March 25 update: By a 90-2 vote, the Senate passed legislation to continue the moratorium on the Medicare payment sequester through the end of 2021. The bill now goes to the House, which is expected to pass it following the Easter recess. The bottom line: The 2% cut won’t be reintroduced this year.
- Hospitals and health systems urgently need Congress to extend the freeze on the 2% Medicare payment sequester, industry leaders said.
- A bill that originated in the Senate in recent days is the best hope for ensuring the sequester won’t be restored as of April 1.
- Although healthcare spending needs to be addressed, sequestration may not be an optimal approach regardless of the circumstances.
Given the financial turmoil they have endured over the past year, the last thing hospitals need is for a 2% decrease in Medicare revenues to kick in April 1.
That message was emphasized in a call hosted March 23 by the American Hospital Association (AHA), with AHA executives and health system leaders urging Congress to act this week to delay the restoration of the Medicare payment sequester.
“This isn’t a case of asking for more money,” said AHA President and CEO Rick Pollack. “This is a situation of preventing a significant cut in Medicare payments that would exacerbate the financial challenges that we’re already facing.”
AHA hopes the Senate will pass the Medicare Sequester Relief Act this week. That bill, which has bipartisan sponsorship, would continue the sequester moratorium that was implemented at the beginning of the COVID-19 pandemic. The moratorium would last through the end of the declared public health emergency.
The House likely would pass the bill as well, although not until after it returns from Easter recess. Even though the moratorium on the sequester would expire in the meantime, CMS can follow a precedent of holding Medicare claims until the president signs the continuation into law, AHA executives said.
A separate bill that has passed in the House would both postpone restoration of the sequester and nullify a 4-percentage-point Medicare spending reduction — amounting to an estimated $36 billion annually over five years — that is required to offset the deficit increase resulting from the recently signed COVID-19 relief legislation.
However, that bill’s prospects in the Senate are thought to be shaky in the short term. Hospital advocates thus are focusing on ensuring a continuation of the sequester moratorium. They then plan to lobby Congress to address the “pay-as-you-go” reduction before it takes effect in the FY22 federal budget.
The financial state of hospitals
An immediate 2% decrease in Medicare revenue would be unwelcome news for hospitals at any time, but especially now. In January 2021, when excluding Provider Relief Fund (PRF) payments, hospital operating margins decreased by 26.7% from December and 46.1% year-over-year, according to Kaufman Hall’s monthly National Hospital Flash Report.
Revenues were down 4.8% year-over-year (when leaving out PRF payments), including 10.4% for outpatient care. Volume declines have been well-documented, especially for outpatient settings and emergency departments.
Amid revenue decreases, hospitals also have faced higher expenses. Total expenses increased by 4.5% year-over-year as of January, according to Kaufman Hall, and by 25.4% per adjusted discharge. Labor expenses per adjusted discharge increased by 30% year-over-year.
“The cost of labor, particularly in addressing healthcare worker shortages, has been astronomical,” Pollack said. “Hospitals have had to rely on staffing firms for temporary assistance, many of which are charging predatory rates.”
Costs of personal protective equipment and drugs also have surged, leading to year-over-year increases of 20% and 36%, respectively.
The practical upshot for hospital operations
The pandemic’s impact on operating income at University Hospitals (UH) Health System in Cleveland has been almost $500 million, said Cliff Megerian, MD, the organization’s CEO. Support from sources such as the Provider Relief Fund and FEMA has made up only 38% of that shortfall.
The health system’s COVID-19 mass vaccination efforts would be impacted by a Medicare cut, Megerian said, as would various other areas of operation.
Megerian cited the example of a medical center expansion project that would bolster the health system’s services in areas such as maternal-fetal health, breast cancer care, sports medicine and men’s health, and would serve as a level 2 trauma center. It also is estimated to bring 1,000 new jobs to the community over the next couple of years.
“Certainly, Medicare cuts will change those timetables,” Megerian said.
That’s in part because “when operating income declines, which would no doubt happen with sequestration being reestablished, the rating agencies can even take action that will negatively impact our borrowing costs,” Megerian said.
The cuts also could lead to the types of employment actions, such as furloughs and temporary salary reductions, that UH had to implement early in the pandemic, he said.
At Mon Health in Morgantown, West Virginia, restoring the sequester would add a $1.5 million hit to the $13 million negative impact the organization has experienced during the pandemic, said David Goldberg, president and CEO.
Beyond dealing with the ongoing financial challenges and striving to maintain or expand patient access in its communities, some of which are in remote areas, the health system needs to ensure it’s prepared for the coming impact of deferred care.
“[Patients] coming in are significantly sicker than what they originally were,” Goldberg said. “Our case mix index is up anywhere from 3% to 6%.”
Healthcare spending as an ongoing concern
The Medicare payment sequester stems from mandatory spending reductions that were included in 2011 federal budgetary legislation. The sequester was supposed to last from FY13 through FY21, but subsequent bills have extended it through FY30 to offset additional spending for various programs. The legislation under consideration in the Senate would push the end date to FY31.
Some policymakers have questioned whether delaying restoration of the sequester is the right move, citing the substantial funding that Congress has allocated to providers during the pandemic. Disbursements through the Provider Relief Fund have totaled $154 billion, with about $24 billion remaining in the pool.
With all of those outlays, “there is some debate” about whether maintaining the sequester moratorium is advisable, Tricia Neuman, executive director of the Program on Medicare Policy at the Kaiser Family Foundation, said during a recent panel discussion hosted by the Committee for a Responsible Federal Budget.
That said, Congress appears more likely than not to extend the moratorium.
“There doesn’t seem to be an appetite at the moment for payment reductions when we’re still in the thick of the pandemic,” she said. “And so at the moment, Congress seems to be in the mood to do everything they can to keep providers whole, or more than whole.”
Although healthcare spending needs to be addressed, sequestration will never be an ideal approach, said Michael Chernew, PhD, professor of healthcare policy and director of the Healthcare Markets and Regulation Lab at Harvard Medical School.
“The sequester is an unbelievably blunt tool,” Chernew said. “The challenge is that you don’t want to use blunt tools as often as we do.”