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MedPAC Agrees on Final Payment Recommendations

JANUARY 10, 2006 -- A key advisory panel voted Tuesday to adopt a final recommendation that Congress increase Medicare hospital inpatient payments in fiscal 2007 by 0.45 percent less than the "market basket" increase in the projected costs of such care. Because the increase for fiscal 2007 is projected to be 4 percent, the recommendation by the Medicare Payment Advisory Commission (MedPAC) would amount to a 3.55 percent increase in inpatient payments next year under the Medicare prospective payment system.

The percentage point figure of 0.45 represents half of an adjustment the commission makes to account for productivity growth when it considers how much of a payment increase to recommend for hospital inpatient and outpatient payments.

MedPAC also adopted a final recommendation that Congress increase Medicare hospital outpatient payments by the same amount as for inpatient payments, market basket minus 0.45 percent. Although hospitals are running negative margins on Medicare patients, relatively generous private insurance payments more than offset those losses, commission staffers say.

MedPAC said that for the short term it is postponing any recommendation that addresses the relatively poor performance of rural hospitals under the outpatient prospective payment system.

The American Hospital Association said it was "dismayed" with MedPAC's vote to reduce the Medicare payment increases provided under current law.

"This poor decision ignores data detailing the pressures facing hospitals and fails to take into consideration the very serious impact any reduction in payment would have on hospitals and the patients we serve," Rick Pollack, the group's executive vice president, said in a statement.

Pollack also said that since 1997, hospitals' total Medicare margins have fallen steadily. And in 2004, 68 percent of hospitals lost money serving Medicare patients.

"With this evidence at hand, MedPAC's recommendation for less than a full market basket update is very troubling, and threatens hospitals' ability to continue to provide vital health care services," he said.

The panel, which files its payment recommendations with Congress on March 1, agreed that Medicare composite rate payments to outpatient dialysis facilities should be increased by the market basket increase for the sector, or 3.1 percent, minus 0.45 percent to adjust for productivity gains. Another recommendation adopted by the panel urges Congress to direct the HHS secretary to eliminate differences in payments to hospital-based and freestanding facilities for services under the dialysis composite rate. This recommendation also says the secretary should combine the composite rate and the add-on adjustment for dialysis drugs into a single bundled payment.

Commissioners agreed to a final recommendation that Medicare payments to doctors in 2007 be increased by the projected change in "input prices" for physician care minus an adjustment for productivity gains. In effect, the increase would be 2.8 percent. The one-year cost of such an increase would be more than $1.5 billion and $5 billion to $10 billion over five years.

Panel members also agreed to language advising the HHS Secretary to adopt a new procedure for reviewing the payment codes that designate the thousands of tests and services for which doctors can bill Medicare. The aim of the recommendation is to identity services that are "overvalued" for purposes of setting Medicare payment amounts. Now, the "Resource Utilization Committee" (RUC) that advises Medicare on payment codes focuses on updating payments for services for which doctors are paid too little and not enough on correcting those for which they are paid too much, commissioners said.

The recommendation calls for a new standing panel of experts to review recommendations by the RUC. Members should include not only doctors but also people "with expertise in health economics." HHS, in consultation with the panel, should identify new services likely to "experience reductions in value"—in other words, services for which doctors can be paid less because of declining costs of that particular type of care. "The services should be referred to the RUC and reviewed in a timely manner," MedPAC advises.

The reviews could have major implications. Whole industries rise and fall based on changes in payment codes, noted a financial analyst at the meeting.

The commission adopted a recommendation for no payment increase to home health agencies in 2007 after its staff released data in December projecting Medicare margins will reach 14.7 percent in 2006.

The panel approved a final recommendation to keep payments in fiscal 2007 to inpatient rehabilitation facilities the same as in fiscal 2006. And it also decided that Medicare payments to long-term care hospitals in 2007 should not be increased. MedPAC projects that profit margins on Medicare patients in those facilities will average 7.8 percent in 2006.

Commissioners also said Congress should not provide a Medicare payment increase to skilled nursing facilities (SNFs) in fiscal 2007. Profits on Medicare patients in such facilities will average 9.4 percent in fiscal 2006, according to commission data.

"We are disappointed that MedPAC recommended no inflation adjustment for SNFs in 2007, especially since the Commission reported last month that profit margins at non-profit SNFs are nearly zero," said Larry Minnix, president of the American Association of Homes and Services for the Aging. "MedPAC's mission does not allow it to analyze Medicaid payment rates," he added. "This recommendation only amplifies the need for our country to take a comprehensive look at how to overhaul long-term care financing to meet the needs of our aging population."

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