 2008 and 2009 because of coding changes. The Centers for Medicare and Medicaid Services is in the process of recapturing some of those overpayments. CMS officials also are supposed to reduce future payments at some point to prevent further overpayments. But the agency has not yet taken this step and is not under a deadline to make that change, so Hackbarth is proposing a coding adjustment amounting to a 1.6 percent decrease in payments in order to encourage CMS to act as soon as possible.

Hackbarth combined that 1.6 percent decrease with other adjustments to arrive at the 1 percent figure.

Kim said that her group does not believe hospitals were overpaid as much as CMS officials believe. She said that it is important to get accurate estimates because "every small percent" change in coding payments "is very important." A 0.1 percent change is worth $100 million to hospitals, which means that the MedPAC draft recommendation would represent a $1.6 billion loss.

However, Hackbarth took into account that hospitals would lose money under that proposal. He recommended compensating for that by helping hospitals with another factor. Under current law, hospitals are expected to get a –1.4 percent productivity update; Hackbarth recommended changing that to zero. That change, accompanied by the reductions aimed at preventing coding overpayments, allowed Hackbarth to support an overall 1 percent increase while still pushing CMS to avoid additional overpayments.

Commissioners Scott Armstrong, president and CEO of the Seattle-based Group Health Cooperative, and Peter Butler, executive vice president and chief operating officer of Rush University Medical Center in Chicago, raised concerns about the continued trend of hospitals receiving lower payments than costs. Armstrong, saying he wondered about the sustainability of the ongoing negative margins, asked whether commissioners should have some target margin that they believe is adequate.

But Hackbarth said that the 17-member commission should not recommend an increase in rates just to push up hospitals' margins. On the contrary, he said that hospitals become more efficient when under financial stress. He also noted that since the backlash against managed care plans, insurers' payments to hospitals "in many markets have been pretty generous for the past 10 years or so." That allows hospitals to make up for lower Medicare payments.

Hackbarth said that Medicare and preferably all payers, including insurers, should put more financial pressure on hospitals. "When institutes face pressure, they're able to reduce their costs," Hackbarth said.

That's partly because many hospitals are nonprofits, and "if you provide more money, most of it's going to be spent" pursuing the hospital's mission, Hackbarth said. "You're just going to be chasing your tail and never deal with escalating costs as a problem."

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