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MedPAC Releases Draft Recommendations for Changes in Medicare Payments

DECEMBER 8, 2005 -- A key congressional advisory panel unveiled a draft recommendation Thursday that would increase Medicare hospital inpatient payments in fiscal 2007 by about 0.45 percentage points less than the "market basket" increase in the projected costs of hospital inpatient care.

If Congress accepts the recommendation the increase in Medicare hospital inpatient spending next year would be smaller than the amount provided under current law. The current law calls for yearly full market basket increases in hospital inpatient payments. However, Congress rarely approves increases at the full market basket rate.

The panel, the Medicare Payment Advisory Commission, will vote next month on whether to actually make the recommendation in a report to Congress next March.

MedPAC Chairman Glenn Hackbarth emphasized that for several sectors—hospitals, dialysis, home health, and skilled nursing facilities—the draft recommendations unveiled Thursday simply repeated last year's recommendations. He cautioned against assuming that the final recommendations would be similar to the drafts.

The commission also unveiled a draft recommendation that would reduce the market basket update in fiscal 2007 by 0.45 percent for Medicare hospital outpatient payments. The 0.45 percentage point figure 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.

The market basket increase for fiscal 2007 is projected to be 4 percent. That means that under the draft the hospital payment increase recommended by the panel would be 3.55 percent. But Commission Chairman Glenn Hackbarth emphasized that the draft recommendation may not be the final one.

A spokeswoman for the American Hospital Association said the bottom line is that hospitals would see payment increases of about 3 percent while costs rise at 4 or 5 percent. She urged the panel to consider recommending a higher increase. According to MedPAC data released Thursday, overall Medicare margins for hospitals in 2006 are projected to be minus two percentage points compared to minus three percentage points in 2004. Medicare margins for inpatient care specifically averaged minus 0.3 percentage points in 2004, MedPAC staff said. They noted that, overall, the negative Medicare margins are being more than offset by relatively generous private insurer payments.

In its first review of payments to inpatient rehabilitation facilities (IRF) under the sector's new prospective payment system (PPS), the commission found profit margins on Medicare patients to be very high. When "PPS" was adopted in 2001, Medicare margins were 1.5 percent, but then rose into the double digits. In 2004 they reached 16.3 percent.

MedPAC staff estimated however that because of the "75 percent rule" to tighten eligibility for IRF care, the number of patients and the Medicare margins would drop. Staff projected that Medicare margins will fall to 8 percent in 2006 as a result.

However, if pending language in the Senate version of reconciliation is approved—language implementing the rule more gradually—the Medicare margins would be 12 to 15 percent, staff said. Under a draft recommendation unveiled by the panel, Congress would increase payments to the facilities in 2007 by half the market basket increase in care costs, meaning a payment increase of 1.8 percent.

The PPS system appears to have been very, very good to long-term care hospitals (LTCH) as well. Before PPS, Medicare margins were near zero. After its adoption in 2002 margins climbed to 5 percent in 2003 and to 9 percent in 2004, MedPAC staff said. They projected 2006 Medicare margins of 7.8 percent. The commission is considering a recommendation that Congress eliminate the payment update to LTCHs in 2007.

In the skilled nursing facility sector, staff found that Medicare margins averaged 13.5 percent for freestanding facilities in 2004 and projected that they would fall to 9.7 percent for those facilities in 2006 because of changes including an end to certain temporary payments. The commission is considering a draft recommendation that Congress eliminate the payment update to skilled nursing facilities in 2007. But staff also found overwhelmingly negative Medicare margins for hospital-based skilled nursing facilities in 2004—minus 86 percent. That led to some brief discussion at Thursday's event about having a payment increase specifically for those facilities.

Similarly, the commission is considering a draft recommendation of no payment increase for home health agencies in 2007 after releasing new data Thursday showing that Medicare margins in the sector averaged 16 percent in 2004 and are projected to reach 16.9 percent in 2006.

For freestanding dialysis, the panel is considering a draft recommendation for 2007 that payments be increased by the market basket increase for the sector, or 3.2 percent, minus 0.45 percent to adjust for productivity. Medicare margins for the sector are projected to be negative 2.9 percent in 2006, a figure that includes Medicare payments for dialysis services and drugs.

In the area of Medicare oncology payments, MedPAC adopted several final recommendations to be made to Congress in January. It said HHS should use its demonstration authority to test innovations in the delivery of care, but not as a mechanism to increase payments. It added that HHS should require providers to enter a patient's hemoglobin level on all claims for erythroid growth factors, which are used to treat anemia. That data should be used as part of an effort to develop a Medicare payment for performance system.

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