Medicare Rates Face Predictable Cuts in 2013

The Medicare Payment Advisory Commission, which makes recommendations on Medicare inpatient and outpatient payment rates, will likely recommend to Congress an increase in inpatient and outpatient payments to hospitals of only 1% in fiscal year 2013, a draft recommendation reveals.

As revelations go, the recommendation is not much of a shocker. For at least the past three years, MEDPAC has made that 1% recommendation.

No matter how you slice it, that rate is below the rate of inflation. Even the most conservative inflation calculations show that it has hovered around 3% for more than the past decade.  So in real terms, MEDPAC's likely recommendation represents a cut.

The clear message is that whether or not hospitals are overpaid on Medicare rates, though Congress has a history of playing good cop to MEDPAC's bad cop, both are acting as though hospitals are overpaid.

In fact, plenty of evidence exists that hospitals are losing money on Medicare patients. How much or how little can range from 10% to 30%. They make it up in volume.

Just kidding. They make it up, largely, through cross-subsidization, and many hospitals have been able to make up some of the cuts by doing much-needed process engineering work, among other efficiency initiatives.

But much of hospitals' ability to maintain a small margin still results from cross-subsidization. Indirect subsidies from commercial insurers ultimately pay for inadequate government payment rates by overpaying for their members' care. That's the idea,  anyway.  

I once thought that cross-subsidization wasn't going to be able to continue to carry that weight for much longer. That was in 2008. Now, as we rapidly close in on 2012, I'm not so sure.

I don't see hospitals padlocking their doors in depressed areas of the country. It happens, but very infrequently. I don't see former hospital CEOs standing in bread lines or wearing sandwich boards. In fact, I see a healthcare system in the US that is still quite healthy overall—at least financially.

In fact, as I wrote a couple of months ago in this space, there is a valid argument out there that cross-subsidization is a waxing, not a waning, force in healthcare today. So maybe a 1% increase is about right, considering the level of disappointment (largely muted) emanating from the usual hospital lobbying groups.

Hospital investment is seen as a golden opportunity, in fact, for several for-profit hospital companies, and even strong nonprofits are on the acquisition trail. Ultimately, I believe that national policymakers have decided that small hospitals are whirlpools of inefficiency in a vast sea of waste, and that this kind of weak updating of payment rates, combined with the tools of ICD-10 compliance, meaningful use standards, and several other national initiatives will serve as a blunt tool to encourage consolidation and efficiency.

Whether a 1% increase next year will make hospital leaders' lives incrementally more difficult is really beside the point.

The question is whether years of 1% increases will ultimately result in some hard decisions on consolidation over the long term. When the breaking point is reached is different for every organization, but many CEOs should have an idea of what that level is.

Too many, in my estimation, don't. At least not until it's too late.