Inpatient Facility Coding & Compliance Alert

Base payment rates for hospitals to rise by 3.25 percent in 2016.

If you think your facility strikes a perfect balance between the inpatient and outpatient services it offers, it could be time to think again. The Medicare Payment Advisory Commission (MedPAC) submitted its report on the adequacy of Medicare payments for hospital inpatient and outpatient services and other issues in a meeting on March 13, 2015, and the results might surprise you. 

Background: Each year the Commission is required to assess the adequacy of hospital payments and recommend payment updates for hospital inpatient and outpatient services. To do so, it considers beneficiaries’ payment adequacy indicators and also compares Medicare payments with the costs of relatively efficient hospitals.

Know What Is Happening Around You

Here’s the scoop from a 30-page detailed analysis on hospital trends and practices, to help you keep abreast of the latest news.

Assessment of payment adequacy: Most of the payment adequacy indicators (such as access to care, quality of care, and access to capital) have been consistently positive in 2012 as well as 2013. However, average Medicare margins continue to be negative, and MedPAC expects the margins to decline further this year. 

Capacity and supply of providers: Hospitals have excess inpatient capacity or a decrease in occupancy because of declining inpatient volume in recent years. Occupancy rates tend to vary based on factors like the number of beds per capita in a market, spending per capita, beneficiary health status, and physician practice styles. 

Volume of services: Medicare outpatient volume has shot up tremendously. However, Medicare inpatient volume has declined, and so has commercial-payer inpatient volume.

“Medical technology and techniques are at a point where many services that were previously inpatient can now be performed on an outpatient basis,” says Duane C. Abbey, PhD, president of Abbey and Abbey Consultants Inc., in Ames, IA. “Hospitals have long held the perception that inpatient services generated the bulk of their revenue. This perception and associated focus in inpatient services must be re-examined in light of this trend.”

Providers’ access to capital: Access to capital remains good for a majority of the hospitals. Capital markets even today target hospitals as a profitable investment. 

Medicare payments and providers’ costs: Payments are projected to decline in 2015 because of changes in Medicare disproportionate share payments, health information technology payments, and other policy changes. These changes may result in lower margins for all hospitals, including the relatively efficient providers.

Declining discharges:  Decline in inpatient payments reflects a 4 percent drop in discharges per capita. Part of the decline in discharges and growth in outpatient services is due to increased use of observation services as a substitute for inpatient care. The rate of decline of average hospital bed occupancy was higher in the rural hospitals, probably because individuals increasingly bypass rural hospitals and travel to urban hospitals for inpatient care. 

Food for thought: “Observation services, if used correctly, can serve as an effective mechanism to provide needed care without a hospital admission,” tells Abbey. “Hospitals continue to be at the mercy of physicians who continue to admit patients as inpatients even when similar services are available with observation.”

Discharges to cost the same: Declining occupancy will not significantly affect cost per discharge, says MedPAC. The majority of hospital costs are fixed. When inpatient volume falls and occupancy rates decline, the hospital costs are higher but the effect is small. However, financial success is more difficult for smaller hospitals, as more costs are fixed. Therefore, there may be a need for low-volume adjustments or other policies to assist small, isolated hospitals.

Hospital shutdown: MedPAC expects more hospital closures in the coming years. In 2013, 25 acute care hospitals closed. Given the declining use of rural hospitals coupled with a desire to maintain access to emergency services in rural areas, it may be time to revisit ways to maintain emergency access in rural areas.

Good news: Data from the American Hospital Association (AHA) annual survey show a 115 percent increase in physicians employed under a salary model from 2007 to 2012.  

Despite potential changes in payments and costs, access is expected to remain strong because hospitals have a financial incentive and the capacity to serve Medicare patients, at least for now. However, in the long run, the growing disparity between Medicare rates and commercial rates (which continue to grow at roughly 5 percent per year) will have to be addressed. 

“As with other aspects of healthcare, Medicare tries to pay less while commercial payers seem to better adjust to more appropriate payment,” feels Abbey. “If this disparity is allowed to grow over time, then beneficiaries’ access to services could become compromised.”

MedPAC Paves the Way With Three Recommendations

Based on the above analysis, MedPAC put forth the following recommendations to Medicare:

Recommendation 1: “Increase base payment rates for the acute care hospital inpatient and outpatient prospective payment systems in 2016 by 3.25 percent, concurrent with the change to the outpatient payment system discussed above and initiating the change to the long-term care hospital payment system,” according to MedPAC.

Recommendation 2: “Modify hospital OPDs services’ payment rates to more closely align with the physician offices’ payment rates for selected ambulatory payment classifications.”

Under current policy, Medicare usually pays more for services in outpatient departments even when those services are also safely performed in physician offices. “This payment difference creates a financial incentive for hospitals to purchase freestanding physicians’ offices and convert them to HOPDs without changing their location or patient mix,” says MedPAC.

Effect: The Commission’s 2014 recommendation would address differences in payment rates across sites of care for outpatient services, reduce Medicare program spending, reduce beneficiary cost sharing, and create an incentive to improve efficiency by caring for patients in the most efficient site for their condition.

Recommendation 3: “Set long-term care hospital (LTCH) base payment rates for non-CCI (chronically critically ill) cases equal to acute care hospital base rates and redistribute the resulting savings to create additional inpatient outlier payments for CCI cases that are treated in IPPS hospitals. The change should be phased in over three years,” explains MedPAC.

This is an effort to wipe out differences in payment rates across sites of care for inpatient care. LTCHs are currently paid much higher rates than traditional acute care hospitals, even for patients who do not require an LTCH’s specific services. MedPAC therefore recommended in 2014 a new criterion for claims to receive the higher level LTCH payments: Chronically critically ill (CCI) patients would still qualify for the relatively high payment rates for LTCH standard diagnosis related groups (DRGs); in contrast, non-CCI cases at LTCHs would receive IPPS standard DRG payment rates.

Implication: This would create savings that could be transferred to acute care hospitals in the form of higher outlier payments for the most costly CCI cases. In the end, the differences in IPPS and LTCH rates would reduce. 

Moreover, this package of changes will perk up the incentives in the system to care for patients in the most appropriate setting, and ensure that funding in the acute care hospital systems is adequate to provide high-quality care for Medicare beneficiaries. This can be made possible by reducing payment rates for services that can safely be provided in lower cost settings and, concurrently, increasing rates for other hospital services by 3.25 percent so that overall Medicare payments are adequate for efficient providers.

The total effect: These three payment changes (the 3.25 percent increase in base payment rates, LTCH reform coupled with acute care hospital CCI outlier payments, and aligning certain outpatient ambulatory payment classifications with physician office rates) would increase Medicare program spending by between $750 million and $2 billion in 2016.

Final takeaway: “MedPAC is an advisory commission; CMS may accept or not accept any of their recommendations. There will be no immediate impact such as for 2015,” explains Abbey. “Long term, the goal of equalizing the payment for a given service in different settings is certainly a worthy goal, which should reduce overall Medicare spending.  However, with this equalization of payments for the same service, there will be changes in payment at the provider level.”