House Ways and Means Subcommittee on Health Hearing
Chairman Brady, Ranking Member McDermott, distinguished Committee members. I am
MedPAC is a small congressional support agency that provides independent, nonpartisan policy and technical advice to the
The Commission has done extensive work on issues related to hospital payment policy. By law, each year the Commission is required to assess the adequacy of hospital payments and recommend payment updates for hospital inpatient and outpatient services. To evaluate whether aggregate payments are adequate, we consider beneficiaries' access to care, changes in the volume of services provided, hospitals' access to capital, quality of care, and the relationship of
In addition to these annual payment adequacy assessments, over the years the Commission has examined several hospital payment policy issues. The goal of these analyses is to ensure that payments are accurate and equitable across different types of hospitals and across different types of hospital services. For example, at various points, the Commission has analyzed graduate medical education (GME) payments, disproportionate share hospital (DSH) payments, and rural hospital add-on payments to determine whether they are set at an empirically justified rate and are effectively targeted to achieve their policy goals. More recently, the Commission has looked at refinements to the hospital readmissions penalty, recovery audit contractor (RAC) reviews of short inpatient hospital stays, and whether payment rates for certain services are encouraging providers to shift these services to more costly sites of care.
In the testimony that follows, I will provide an overview of trends in the hospital sector and then describe a range of Commission recommendations to improve the accuracy of fee-for-service (FFS) hospital payment rates.
Background
In 2013, the 4,700 hospitals paid under the
From 2012 to 2013, the use of outpatient services increased by 3.8 percent per Medicare FFS Part B beneficiary; over the past seven years, the cumulative increase was 33 percent. This growth in part reflects a secular shift in care from the inpatient setting, as well as the trend of hospitals purchasing freestanding physician practices and converting them into hospital outpatient departments (HOPDs). As hospitals do so, market share shifts from freestanding physician offices to HOPDs. From 2012 to 2013, hospital-based evaluation and management visits per beneficiary grew by 9.4 percent compared with 1.1 percent growth in physician-office-based visits. Other categories of services, such as echocardiograms and nuclear cardiology, are also shifting to the higher cost site of care. Among other effects, the shift in care setting increases
The Commission's annual payment adequacy assessment has consistently found that there is adequate access to and supply of hospital beds. The average hospital occupancy rate declined from 64 percent to 60 percent between 2006 and 2013, suggesting excess capacity in many markets. In the 10 metropolitan areas with the lowest number of hospital beds per capita, the average occupancy rate was 60 percent, compared with an average occupancy rate of 56 percent in the ten metropolitan areas with the highest number of beds per capita. There were 15 hospital openings and 25 hospital closures in 2013, resulting in a net decrease of approximately 1,000 hospital beds, a 0.1 percent reduction in existing bed capacity. Bed capacity is likely to continue declining, reflecting the continued decline in inpatient use and the corresponding rise in outpatient use. As mentioned,
Turning to other payment adequacy factors, hospital quality is uneven but has improved. Hospitals spent
Part of the reason
The Commission has shown that higher payments from private insurers allow hospitals to have higher costs which, in turn, makes
Of course, hospitals vary in their circumstances. Some hospitals have market power, a higher percentage of private payer patients, and stronger revenue from investments and donations. These hospitals tend to have higher costs. Hospitals without these characteristics have lower costs. Put differently: hospitals with the most revenue have the highest costs per admission. For example, we found that hospitals with low private payer profits from 2008 to 2012 had a median standardized
MedPAC's 2015 hospital recommendations
Based on its annual assessment of payment adequacy indicators, MedPAC recommended a package of hospital payment policy changes for 2016. The package included a payment update and two policies to equalize payment rates between different settings.
The update recommendation is higher than current law because payment adequacy indicators are largely positive, but
One problem with the current system of relative prices is that differences in prices across care settings are causing distortions in provider incentives. For example, hospital outpatient department rates are not aligned with rates paid for the same services in physicians' offices, giving hospitals an incentive to acquire physician practices and bill for the same services at outpatient rates, increasing costs to the program and to the beneficiary. To remove this incentive, we recommended setting outpatient rates equal to, or closer to, physician office rates for a set of services that are often performed in both locations.
