ECG Summary of March 2023 MedPAC Report to the Congress: Medicare Payment Policy

Background and Report Highlights

Summary of Key Chapters

Hospital Inpatient and Outpatient Services

MedPAC reported wide variation in performance for acute care hospitals, with some key indicators remaining below pre-pandemic levels, suggesting the sector has yet to fully rebound. Furthermore, the Commission noted higher and more volatile input costs for hospitals in recent years. As such, MedPAC recommended an additional 1% increase in base payment rates above the current levels. The Commission also recommended providing supplemental funds to further support safety net hospitals.

Access and Quality

• MedPAC noted that the supply of hospitals has been steady year-over-year, and in aggregate, general acute care hospitals continued to have excess inpatient capacity in 2021. However, while the overall occupancy rate was at 65% in 2021, the results varied widely across hospitals—with 5% of hospitals at an occupancy rate above 86% and 25% of hospitals with an occupancy below 30%.
• While MedPAC cited difficulty assessing quality of care in 2020 due to the coronavirus pandemic, the Commission found 2021 quality results were mixed when compared to 2019. Specifically, risk-adjusted readmission rates improved but risk-adjusted hospital mortality rates increased, while overall patient experience metrics declined across the board.

Payment Adequacy

• MedPAC found that Medicare payment to hospitals continued to be lower than hospital costs in 2021, but showed improvement compared to 2020. On average, IPPS hospitals’ Medicare margin increased in 2021 to -6.2%, including federal relief funds.
• However, the Commission also found that IPPS hospitals’ all-payer operating margin increased to a record high of 8.7% in 2021 with federal relief funds and 7.2% without relief funds.
• MedPAC also noted that the performance of hospitals varied widely, with for-profit hospitals generating an all-payer operating margin of 13.9% on average without relief funds, compared to an all-payer operating margin of 6.8% for nonprofit hospitals without relief funds in 2021.
• With the costs used to set Medicare payment rates exceeding forecasts and the expiration of federal relief funds, MedPAC predicted lower margins in 2023. Specifically, the Commission estimated that IPPS hospitals’ Medicare margin will decrease to -10% in 2023.

Other Findings

• MedPAC continued to advocate for the adoption of a new Medicare Safety Net Index (MSNI) as the basis for distribution of supplemental payments to safety net hospitals that care for a high share of Medicare beneficiaries with low incomes. The Commission also recommended an additional $2 billion be added to the MSNI pool of funds to help maintain safety net hospitals.
• The MSNI developed by the Commission would be computed for each hospital based on three components: 1) the share of Medicare volume associated with low-income beneficiaries, identified as those who received the Part D low-income subsidy (LIS), 2) the share of revenue the hospital spends on uncompensated care, and 3) the share of total volume associated with Medicare beneficiaries.

Recommendations

• For 2024, MedPAC recommended updating the 2023 Medicare base payments for general acute care hospitals by the amount specified in the current law plus 1%. Relative to the current law, the recommendation is projected to increase spending by more than $10 billion over five years.
• As mentioned above, MedPAC also recommended the adoption of a new MSNI to distribute supplemental payments to safety net hospitals. As part of this recommendation, MedPAC proposed adding $2 billion to the MSNI pool.

Physician and Other Health Professional Services

Due to higher-than-average growth in input costs for physician services, MedPAC recommended that base payment rates for physician services be raised by 50% of the projected increase in the Medicare Economic Index (MEI) to help ensure that payment rates keep pace with growing costs. The Commission also recommended an add-on payment for services provided to low-income beneficiaries.

Access and Quality

• MedPAC highlighted a sharp increase in the number of advanced practice registered nurses and physician assistants, in addition to an increase in the number of specialists, balanced by a decline in the number of primary care physicians. This is directly correlated with the finding that both Medicare beneficiaries and privately insured people have greater difficulties securing a new primary care provider than they do finding a specialist. MedPAC reported that about half of Medicare beneficiaries who have sought a new primary care provider in the last year have struggled to find one.

