Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 5 of 12)
(Continued from Part 4 of 12)
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A. HOSPITAL INSURANCE
1. Cost Projection Methodology
The principal steps involved in projecting future HI costs are (i) establishing the present cost of services provided to beneficiaries, by type of service, to serve as a projection base; (ii) projecting increases in HI payments for inpatient hospital services; (iii) projecting increases in HI payments for skilled nursing, home health, and hospice services covered; (iv) projecting increases in payments to private health plans; and (v) projecting increases in administrative costs.
a. Projection Base
To establish a suitable base from which to project future HI costs, the incurred payments for services provided must be constructed for the most recent period for which a reliable determination can be made. Accordingly, payments to providers must be attributed to dates of service, rather than to payment dates; in addition, the nonrecurring effects of any changes in regulations, legislation, or administration, and of any items affecting only the timing and flow of payments to providers, must be eliminated. As a result, the rates of increase in the HI incurred costs differ from the increases in cash expenditures shown in the tables in section III.B.
For those expenses still reimbursed on a reasonable-cost basis, the costs for covered services are determined on the basis of provider cost reports. Due to the time required to obtain cost reports from providers, to verify these reports, and to perform audits (where appropriate), final settlements have lagged behind the original costs by as much as several years for some providers. Additional complications arise from legislative, regulatory, and administrative changes, the effects of which cannot always be determined precisely.
The process of allocating the various types of HI payments made to the proper incurred period--using incomplete data and estimates of the impact of administrative actions--presents difficult problems, and the solutions to these problems can be only approximate. Under the circumstances, the best that one can expect is that the actual HI incurred cost for a recent period can be estimated within a few percent. This process increases the projection error directly by incorporating any error in estimating the base year into all future years.
b. Fee-for-Service Payments for Inpatient Hospital Costs
Payment for almost all inpatient hospital services for fee-for-service beneficiaries occurs under a prospective payment system. The law stipulates that the annual increase in the payment rate for each admission relate to a hospital input price index (also known as the hospital market basket), which measures the increase in prices for goods and services purchased by hospitals for use in providing care to hospital inpatients. For fiscal year 2022, the prospective payment rates have already been determined. For fiscal years 2023 and later, the statute mandates that the annual increase in the payment rate per admission equal the annual increase in the hospital input price index (for those hospitals submitting required quality measure data), minus a specified percentage. For this report, the Trustees assume that all hospitals will submit these data.
Increases in aggregate payments for inpatient hospital care covered under HI can be analyzed in five broad categories, presented in table IV.A1:
(1) Hospital input price index--the increase in prices for goods and services purchased by the hospital;
(2) Unit input intensity allowance--an amount added to or subtracted from the input price index (generally called for in legislation) to yield the prospective payment update factor;
(3) Volume of services--the increase in total output of units of service (as measured by covered HI hospital admissions);
(4) Case mix--the financial effect of changes in the average complexity of hospital admissions; and
(5) Other sources--a residual category reflecting all other factors affecting hospital cost increases (such as enacted legislative changes).
Table IV.A1 shows the estimated historical values of these principal components, as well as the projected trends used in the estimates. The impact of sequestration in
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Table IV.A1.--Components of Historical and Projected Increases in HI Inpatient Hospital Payments/1
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The input price index is a weighted average of the price proxies (prices of specific inputs) used in delivery of HI inpatient services. In the first 2 years of the projection period, the methodology used to determine the increases in the input price index is based on the methodology underlying the regulatory updates. Thereafter, the methodology utilizes least-squares regression models for each price proxy to project this index. The process begins by regressing the historical time series for each price proxy on one of three independent variables: average hourly compensation, GDP deflator, and CPI. The regression results are then applied to the projected independent variables to produce projections for each detailed price proxy, which are weighted together to produce the aggregate input price index.
The unit input intensity allowance is generally a downward adjustment provided for by law in the prospective payment update factor; that is, it is the amount subtracted from the input price index to yield the update factor./56
Beginning in fiscal year 2004, the law provides that increases in payments to prospective payment system hospitals for covered admissions will equal the increase in the hospital input price index for those hospitals that submit the required quality measure data. For other hospitals, the increase will be slightly smaller. For this report, the Trustees assume that all hospitals will submit these data. Beginning in fiscal year 2010, the law mandates amounts to be subtracted from the input price index, including the increase in economy-wide productivity in 2012 and later, and amounts ranging from 0.1 percentage point to 0.75 percentage point for 2011 through 2020. As a result of these adjustments, the unit input intensity allowance, as indicated in table IV.A1, is negative throughout the first 10-year projection period.