A similar problem exists for hospital inpatient services. Long-term care hospitals (LTCHs) are currently paid much higher rates than traditional acute care hospitals (ACHs). Historically, there have been few criteria defining LTCHs, the level of care they provide, or the patients they treat. The Commission and others have repeatedly raised concerns that the lack of meaningful criteria for admission to LTCHs means that these providers can admit less-complex patients who could be cared for appropriately in less expensive settings. Comparatively attractive payment rates for LTCH care have resulted in an oversupply of LTCHs in some areas and may generate unwarranted use of LTCH services by patients who are not chronically, critically ill (CCI). To reduce incentives for LTCHs to admit lower acuity patients--who could be appropriately cared for in other settings at a lower cost to
Special hospital add-on payments
Our analysis of payment adequacy addresses whether
IME and DSH payments
Indirect medical education (IME) payments are designed to support the higher costs of patient care associated with teaching. Based on a formula, IME payments are an adjustment--a percentage increase--to the amount
Similarly, the DSH adjustment has a weak relationship to the cost of treating low-income patients. The original justification for Medicare DSH payments was that poor
Financing graduate medical education
Despite the tremendous advances our graduate medical education (GME) system has brought to modern health care, the Commission finds that it is not aligned with the delivery system reforms essential for increasing the value of health care in
The Commission has made five recommendations to the
The remaining four recommendations:
1) Address concerns raised by the graduate education community that
2) Call for an objective analysis of workforce needs based on reformed care delivery and better organization of responsibilities among physicians and other health care professionals in lieu of increases in the number of
3) Call for analyses to understand the value of different specialty residency programs to hospitals to better support future discussions of
4) Call for an examination of a range of
Rural hospital add-on payments
A key objective of
Rural hospital background
In its
The Commission also found similar levels of quality among rural and urban settings, particularly in the post-acute care setting. However, the Commission did find differences in quality of care between urban and rural hospitals. Smaller rural hospitals do not perform as well as urban hospitals on most process measures and on condition-specific 30-day mortality rates. The Commission's analysis of 2010
The Commission found that the adequacy of payments to rural hospitals has improved over time, in part due to the creation of special add-on payments to support these providers. In 2001, when rural hospitals' inpatient profit margins were below urban hospitals' profit margins, the Commission concluded that
Principles for evaluating rural add-on payments
One challenge for policymakers is that the current mix of rural payment adjusters is not guided by a coherent set of underlying principles. The adjusters evolved separately, and there is not a clear common framework for how they are intended to work together to preserve access without duplicative, overlapping adjustments. In addition, they are not always targeted to the areas with the greatest concerns about access to care. The lack of targeting stems in part from
Principle: Target payment adjusters to low-volume, isolated providersto preserve access
Payment adjusters should be targeted to providers that are necessary to preserve beneficiaries' access to care. Generally this means that
Many of the current adjustments focus on increasing payments to low-volume providers. However, there are two types of low-volume providers. One type is isolated providers who have low volumes because of low population density in their markets. These providers often have difficulty covering their fixed costs given their low volume of cases. For these providers, low volumes are inevitable and beyond their control. A second type of provider has low volumes because neighboring competitors attract patients away from the low-volume provider. These providers are not necessary for access, and it may be inappropriate to give a low-volume adjustment to two competing low-volume hospitals that are 5 or 10 miles from each other. By focusing low-volume adjustments on isolated providers, rather than making the adjustment available to all providers with low volumes,
Principle: Empirically justify the magnitude of payment adjustments
The magnitude of the adjustment should be determined empirically. For example, it is necessary to determine the degree to which a low patient volume makes it more difficult for a provider to cover its fixed costs. Patient volume should be measured as total patient volume rather than solely
Principle: Maintain incentives for cost control
It matters not only how much money is paid to rural providers, but also how it is paid. For example,
Principle: Set equal quality expectations for nonemergency services, but recognize that emergency services may need to be subject to differentquality standards
Expectations for quality of care in rural and urban areas should be equal for nonemergency services that rural providers choose to deliver. That is, if a provider has made a discretionary decision to provide a service, that provider should be held to a common standard of quality for that service, whether the service is provided in an urban or a rural location. Emergency services may be subject to different quality standards to account for different levels of staff, patient volume, and technology between urban and rural areas.
Refining the hospital readmissions penalty
Noting high hospital readmission rates (around 19 percent) and little improvement in these rates over time, the Commission recommended a penalty for hospitals with relatively high readmissions rates.
Given the positive effects of the penalty, the Commission believes that the policy should be continued, and has recommended expanding readmissions penalties into several post-acute care sectors. However, the calculation of readmissions rates and penalties could be refined to address three issues with the current policy.
* Under current policy, aggregate penalties remain constant when national readmission rates decline. This means that some providers will always be penalized, even if the entire sector improves its readmissions rate substantially. Instead, the Commission would set a fixed target for readmission rates. Penalties would go down when industry performance improves.
* In 2015, the HRRP covers five conditions (heart failure, acute myocardial infarction, (AMI), pneumonia, chronic obstructive pulmonary disease (COPD), and planned hip and knee replacement surgery). Single-condition readmission rates face significant random variation due to small numbers of observations. Instead, the Commission would use an all-condition readmission measure to increase the number of observations and reduce random variation.
* Hospitals' readmission rates and penalties are positively correlated with their low-income patient share. To avoid unfairly penalizing hospitals that treat large shares of low-income patients, the Commission would evaluate hospital readmission rates against a group of peers with a similar share of poor
Hospital short-stay issues
Since the implementation of the IPPS, payment incentives along with changes in technology and medical practice patterns have substantially shortened hospitals' average inpatient lengths of stay, allowing many inpatient services to successfully migrate to the outpatient setting. As a result, the issue of whether a patient requires inpatient care or could instead be treated safely as an outpatient has received increasing attention. Because hospitals generally receive higher payments for clinically similar patients served in the inpatient setting as compared with the outpatient setting, hospitals may have a financial incentive to admit patients.
