The changes have been proposed even as hospitals are projected to have their worst Medicare margins in 30 years.


Dec. 10—Congress’s primary Medicare advisory panel is considering recommendations that separately would change the 340B discount drug program and modify Medicare Advantage payments.

The changes proposed this week by the chairman of the Medicare Payment Advisory Commission (MedPAC) include reducing the pay rates for drugs that hospitals qualify for in the 340B program, which requires manufacturers to sell drugs to qualifying hospitals at deep discounts. A second change would eliminate both a cap on the benchmark amount for Medicare Advantage plans and the doubling of the quality-based payment bonuses in certain counties. The panel will vote on the recommendations to Congress in its January meeting.

The proposed changes came as MedPAC projected hospitals in 2016 will have their worst Medicare margins in the 30-year history of the prospective payment system: -9 percent, compared with the previous low of -7.3 percent margin in 2008, which came as the economic recession started and followed a high-cost growth period, according to MedPAC staff.

The expected margin decline was blamed primarily on a $1.8 billion decline from 2015 in electronic health record incentive payments and a $3 billion decrease in uncompensated care payments. Another hit will come from increased penalties for readmissions and hospital-acquired conditions (HACs). The HAC Reduction Program will cut 1 percent from overall Medicare payments to 758 hospitals in FY16, according to a Dec. 10 announcement by the Centers for Medicare & Medicaid Services.

The declining margins led MedPAC staff to recommend that hospital inpatient and outpatient payment rates increase by 1.65 percent in FY16. Although payment rate updates and case mix growth are expected to increase hospital revenue, cost growth is expected to exceed legislated rate increases.

Drug Program Changes

The proposed 340B change, which was revenue-neutral, would reduce payments for 340B drugs by 10 percent of the average sale price and use those savings in the Medicare uncompensated care pool. The estimated $300 million in new uncompensated care funds would go to prospective payment system (PPS) hospitals that demonstrate on their S-10 forms that they provide large amounts of uncompensated care.

The approach is different than the one Medicare now uses to distribute $6 billion in uncompensated care funds. The current approach is based on a hospital’s number of Medicaid days.

The change would cut an average of $32,000 from payments to PPS disproportionate share hospitals, primarily due to reduced drug cost-sharing payments due from patients after drug prices were reduced.

A MedPAC analysis concluded that Medicaid days are a poor predictor of uncompensated care. MedPAC staff concluded that a better indicator is the S-10 report, on which hospitals report their charity care and bad debt costs—but not the amount that goes uncovered by Medicaid payments. The change would be phased in over three years.

The change was expected mostly to increase payments to large public hospitals and, to a smaller extent, rural hospitals. Payments would increase for only 29 percent of for-profit hospitals. A smaller number of hospitals would face cuts under the proposal.

The proposal would not affect non-disproportionate share hospitals or critical access hospitals.

Joanna Hiatt Kim, a vice president at the American Hospital Association (AHA), said the proposed changes would penalize hospitals that are able to obtain better prices on drugs. She added that it is contrary to the point of a PPS system and is “patently unfair.”

“This recommendation entails MedPAC calling into question the wisdom of Congress in designing the 340B program because it essentially says the commission thinks Congress has targeted the wrong hospitals through that program,” Hiatt Kim said.

AHA was unclear on exactly what problem MedPAC was trying to solve with the change.

“But if it is that Medicare wants discounts on access to drugs, then we urge it to do so and access those directly,” Hiatt Kim said.

Insurance Changes

The Medicare Advantage changes would eliminate the doubling of quality bonuses, which are based on 2004 benchmarks and affect plans in 236 counties. Plans effectively are paid twice for the same quality performance, according to MedPAC.

Also proposed for elimination are benchmark caps that are based on 2010 benchmarks and affect plans in more than 1,400 counties. These usually reduce quality bonuses.

The changes were needed to remove “distortions in decisions when plans are deciding where and when to participate,” said Mary Naylor, a MedPac commissioner.

However, the proposed changes drew criticism from a health plan advocate.

Howard Shapiro, director of public policy for the Alliance for Community Health Plans (ACHP), said the targeted provisions would mitigate the impact of benchmark reductions in the Affordable Care Act on plans and their enrollees.

“This change would substantially cut funding for benefits for MA enrollees and it would have a severely disproportionate impact on not-for-profit, small regional plans,” Shapiro said. “ACHP members are many of those smaller plans, represent about 13 percent of enrollment, and would have about 42 percent of the net impact of the two recommendations, combined.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare.

Publication Date: Thursday, December 10, 2015