Increases in payments for inpatient hospital services also reflect growth in the number of inpatient hospital admissions covered under HI fee-for-service. As shown in table IV.A1, increases in admissions are attributable to growth in both HI enrollment and admission incidence (admissions per beneficiary)./57
A very large decrease in admissions occurred in 2020 due to the pandemic, and a number of these admissions are expected to return over the next few years. The historical and projected growth in enrollment reflects a more rapid increase in the population aged 65 and over than in the total population of
The choice of more beneficiaries to join private health plans has been an offsetting factor to the HI enrollment growth, as shown in the "Managed care shift effect" column of table IV.A1. In other words, greater enrollment in private health plans reduced the number of beneficiaries with fee-for-service Medicare coverage and thereby reduced hospital admissions paid through fee-for-service. Private Medicare health plan membership is projected to continue to grow for most of the projection period.
Since the beginning of the prospective payment system (PPS), inpatient hospital payments have varied based on the complexity of admissions. These variations are primarily due to (i) the changes in diagnosis-related group (DRG) coding as hospitals continue to adjust to the PPS and (ii) the trend toward treating less complicated (and thus less expensive) cases in outpatient settings, which results in an increase in the average prospective payment per admission.
The average complexity of hospital admissions (case mix) increased in fiscal year 2021, and it is expected to decrease in fiscal years 2022 and 2023 before increasing by 0.5 percent annually in fiscal years 2024 through 2031 as a result of an assumed continuation of the current trend toward treating less complicated cases in outpatient settings, ongoing changes in DRG coding, and the overall impact of new technology. The early years are affected by the COVID-19 pandemic.
Hospital payments are also affected by other factors, as reflected in the "Other sources" column of table IV.A1. For example, statutory budget neutrality adjustments offset costs from significant increases in case mix that occurred when the new Medicare severity diagnosis-related group (MS-DRG) system was introduced in 2008. Although the law limited the size of these adjustments in 2008 and 2009, it allows subsequent recovery of any extra payments that resulted. The "Other sources" column reflects all of these actual and anticipated effects and adjustments. In addition, one can attribute part of the increase from "other sources" to the increase in payments for certain costs, not included in the DRG payment, that are generally growing at a rate slower than the input price index. These other costs include capital, medical education (both direct and indirect), disproportionate share hospital (DSH) payments, and payments to hospitals not included in the PPS. A particularly important change affecting these costs is the reduction in Medicare DSH payments. This change reflects the major coverage expansions that began in 2014 and that continue to result in significantly fewer uninsured hospital patients. In 2019, however, the elimination of the individual mandate increased the number of uninsured, resulting in an increase in this factor. The "Other sources" column also reflects the impact of the 20-percent add-on for COVID-19 admissions during the public health emergency.
Additional possible sources of changes in payments include (i) a shift to higher-cost or lower-cost admissions due to changes in the demographic characteristics of the covered population; (ii) changes in medical practice patterns; and (iii) adjustments in the relative payment levels for various DRGs, or addition/deletion of DRGs, in response to changes in technology.
The "Other sources" column reflects, as appropriate, the impact of certain enacted legislation, including the sequestration process. Also reflected in this column is the impact of the estimated bonus payments and penalties for hospitals due to the health information technology incentives.
The increases in the input price index (less any intensity allowance specified in the law), units of service, and other sources are compounded to calculate the total increase in payments for inpatient hospital services. The last column of table IV.A1 shows these overall increases.
c. Fee-for-Service Payments for Skilled Nursing Facility,
To project fee-for-service payments for skilled nursing facilities (SNFs), a method similar to that for inpatient hospitals is used. First, the number of covered days is determined, and then the average reimbursement per day is calculated. Historically, the number of days of care covered in SNFs under HI has varied widely. This extremely volatile experience has resulted, in part, from legislative and regulatory changes and from judicial decisions affecting the scope of coverage. Since 2012, there have been significant decreases in the number of covered SNF days. The intermediate projections assume that changes in covered SNF days will continue to reflect the positive growth and aging of the population, but the underlying trend will be 0 percent in 2021 and beyond. The impacts of the pandemic are also incorporated in these projections, including the waiver of the 3-day prior-stay requirement during the public health emergency.