Created by the
In reaction to the heightened scrutiny of short inpatient stays, hospitals have increased their use of outpatient observation status. Greater use of outpatient observation status, in turn, has caused concern about beneficiaries' financial liability. While
In an effort to clarify admission appropriateness and alleviate concerns about increased use of observation and its impact on beneficiary liability, as well as hospitals' concerns about RAC audits, CMS established the "two-midnight rule" in 2014. This rule stipulates that for hospital stays spanning two or more midnights (including time spent in the inpatient and outpatient settings), RACs should presume these stays are appropriate for the inpatient setting and are exempt from audit. By contrast, stays of less than two midnights remain subject to audit. The two-midnight rule has been controversial, and its enforcement has been delayed by both CMS and the
Short-stay policy recommendations
In response to these issues, the Commission has developed a set of recommendations designed to provide greater protections for beneficiaries and reduce administrative burden for hospitals while ensuring that the program is not paying too much for hospital care. Several of these recommendations provide guidance on refining and targeting the RAC program. The remaining recommendations seek to reduce the financial burden that beneficiaries may face from hospitals' increased use of outpatient observation status.
Recommendations to improve hospital oversight
The Commission has recommended to the Secretary a package of policies to improve the RAC program. First, the Commission recommended targeting RAC audits to hospitals with the highest rates of short inpatient stays. Currently, RACs are auditing short inpatient stays broadly, across all hospitals. A more targeted policy would focus auditing efforts on hospitals with aberrant patterns of short inpatient stays, while reducing administrative burden for hospitals using short inpatient stays appropriately.
Second, the Commission recommended adjusting RACs' contingency fees based on their performance to make RACs more accountable for their decisions to deny hospitals' claims for short stays. The contingency fee structure of the RAC program provides an incentive for the RACs to identify as many inappropriate claims and recover as much
Third, the Commission recommended realigning the RAC look-back period and the
Finally, the Commission recommended the withdrawal of the two-midnight rule because, while the rule addresses some of its stated goals, it also eliminates RAC oversight for a large group of inpatient claims. Withdrawing the two-midnight rule, in conjunction with implementing the Commission's other audit-related recommendations, would be a better way to address the concerns associated with hospital short stays.
Concurrent with the RAC-related policies described above, the Commission has discussed the concept of a payment penalty on hospitals with excessive numbers of short inpatient stays to improve the efficiency of program oversight. The Commission believes that this concept warrants further evaluation and recommended that the Secretary evaluate a penalty on hospitals with excess rates of short inpatient stays to substitute, in whole or in part, for RAC review of short inpatient stays.
Recommendations to reduce beneficiary liability
Hospitals' increased use of observation status has led to greater financial liabilities for certain beneficiaries. The Commission has made three recommendations to address this issue. First, the Commission recommended that the
The Commission recommended that the
Beneficiaries who receive care in a hospital outpatient department may face an additional liability for self-administered drugs, such as daily oral medications taken by the beneficiary at home. These drugs are covered by Medicare Part A for hospital inpatients, but are generally not covered by Medicare Part B for hospital outpatients. Patients in outpatient observation, who tend to have longer stays than other beneficiaries treated under outpatient status, are more likely to encounter this problem. Among the two-thirds of hospitals reporting SAD charges, about 75 percent of observation claims included charges for SADs. These claims had average drug charges of
Payment policy approaches to hospital short stays
The substantial payment difference between similar inpatient and outpatient stays creates a financial incentive for hospitals to admit patients to inpatient status. One way to reduce this financial incentive and ensure that admissions decisions are being made on a purely clinical basis is to reduce payment differences for similar stays in the inpatient and outpatient settings. The Commission explored two payment policy approaches to lessen payment differences between similar inpatient and outpatient stays. Under the first approach,
Under a one-day-stay DRG policy,
Alternatively, a site-neutral approach would pay comparable rates for similar inpatient and outpatient stays. The effect of a site-neutral approach may be different for medical and surgical hospital stays. For medical stays, it would be difficult to eliminate the inpatient and outpatient payment differential without creating new vulnerabilities because identifying similar stays would likely necessitate establishing length-of-stay criteria. Because surgery is a more clearly defined service, it might be possible to develop site-neutral payment for similar inpatient and outpatient surgeries without creating payment differentials based on length of stay.
Payment policy changes such as one-day-stay DRGs and site-neutral payment for medical stays would involve trade-offs. On the one hand, revising the payment system may reduce the need to audit one-day inpatient stays for admission appropriateness because the financial consequences related to the admission decision would be reduced. On the other hand, a revised payment system would create new payment cliffs and associated vulnerabilities, and therefore may simply shift the focus of audit oversight. Moving away from the fixed inpatient DRG payments to one-day-stay DRGs or site-neutral payment for medical stays also raises concerns about creating financial incentives for longer stays, which is counter to the original structure and intent of the DRG system. Given the competing arguments, the Commission has not made any recommendations to pursue payment changes at this time, but it has noted interest in continuing to explore these and other potential short-stay payment policy concepts in the future.
Read this original document at: http://waysandmeans.house.gov/wp-content/uploads/2015/07/20150722HL-Testimony-Miller.pdf
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