Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Newsletter Article


MedPAC's Take: Hospitals, Doctors Should Get a 1 Percent Bump in Payment Rates

By John Reichard, CQ HealthBeat Editor

The Medicare Payment Advisory Commission (MedPAC) voted to recommend to Congress that inpatient and outpatient Medicare hospital payments rise by 1 percent in fiscal 2012—too small an increase, according to the hospital industry.

The commission also decided to recommend that payment rates under the physician fee schedule should grow by one percent, and those for ambulatory surgery centers should increase by .5 percent. MedPAC will issue the recommendations to Congress in March.

An American Hospital Association (AHA) official said the hospital outpatient payment recommendation should have called for a "market basket" increase, currently estimated to be 2.6 percent in fiscal 2012, not the smaller 1 percent hike. The market basket refers to an index that measures annual changes in the cost of delivering medical care.

The official, AHA senior associate director for policy Joanna Kim, added that the inpatient payment was reduced too much to compensate for what MedPAC refers to as "documentation and coding improvements," or "DCI."

MedPAC had contemplated recommending an inpatient payment update of 2.5 percent, but lowered that figure by 1.5 percentage points because of "DCI." The result was the one percent increase recommendation.

MedPAC is also supposed to account for productivity gains in calculating recommended payment changes. But commissioners said that a productivity adjustment should not be made in 2012. They decided the adjustment, which would reduce payments, is not warranted because of the DCI adjustment.

MedPAC Chairman Glenn Hackbarth added, however, that this does not mean productivity adjustments shouldn't be made in future years.

Tug of War Over DCI

DCI is an ongoing bone of contention between the Centers for Medicare and Medicaid Services (CMS) and the hospital industry. The term refers to changes in the way hospitals have billed for payments since the 2007-09 adoption by Medicare of an "MS-DRG" system designed to more accurately account for the costs of care. The MS-DRG system entails more precise assessments of the severity of illness of patients admitted to the hospital.

The new payment system "created financial incentives to better document and code secondary diagnoses," said MedPAC staffer Jeff Stensland. DCI "increased payments, without any real change in average patient complexity or the cost of care," he added.

By law, the changes from adopting the MS-DRG system were not supposed to increase or decrease Medicare payments, which means the higher payments must be recouped, MedPAC officials say.

But hospitals and MedPAC are at odds over how much payments should be reduced to account for DCI and over what period of time.

The inpatient payment recommendation adopted last week also said that Congress should "require the secretary of Health and Human Services to make adjustments to inpatient payment rates in future years to fully recover all overpayments due to documentation and coding improvements."

But MedPAC says the financial shock for hospitals would be too great if DCI were recouped in one fell swoop. To prevent future DCI overpayments, a 3.9 percentage point reduction in Medicare hospital inpatient payments would be required. However, the recommendation would only require 1.5 percentage points of that to be recouped in fiscal 2012, leaving the remaining 2.4 percentage points to be recovered in future years.

But AHA's Kim said that the estimates of DCI-related overpayments MedPAC is relying on are too large. So, she said, the 1.5 percentage point adjustment for DCI in 2012 should be "quite a bit smaller."

MedPAC calculates that overall hospital profit margins on Medicare patients were minus 5.2 percent in 2009. But the commission said hospitals are profitable overall because of higher private sector insurance payments. Thus, overall hospital profit margins in 2009 were a positive 3 percent.

MedPAC says these higher private insurance payments tend to make a number of facilities less careful than they should be about controlling costs. Efficient hospitals in 2009 had a positive Medicare margin of 3 percent, according to MedPAC data.

Commissioners in December had expressed the need, however, for some type of financial warning system to signal that hospitals are going to go under because of the overall negative Medicare margins.

At last week's meeting, MedPAC staffer Stensland said such an early warning measure that looks at hospital cash flow (called "EBITDAR") shows that a relatively small proportion of hospitals in 2006—five percent—had negative cash flow. That percentage was unchanged in 2009, Stensland noted. The figures suggested a continuation of the recent trend toward only a relatively small percentage of annual hospital closures, the analyst said.

MedPAC calculates that the hospital payment recommendation would increase Medicare spending by between $250 million and $750 million in fiscal 2012 and would save between $1 billion and $5 billion over a five-year period as past DCI-related overpayments are recovered.

Doctor payments

As signaled by the December meeting, the commission urged a 1 percent increase in the physician fee schedule.

MedPAC's latest estimate is that payments to doctors next year under Medicare's controversial payment formula will fall 25 percent unless Congress intervenes. The American Medical Association warns that more and more Medicare beneficiaries face problems getting access to care because of physician disgust with payment levels.

Hackbarth devoted considerable time to explaining the apparent disconnect between MedPAC surveys to detect problems of Medicare patients getting access to doctors and reports received by some members of Congress about access problems.

Hackbarth said that survey data shows that only a relative handful of Medicare patients have to look for a primary care doctor each year and that of this small group, only a small fraction have access problems. The net result is that only a couple of percent of Medicare patients have trouble finding a doctor, he said. Access by Medicare patients to physicians is as good as or better than in the under-65 population, he added.

Hackbarth acknowledged that there are some congressional districts in which lawmakers field lots of complaints about access. But he said that doesn't mean MedPAC survey data is inaccurate. It's national data, he noted, and access may be more difficult in some local areas than in others. Also, the reason for access problems may not be that Medicare payment rates are too low but that there aren't enough primary care doctors in a particular area, affecting both Medicare and privately insured patients, he added.

Nevertheless, two percent of Medicare patients with access problems "is a lot of people"—about 900,000. And breaking that down further per congressional district, "that's still a lot of people. People are experiencing significant access problems we need to worry about," he said.

Commissioners expressed some frustration with simply looking at Medicare payment levels in considering the adequacy of Medicare payments. For example, doctors can order more tests and procedures to boost income even if payment rates are relatively low.

The volume of physician services per beneficiary continues to grow, according to MedPAC data. By one measure, physicians average $273,000 in annual income, according to MedPAC information recently released.

Publication Details