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Rural Hospitals See Better Chance Now of Fixing Massachusetts 'Manipulation'

By John Reichard, CQ HealthBeat Editor

January 22, 2013-- Hospital associations in almost two dozen states are once again trying to erase a provision of the health care law they say boosts Medicare payments to Massachusetts hospitals at the expense of facilities in other states.

After a failed attempt to do so last year, they think they've got a better shot in 2013.

A Jan. 16 letter from 20 state hospital associations and the National Rural Health Association says that because of the provision, Massachusetts hospitals obtained an additional $367 million in Medicare payments in fiscal 2012 that otherwise would have gone to other states. "If left uncorrected, hospitals in 49 states will experience reduced funding of more than $3.5 billion over the next ten years as a direct result of this manipulation," the letter says.

Many of the same state hospital associations lobbied a year ago to eliminate the provision, without success. They did so in a political climate in which Democrats did not want to reopen the health care law in fear of exposing it to many other attempts to change it.

Intervention by the Obama administration would disadvantage Massachusetts. But those who favor eliminating the provision are more hopeful now, because they see signs of support from within the administration, They also see a better chance this year Democrats will be willing to reopen the health care law (PL 111-148, PL 111-152) to tweak it in advance of its full implementation next year.

The provision, section 3141 of the health care law, relates to elements of Medicare payments called "the hospital wage index" and the "rural floor." The index is used to determine how a hospital's Medicare payments should be adjusted to account for its labor costs. The floor is a Medicare rule that requires hospitals classified as urban to be reimbursed at least as much as rural facilities for wages paid to doctors and staff.

When Medicare makes significant changes in payment levels to account for a hospital's wage rates, it does so in a budget-neutral way. So if one hospital gets paid a lot more under the wage index, that increase must be offset by reducing payments to another hospital or hospitals.

This budget neutrality provision has at various times either been enforced on a national or state basis. If it's done nationally, one hospital's increase is offset by reductions to hospitals nationwide. If it's done statewide, an increase at one hospital within a state comes at the expense of other hospitals in that same state, not nationally.

In fiscal 2008, the change in status of a 19-bed hospital on Massachusetts' Nantucket Island set the stage for a big increase in Medicare payments to hospitals throughout the state. The facility switched from being designated a "critical-access hospital" to being an "IPPS" hospital, which falls under Medicare's inpatient prospective payment system. The switch to IPPS triggered the rural floor requirement, which set up all other hospitals in the state to get higher payments because they were all classified as urban and would have to be compensated for wages at the same rate as the Nantucket facility and its high wage costs.

Centers for Medicare and Medicaid Services(CMS) officials saw the tactic as a manipulation of the payment system by Massachusetts hospitals that would come at the expense of hospitals nationwide. So it countered the move by saying that budget neutrality would be enforced on a statewide basis. So increases based on the wage index in the state would come at the expense of other hospitals in Massachusetts, and the state's hospitals as a whole would not benefit as they would under national budget neutrality. CMS also said it wanted four years' worth of cost reports from the Nantucket facility before calculating payment adjustments based on its wage expenses.

Enter the health care law. Section 3141 switched budget neutrality back to being national, not statewide. And on Oct. 1, 2011, the Nantucket facility got its wage index adjustment based on the four years of cost data. That produced the $367 million increase in Medicare payments in fiscal 2012. The huge imbalance of urban versus rural facilities in the state—the Nantucket facility was the only one designated as rural and all the others were urban—combined with the high wage rates on Nantucket meant a windfall for Bay State hospitals generally.

It also triggered the backlash from other state hospital associations. Hospital associations seeking removal of the section 3141 provision are from Alabama, Arkansas, Delaware, Georgia, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Virginia, West Virginia, and Wisconsin.

The 20 hospital associations were not alone in criticizing the health care law provision. In a July 11, 2011 Federal Register notice, CMS referred to it as a "manipulation." Former CMS Administrator Donald Berwick, an Obama administration appointee, was quoted in a Jan. 13, 2013, Boston Globe story as using the same word to describe the provision. In addition, House Republicans on the Ways and Means Committee and Republican Tom Coburn of Oklahoma in the Senate may pursue legislation to eliminate the provision.

The influential Medicare Payment Advisory Commission (MedPAC) also weighed in against the provision after the health care law passed. It said in a June 17, 2011, letter to Medicare officials that as a result of a change "in one small [Massachusetts] hospital's status" under the provision, "and the subsequent change in the wage index, payment rates for urban hospitals in Massachusetts will increase by 8 percent. ... These extra payments will be made budget neutral at the national level, and therefore all hospitals—including rural hospitals—will absorb the financial loss," MedPAC said in the letter. "This is a clear example of how the current system of exceptions is not an equitable method of adjusting for input prices. A new wage index system is needed."

The Massachusetts Hospital Association (MHA) defended the provision last year by saying that dropping it would harm 30 states. It also said the provision was supported by the American Hospital Association. In a statement Jan. 17, MHA said that "national budget neutrality is the norm, and has been since 1997. There are myriad other reimbursement adjustments under the Medicare program, which all-told benefit about a third of all hospitals in the country. These Medicare adjustments are paid for—and have always been paid for—using a national allocation to which all hospitals contribute. Thus there have always been winners and losers and Massachusetts has been on both sides of that equation."

The association added that "in 2008, the rural floor adjustment was singled out for different treatment under budget neutrality. What the federal health reform law did was simply reinstate the payment model to its original form."

Nevertheless, data that hospital sources say they obtained from CMS indicate that most states take a financial hit if the provision isn't eliminated. In an environment in which it may be easier to open up the health care law if Democrats want to tweak it to get ready for full implementation in 2014, critics of the provision may have a better chance of eliminating the provision this year than they did last year. But while the great majority of states would likely be on their side, opposition could come from some other states in addition to Massachusetts.

While critics of the provision say it comes at the expense of all the other states, it turns out the data that industry sources obtained shows that the switch to national rather than statewide budget neutrality also benefits other states: Alaska, Arizona, California, Colorado, Connecticut, New Hampshire, New Jersey, and Rhode Island. How they benefit varies, but none nearly as much as Massachusetts.

In a number of these states, hospital association officials say, the number of hospitals that are considered urban still don't have wage scales that come up to the rural floor, and the adjustments are understandable. The officials also say they are working to make sure that states whose hospitals legitimately benefit from the rural floor can maintain that benefit while arrangements under which all hospitals in a state get higher payments that have no relationship to actual costs are eliminated.

Nothing is easy when it comes to making changes in Medicare payments.

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