Payment Adequacy

• Medicare spending on clinician services increased between 2020 and 2021 but remained lower than spending in 2019. However, spending per beneficiary on E&M services was higher in 2021 than it was in 2019, while spending on other categories (e.g., tests, procedures, imaging, anesthesia) was lower in 2021 compared to 2019. This was driven largely by the increase in Medicare Physician Fee Schedule rates for E&M services in 2021.
• In terms of provider compensation, MedPAC found that median all-payer compensation grew roughly 3% per year between 2017 and 2021, with primary care compensation remaining well below that of specialists. The highest-compensated specialties in 2021 included radiologists, nonsurgical specialists, procedural specialists, and surgical specialists.
• MedPAC noted that some providers treat a disproportionate share of low-income beneficiaries (defined by enrollment in the Part D low-income subsidy program), resulting in lower reimbursement and potentially higher costs. MedPAC hypothesized that the resulting strain on these providers could reduce access to care.
• Finally, MedPAC found that rates offered by preferred provider organization (PPO) plans decreased compared to Medicare since 2020. Specifically, in 2021, PPO plans reimbursed for clinical services at an average of 134% of FFS Medicare rates, compared to 138% in 2020. This decrease was attributed largely to a diminishing gap in the rates for E&M services in 2021.

Other Findings

• MedPAC noted that while payment adequacy indicators remained positive or improved in 2021 and 2022, input costs for clinicians increased at much higher rates compared to historical data. Specifically, MedPAC found that clinician input costs (as measured by the MEI) grew by 2.6% in 2021 and are estimated to grow by 4.7% in 2022. Historically, these costs have increased between 1% and 2% per year. MedPAC further predicted that these costs will continue to grow in 2023 and 2024 by an estimated 3.9% and 2.9%, respectively.

Recommendations

• For 2024, MedPAC recommended that Congress update the Medicare base payment rate to reflect 50% of the projected increase in the MEI. Based on MEI projections at the time of publication, the recommended update for 2024 would be 1.45%. MedPAC recommended this as a permanent update that would be built into subsequent years’ payment rates.
• MedPAC also recommended that Congress enact a non-budget-neutral add-on payment, on a periodic lump-sum basis, for services provided to low-income beneficiaries. The Commission noted that this add-on payment should not be subject to cost sharing and should equal a clinician’s allowed charges multiplied by 15% for primary care, and 5% for non–primary care.
  

Post-Acute Care

MedPAC recommended a relative reduction in payment levels for skilled nursing, home health, and inpatient rehabilitation facilities and modification to reimbursement methodologies for hospice care to better align payment with provider costs and encourage more effective length-of-stay management. For several years, MedPAC has raised concern that disproportionately high Medicare margins for post-acute providers required correction to more closely align aggregate payments with aggregate costs.

MedPAC also continued to monitor the recovery in financial performance of providers in these settings following the devastating impacts of the pandemic. While several indicators remain below pre-pandemic levels across facility types, MedPAC did not find these to be adversely impacting beneficiary access to care.

Skilled Nursing

• Skilled nursing facility (SNF) use for Medicare beneficiaries has been declining for several years, and MedPAC found that both admissions and days per 1,000 FFS beneficiaries continued to decrease between 2020 and 2021. However, this decrease (2.4% decline in admissions per 1,000 and 3.7% decline in days per 1,000) was less than the annual rate of decline between 2017 and 2019.
• MedPAC noted that Medicare spending on SNF services increased 0.5% between 2020 and 2021. Payment per day increased 3%, while costs per day grew at a slightly higher rate of 4%.
• The Medicare margin for freestanding SNFs was 17.2% in 2021, compared to a non-Medicare margin (including all payers, PHE-related funds, and all lines of business except Medicare FFS) of 0.1% in 2021.
• Given the high Medicare margin compared to other payers, MedPAC recommended that Congress reduce Medicare base payment rates to SNFs by 3% in FY 2024. Of note, current law is expected to increase payment rates by 2.6% in 2024. However, CMS has also noted its intention to reduce payments to correct for unintentional increases resulting from the implementation of the Patient-Driven Payment Model (PDPM) system.
• MedPAC’s analysis of Medicaid rates found that in 2021, 8 states froze or reduced rates paid to nursing homes, 39 states increased rates, and 4 states did not report. This represents an increase in the number of states providing a positive adjustment compared to 2020.

Home Health

• Since 2013, the number of home health agencies (HHAs) has been slowly declining. This trend continued between 2020 and 2021, with the number of HHAs decreasing by 0.8%. However, this is a lower decline compared to prior years, suggesting the trend may be slowing.
• Despite a decline in the number of HHAs, MedPAC found that the number of 30-day episodes per 100 Medicare FFS beneficiaries increased by roughly 1% in 2021 and the share of FFS beneficiaries using home health increased to 8.3%.
• MedPAC noted that the use of telehealth during and following the pandemic has surged as the number of in-person visits per 30-day period fell 4.7% between 2020 and 2021. The expanded use of telehealth was a flexibility granted during the pandemic that was later made permanent. MedPAC also suggested that the use of telehealth may have contributed to a decrease in costs for freestanding HHAs, with the average cost per 30-day period declining by 2.9% in 2021.
• Medicare margins for freestanding HHAs averaged 24.9% in 2021, a historic high compared to a 2020 margin of 20.2% and a 2019 margin of 15.4%. However, the projected 2023 margin for HHAs is 17%. This is driven in part by policy changes that will go into effect, including a required reduction to the base payment rate of 3.5% to maintain budget neutrality following the implementation of the Patient-Driven Grouping Model (PDGM).
• Overall, MedPAC recommended Congress reduce the 2023 Medicare base payment rates for HHAs by 7%.

