Policy & Regulation News

Efficient Hospitals Face Negative Medicare Margins, MedPAC Finds

Relatively efficient hospitals reported negative Medicare margins for the second consecutive year, causing MedPAC to recommend a two percent payment bump.

Efficient hospitals and Medicare margins

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By Jacqueline LaPointe

- Medicare reimbursement rates rarely cover the actual costs of providing hospital care. But now negative Medicare margins are impacting the most efficient hospitals out there, according to a new report from the Medicare Payment Advisory Commission (MedPAC).

In the commission’s annual March report to Congress, MedPAC reported that the select group of hospitals providing relatively high-quality care at lower costs experienced negative Medicare margins for a second consecutive year.

The Medicare margins were about -2 percent in 2017, declining from -1 percent the previous year.

Medicare margins have been in the negative range for most hospitals. MedPAC reported that the overall Medicare margin was -9.9 percent in 2017. The margin dropped from -9.7 percent in 2016.

The industry experts also expect Medicare margins to continue dropping in the near future. The commission predict the overall Medicare margin to decrease to -11 percent by 2019.

The decline in overall Medicare margin is not unexpected, MedPAC explained. The commission has observed declining Medicare margins since 2009 because of several payment adjustments required by statute, including annual hospital payment reductions, coding and documentation improvement adjustments, decreases in EHR adoption incentive payments, and declines in uncompensated care payments due to increases in the number of insured patients after the Affordable Care Act.

However, the commission is now alarmed by their prediction that the margins of efficient hospitals will also remain negative in 2019.

“When a hospital or other provider is being efficient and still can’t stay in the black in Medicare, that's cause for concern,” James E. Mathews, PhD, MedPAC Executive Director recently said in a call with reporters.

Given the current state of Medicare margins, MedPAC is advising Congress to boost hospital payments by a total of 2.8 percent, with 0.8 percent of the reimbursement bump stemming rewards for high-performers in the proposed Hospital Value Incentive Program (HVIP).

“In examining our payment adequacy indicators, we found that, in 2017, beneficiaries had good access to care, hospitals maintained strong access to capital markets, and hospital quality improved, despite negative Medicare margins for most providers,” the commission stated in the report.

“Looking forward, we expect beneficiaries’ access to care to remain adequate given hospitals’ modest occupancy rates and good access to capital. However, the aggregate Medicare profit margin is expected to decline to approximately -11 percent in 2019. Given these payment adequacy indicators, an update of two percent coupled with enhanced payments for hospitals with strong performance under the proposed HVIP would be high enough to maintain beneficiaries’ access to care and move payment rates closer toward the cost of efficiently delivering high-quality care.”

The HVIP would replace four of Medicare’s hospital quality incentive programs: the Hospital Inpatient Quality Reporting Program, Hospital Readmissions Reduction Program (HRRP), Hospital-Acquired Condition Reduction Program (HACRP).

MedPAC has raised concerns about the four programs in previous reports to Congress. The commission has argued that hospitals face too many overlapping reporting and payment programs, the measures used to assess hospital performance are not appropriate, and some of the programs score providers relative to one another despite “the potential availability of a clear, absolute, and prospectively set system of targets.”

The commission is now proposing a “single, outcome-focused, quality-based payment program from hospitals” to replace the programs.

The HVIP would use prospectively set performance standards to assess hospital performance and dole out incentive payments or penalties. The program would withhold funds from hospital payments and redistribute the funds based on hospital performance compared to those in a peer group.

MedPAC intends for the proposed two percent payment bump along with the replacing of current quality incentives for a new value-based program to improve hospital Medicare margins from 2019 to 2020.

“We rarely recommend payment updates in excess of current law. This is quite an unusual circumstance for us,” Matthews said. “But we feel the status of the efficient hospital, does warrant these kinds of measures, and we have tried to be as judicious and targeted in spending these additional dollars as we can be.”

Long-term care hospitals and dialysis center should also receive a payment increase in 2020, MedPAC advised in the report to Congress. Meanwhile, the commission recommended no update for physicians, skilling nurse facilities, and ambulatory surgical centers and negative updates for home health providers, inpatient rehabilitation facilities, and hospices.