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MedPAC Mulls Draft Recommendations for 2008

By John Reichard, CQ HealthBeat Editor

December 7, 2006 -- The Medicare Payment Advisory Commission unveiled a draft recommendation Thursday that would increase Medicare inpatient hospital rates in fiscal 2008 by a projected "market basket" increase in the costs of providing such care minus 0.65 percentage points. The subtraction from the market basket figure is an adjustment to account for growth in productivity of providing inpatient care.

The panel also unveiled a draft recommendation for Medicare outpatient hospital payments that would provide for the same level of increase for that sector: market basket minus 0.65 percentage points.

MedPAC, an independent federal body established to advise Congress on issues affecting the Medicare program, will vote on final versions of the recommendations at a meeting next month. MedPAC Chairman Glenn Hackbarth said the draft recommendations were the same as the payment recommendations made by the advisory commission last year and may well change once they are voted on in final form in January. They should merely be viewed as a starting point for discussion, he said.

American Hospital Association Senior Vice President for Advocacy Carmela Coyle said the draft recommendations would amount to an increase of 2.55 percentage points, but argued that the commission might not make the adjustment relating to productivity growth.

Even with a full market basket increase—which she said would be 3.2 percent in fiscal 2008—hospital profit margins on Medicare patients would decline, she said. Citing data released at the commission meeting Thursday, she said Medicare—reflecting both inpatient and outpatient services—would slide to a negative 5.4 percent, down from a negative 3.3 percent in 2005.

Making the case why the panel might vote for a full market basket increase, Coyle noted comments by commission member Ralph W. Muller that if ever there were a year for a full market basket increase, fiscal 2008 would be it. Muller noted that a negative margin of 5 percent "starts to be a serious number" and that the 2 percentage point slide in margins is probably "the biggest drop that we've projected all these years in a margin."

But another commission member, former Congressional Budget Office Director Douglas Holtz-Eakin, asserted that hospitals appear to be in good shape financially because of capital outlays by existing facilities and a desire by new players to get into the hospital market.

Medicare is only part of the story, however. Revenue from other insurers is boosting the financial condition of hospitals, lessening the ill effects of Medicare payments. Congress rarely grants a full market basket update to hospitals.

In another draft recommendation, MedPAC said that "indirect medical education" payments—known as "IME" and made to teaching hospitals ostensibly to reflect higher costs involved in providing care because of the education the facility provides to medical students—should be reduced by 1 percentage point in fiscal 2008. That would bring the payment add-on for IME down to 4.5 percent.

Under the draft recommendation, the money saved would be added back to payment rates for all hospitals. The rationale for the recommendation is that with the implementation of "severity adjustment" that would pay teaching facilities more for sicker patients, the IME payment they receive should be chopped.

Other draft recommendations called for eliminating a payment update for skilled nursing facilities and home health agencies, which on average showed healthy Medicare margins in 2005—13 percent in the case of freestanding SNFs and 16.7 percent in the case of freestanding home health agencies.

A draft recommendation for inpatient rehabilitation facilities would eliminate a payment update for those facilities in fiscal 2008. Although their Medicare margins averaged 13 percent in 2005, they are projected to fall to 2.7 percent in 2007 because of the "75 percent rule," which refers to the percentage of certain types of patients a facility must have to qualify for relatively generous inpatient rehabilitation payments.

But doing what MedPAC did last year might not be the right thing in the case of IRFs, said Hackbarth, apparently referring to the plummeting margins.

Similarly, a draft recommendation for long-term care hospitals would eliminate the payment update for those facilities in 2008. Its Medicare margins averaged 11.8 percent in 2005, but will fall to between zero and 2 percent in 2007, a MedPAC staffer said. A rule limiting how many patients acute care hospitals can refer to long-term care hospitals within the same facility is behind the drop.

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