Inpatient Rehabilitation

• MedPAC found that between 2020 and 2021, Medicare cases per 10,000 FFS beneficiaries increased by 4% and the number of inpatient rehabilitation facilities (IRFs) and IRF beds also increased. The aggregate IRF occupancy rate was 68%, suggesting some excess bed capacity.
• Between 2020 and 2021, the all-payer margin for freestanding IRFs increased from 10.2% to 14%. Similarly, Medicare margin for IRFs increased to 17% in 2021—mostly driven by slow growth in costs. However, MedPAC predicted that the 2023 margin for IRFs will decrease to 11%, driven largely by the expiration of payment increases related to the public health emergency.
• Given the high observed margins, MedPAC recommended that Congress reduce the 2023 IRF base payment rate by 3% in FY 2024.

Hospice

• MedPAC identified continued growth in the hospice market, with the number of providers increasing by 6% in 2021 as more for-profit hospice agencies entered the market. MedPAC found that the number of beneficiaries who utilized hospice, and the number of hospice days furnished, remained relatively stable.
• The 2020 Medicare aggregate margin for hospice agencies was 14.2%, up from 13.4% in 2019. This was partially driven by a slower increase in costs, rising only 1.1% between 2019 and 2020. However, MedPAC estimated that costs per day increased 4.2% in 2021. The Commission projected an aggregate Medicare margin of roughly 8% in 2023.
• MedPAC also estimated that 18.6% of hospice agencies exceeded the cap (which limits the aggregate payments a hospice provider can receive in a given year) in 2020.
• In terms of reimbursement, MedPAC recommended modification to payment methodologies to reduce payment levels to providers with disproportionately average lengths of stay and high margins and increase payment levels for other provider organizations. More specifically, the Commission recommended that the aggregate cap be wage adjusted and reduced by 20%. Of note, MedPAC has made this recommendation every year since 2020.
• MedPAC recommended that Congress update the 2023 Medicare base payment rates by the amount specified in current law (i.e., no deviations recommended).

Medicare Advantage: Status Report

MA plans continue to have success in the market, with increased membership, payments, and overall growth of the MA program. As the MA plans continue to gain more share of the Medicare market, MedPAC remains concerned that the financial benefits of the MA program are largely driven to the companies sponsoring MA plans, while MA payments exceed FFS payments at the cost of taxpayers and FFS Medicare beneficiaries.

Plan Growth

• MedPAC noted that MA enrollment has grown at a steady pace over the past several years and has more than doubled since 2013. MA enrollment is at 49% of eligible Medicare beneficiaries, and by 2024, MedPAC expects over half of all Medicare beneficiaries to be enrolled in an MA plan.
• MA growth has been disproportionately higher among local PPOs, which grew by 1.5 million enrollees and accounted for two-thirds of the overall growth from 2021 to 2022. The rapid increase in local PPOs is driven in part by the increase in MA rebates, resulting in additional benefits.
• In some metropolitan areas, MA enrollment is more than 70% of eligible Medicare beneficiaries. As such, MedPAC raised questions about benchmarks in these areas, since the local FFS population—a growing minority—is the basis for MA payment benchmarks.

Payments and Coding

• MedPAC noted that margin data is hard to evaluate for MA plans, but overall financial indicators suggest that the financial performance for MA plans continues to be strong. Bid amounts have been decreasing but are still below market benchmarks and below FFS payments, which creates value for both the beneficiaries and the plan.
• MedPAC reiterated from past reports that part of the positive financial performance is due to uncorrected MA coding intensity, which is still favorable to MA plans despite CMS’s effort to curb such behavior. In 2021, MA plans received $17 billion in excess payments despite CMS’s downward adjustment to MA risk scores, which were reported as 10.8% higher than FFS risk scores.

Recommendations

• MedPAC did not have any new MA recommendations, but the Commission continued to push for past recommendations that have not been implemented.
• MedPAC’s outstanding recommendations focus on many of the issues it noted in the most recent report—the need to fully account for MA coding intensity, improve encounter data accuracy and completeness, establish more equitable benchmarks, and update the quality program.

Published March 23, 2023