The methodology used to develop the market basket increases for SNFs is consistent with the methodology used to develop the hospital market basket increases. These market basket increases are reduced by the increase in economy-wide productivity beginning in 2012. Cost per day also increases by a case mix increase. The implementation of a new RUG system caused a very large increase in case mix in 2011, and a reduction of about 12.6 percent was applied in 2012 to match payments from the prior system. Subsequently, case mix increases dropped from 2.0 percent in 2013 to 0.1 percent in 2019. In 2020, a new payment system was implemented, leading to an increase in case mix of 4.9 percent. For the projection, the case mix increases are assumed to gradually increase to a level of 1.5 percent annually by 2022. The required reduction in costs due to sequestration is also reflected in the projected expenditures. These assumed trends result in projected rates of increase in cost per day that are assumed to decline to a level slightly higher than increases in general earnings throughout the projection period.
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Table IV.A2 shows the resulting increases in fee-for-service expenditures for SNF and other types of services. The sequestration impact is reflected in the table.
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Table IV.A2.--Relationship between Increases in HI Expenditures and Increases in Taxable Payroll/1
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A similar methodology is used to project home health agency (HHA) payments. For most historical years, HI experience with HHA payments had shown an upward trend, frequently with sharp increases in the number of visits from year to year. There were large decreases in utilization in 2012 followed by a rebound in 2013 through 2015. There were decreases again for 2016 through 2019, and then utilization dropped significantly in 2020 due to the pandemic. Beginning in 2021 and throughout the rest of the short-range projection period, utilization increases are assumed to be equal to the growth and aging of the population plus 1 percent annually, plus an additional factor to include the impact of COVID-19 (as utilization rebounds from the very low levels that occurred during the pandemic).
Reimbursement per episode of care58 is assumed to increase at a slightly higher rate than increases in general earnings, but adjustments to reflect statutory limits on HHA reimbursement per episode are included where appropriate. As with other services, a least squares regression model was used to develop market basket increases, which are reduced by the increase in economy-wide productivity beginning in 2015. Costs also increase by a case mix increase factor. Case mix increases have been modest, decreasing in 2011 and 2012 before rebounding in 2013 through 2020. Beginning in 2021, case mix increases are projected to grow at a rate of 1.5 percent annually. CMS adjusted HHA payment levels from 2008 through 2013 to gradually offset the financial effect of the unduly high mix of services in the first and subsequent years. HHA payment rates were rebased starting in 2014, and an estimated 14-percent reduction in payments was phased in over a 4-year period. Projected HHA costs reflect these regulatory adjustments. Table IV.A2 shows the resulting increases in fee-for-service expenditures for HHA services.
HI covers certain hospice care for terminally ill beneficiaries. Hospice payments were originally very small relative to total HI benefit payments, but they have grown rapidly in most years and now substantially exceed the level of HI home health expenditures. This growth rate is composed of two factors: (i) the price update, which is a function of the hospital market basket with an adjustment for economy-wide productivity, and (ii) a residual, which includes all other factors. This residual grew at a rate of about 5 percent annually from 2008 through 2013, became negative in 2014, and rebounded in 2015 through 2019. In 2020 and 2021, the pandemic resulted in lower growth in the residual. For 2022 and the remainder of the short-range projection period, the residual is expected to increase at the 2008-2013 rate. Estimates for hospice benefit payment increases are based on mandated daily payment rates and annual payment caps, and these estimates assume a deceleration in the growth in the number of covered days.
d. Private Health Plan Costs
HI payments to private health plans have generally increased significantly from the time that such plans began to participate in the Medicare program in the 1970s. Most of the growth in expenditures has been attributable to the increasing numbers of beneficiaries who have enrolled in these plans. Section IV.C of this report contains a description of the private health plan assumptions and methodology.
e. Administrative Expenses
Historically, the cost of administering the HI trust fund has remained relatively small in comparison with benefit amounts. The ratio of administrative expenses to benefit payments has generally fallen within the range of 1 to 3 percent. The short-range projection of administrative cost is based on estimates of workloads and approved budgets for Medicare Administrative Contractors and CMS. In addition, due to sequestration, the administrative costs reflect an estimated 5- to 7-percent reduction for the period
2. Summary of Aggregate Reimbursement Amounts on an Incurred Basis under the Intermediate Assumptions
Table IV.A3 shows aggregate historical and projected reimbursement amounts by type of service on an incurred basis under the intermediate assumptions. The sequestration impact is reflected in the table.
