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On the Way to Reform: Medicare Rate Updates Pack the Biggest Punch

Scott B. Clay, for HealthLeaders Media, July 20, 2009

The issue at hand is the "behavioral adjustment" to offset estimated upcoding from the transition to MS-DRGs, which capture more precise data regarding severity of care. Essentially, CMS contends that, even with behavioral offset reductions already taken, hospitals were overpaid for 2008 and are being overpaid for 2009. So the 2008 and 2009 revenues already booked need to be recovered in addition to further offsets in the base rates for 2010 and 2011.

Comments to the proposed 2010 rule have been sent by the American Hospital Association, the Medicare Payment Advisory Commission, which advises Congress on Medicare expenditures, and others. The AHA disputes CMS' findings and provided an alternative analysis which supports the contention that no unearned upcoding occurred. MEDPAC, on the other hand, wrote a letter confirming CMS' findings and supporting the proposed reduction in payment updates by a total of 8.5% over three years with the additional recommendation to take a larger reduction than proposed in 2010. Alternative views and positions on this important subject will continue, but the prevailing economic and political winds seem to be blowing in the direction of cost reductions for Medicare.

Given the magnitude of the impact on hospitals, these changes have been politically unpalatable in the past, but the health reform debate currently underway has highlighted the unsustainable growth rate in government healthcare spending and proposals for a larger government role in healthcare have created more pressure to find funding by reducing existing costs. In general, the Administration has put cost reductions front and center in this round of healthcare reform and is highly focused on "bending the cost curve."

A prime example of this is the recent report that President Obama is pushing to move Medicare payment authority away from Congress and put it in the hands of non-elected officials. The rationale is that Medicare payments have served as an effective constituent service tool for many in Congress, and that "bending the cost curve" in Medicare is impossible if politicians are unwilling to play hard ball with local doctors and hospitals. The Administration has sent two proposals to Congress to address this problem. The first would put the authority for payment updates in the hands of MEDPAC (and their comment on the proposed 2010 IPPS rule clearly outlines their general position on payments). The second proposal would create a new advisory council which reports directly to the President, with limited provisions for Congress to overturn decisions.

Implications for healthcare leaders
The inescapable implication of these trends is that hospitals will need to focus in the short term on continuing the work of reducing their underlying cost structure. These efforts have begun during the recent economic downturn, but sustained pressures on revenue growth will require further discipline in identifying opportunities to operate more efficiently even while making adjustments for the long-term impact of healthcare reform initiatives.

Without a doubt, there are many moving parts in the healthcare reimbursement puzzle, and some changes will be positive for healthcare providers. However, during these times of intense debate over the long-term future of healthcare financing and delivery, it is important to keep an eye on those changes which will impact financial performance in the next two to three years, and perhaps no other single variable is more important than the annual update to the Medicare inpatient prospective payment system.


Scott B. Clay is senior principal at Noblis Health Innovation. He can be reached at scott.clay@noblis.org.
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