MedPAC backs Medicare changes to increase hospital pay in 2021 by up to 3.3%

• For 2021, MedPAC recommended a 2% hospital Medicare rate increase, an additional 0.8% as a value payment and elimination of an existing 0.5% cut.
• If the new value-payment program is not created, hospitals should receive a 2.8% inpatient and outpatient rate increase, according to the recommendation.
• MedPAC plans a broader review of Medicare’s payment approach to hospitals.

Congress’s leading Medicare advisers want hospitals to garner a 2% rate increase and up to a 0.8% quality bonus for 2021. The change also would eliminate 0.5% in payment cuts to bring the total potential increase to 3.3%.

The Medicare Payment Advisory Commission (MedPAC) recently gave preliminary approval to a recommendation that Medicare increase hospital inpatient and outpatient rates by the statutory 2.8% but use a portion to fund a new value-payment system. If Congress does not create such a system, then Medicare should default to providing the 2.8% rate increase, commissioners said.

MedPAC ‘s recommended Hospital Value Incentive Program (HVIP) would replace four existing Medicare hospital quality payment programs:

• Hospital Inpatient Quality Reporting
• Hospital Readmissions Reduction
• Hospital-Acquired Condition Reduction
• Hospital Value-Based Purchasing

Eliminating the existing quality programs would remove associated cuts that amount to 0.5% of payment, bringing the potential hospital payment increase to 3.3%.

The HVIP would track performance on mortality, readmissions, Medicare spending per beneficiary, patient experience and hospital-acquired infections. The program also would:

• Establish rewards and penalties based on prospectively set targets
• Inform hospitals in advance of how performance will translate into payment changes
• Use a continuous scale of points, so hospitals with similar performance receive similar financial rewards
• Give even top-performing hospitals an incentive to continue to improve

Industry reaction differs

The proposed value-payment program drew criticism from the American Hospital Association (AHA), which urged MedPAC to delay forwarding the recommendation to Congress until changing it to address design-related concerns. For instance, AHA urged reconsidering the use of all-condition mortality and readmission measures, “given the utility of condition-specific measures,” the association wrote in a letter.

However, the 2.8% rate increase was listed in a Moody’s Investor Service report as a credit-positive for hospitals, since it would be the largest increase in years.

Hospital executives on the commission said the rate increase is sorely needed given MedPAC’s finding that hospitals’ overall Medicare margins were -9.3% in 2018. In fact, Medicare has not fully covered the costs of caring for Medicare patients since 2002, according to the commission’s data.

Some warned that the Medicare underpayments are contributing to a reported surge in closures. At least 47 hospitals closed in 2019, MedPAC reported in early December, and that was more than double the total for 2018.

Jonathan Perlin, MD, PhD, a MedPAC commissioner and the president of clinical services and chief medical officer with HCA Healthcare, said financially struggling hospitals don’t stop seeing Medicare patients, as a physician might. They just close.

Financially distressed hospitals approaching HCA about being acquired “are desperate for capital to become competitive,” Perlin said.

Among 92 hospital transactions that took place in 2019, according to data from Kaufman Hall, 20% of sellers were “financially distressed.”

Coming initiatives could further affect Medicare payments

During 2020, MedPAC plans further policy recommendations based on reviews of issues affecting hospitals.

Francis Crosson, MD, chairman of MedPAC, said the commission will review the various federal payment programs, which some commissioners said keep hospitals tied to Medicare fee-for-service payments.

Dana Gelb Safran, ScD, a commissioner and head of measurement for the healthcare venture formed by Amazon, Berkshire Hathaway and JPMorgan Chase, said Medicare needs to move to a payment system that makes hospitals accountable for the total cost of care.

“This is something we can’t ignore going forward,” Safran said.

Brian DeBusk, PhD, a commissioner and CEO of DeRoyal Industries in Powell, Tennessee, said if Congress fails to authorize the new value program, then it should consider allowing bonuses only for organizations participating in advanced alternative payment models.

That approach may address physician concerns that Medicare is providing no overall payment increase for physicians, while hospitals receive a relatively large increase, DeBusk said.