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Table IV.A3.--Aggregate Part A Reimbursement Amounts on an Incurred Basis
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3. Financing Analysis Methodology
Because payroll taxes are the primary basis for financing the HI trust fund, HI costs can be compared on a year-by-year basis with the taxable payroll in order to analyze costs and evaluate the financing.
a. Taxable Payroll
Taxable payroll increases occur as a result of increases in both average covered earnings and the number of covered workers. The taxable payroll projection used in this report is based on the same economic assumptions used in the 2022 Annual Report of the
b. Relationship between HI Costs and Taxable Payroll
The most meaningful measure of HI cost increases, with regard to the financing of the system, is the relationship between cost increases and taxable payroll increases. If costs increase more rapidly than taxable payroll, either income rates must be increased or costs reduced (or some combination thereof) to finance the system in the future. Table IV.A4 shows the projected increases in HI costs relative to taxable payroll over the 10-year projection period. For the intermediate assumption, these relative increases start at 0.5 percent per year in 2022, increase to 2.8 percent in 2025 and to 2.0 percent in 2029, and decrease to 1.4 percent in 2030 and 2031 due to the sequestration reductions. The result of these relative growth rates is a steady increase in the year-by-year ratios of HI expenditures to taxable payroll, as shown in table IV.A4. The sequestration impact is reflected in the table.
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Table IV.A4.--Summary of HI Alternative Projections
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4. Projections under Alternative Assumptions
Projected HI expenditures under current law are subject to considerable uncertainty. To illustrate this uncertainty, HI costs have been projected under three alternative sets of assumptions.
Under the low-cost alternative over the 10-year projection period, increases in HI expenditures relative to increases in taxable payroll follow a pattern similar to that for the intermediate assumption, but at a somewhat lower rate; annually, the rate for expenditures in relation to taxable payroll becomes 2.0 percent less by 2022, increases to 0.8 percent more by 2025, decreases to 0.1 percent in 2029, and decreases to 0.5 percent less in 2031 due to the sequestration reductions. Under the high-cost alternative, the ratio of expenditures to payroll increases from 4.8 percent in 2022 to 5.7 percent in 2023 and then decreases to 4.0 percent in 2029 before becoming 3.4 percent in 2031 due to the sequestration reductions, as shown in table IV.A4.
Beyond the first 25-year projection period, HI costs under the intermediate assumptions are based on the assumption that average per beneficiary expenditures (excluding demographic impacts) will increase at the baseline rates determined by the economic model described in sections II.C and IV.D less the economy-wide productivity adjustments. This rate is assumed to be about 0.1 percentage point faster than the increase in the Gross Domestic Product (GDP) per capita in 2045 but would decelerate to 0.3 percentage point slower than GDP per capita by 2096. HI expenditures, which were 3.4 percent of taxable payroll in 2021, increase to 4.9 percent by 2046 and remain at roughly 4.8 percent until 2096 under the intermediate assumptions. Accordingly, if all of the projection assumptions were realized over time, the HI income rates (4.03 percent of taxable payroll summarized over 75 years) would be inadequate to support the HI cost.
For the HI low-cost and high-cost projections, Medicare expenditures are determined by changing the assumption for the ratio of aggregate costs to taxable payroll (the cost rate). These changes are intended to provide an indication of how Medicare expenditures could vary in the future as a result of different economic, demographic, and health care trends. During the first 25-year projection period, the low-cost and high-cost alternatives contain assumptions that result in HI costs increasing, relative to taxable payroll increases, approximately 2 percentage points less rapidly and 2 percentage points more rapidly, respectively, than the results under the intermediate assumptions. Costs beyond the first 25-year projection period assume that the 2-percentage-point differential gradually decreases until 2071, when HI cost increases relative to taxable payroll are approximately the same as under the intermediate assumptions.
Assumptions regarding income to the HI trust fund--including payroll taxes, income from the taxation of benefits, interest, and other income items--and assumptions regarding administrative costs are consistent with those underlying the OASDI report.
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The report is posted at: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf
(Continues with Part 6 of 12)
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Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 8 of 12)
Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 1 of 12)
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