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Lines Drawn Over Recommended Cuts in Medicare Hospital Reimbursement

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Lines Drawn Over Recommended Cuts in Medicare Hospital Reimbursement

In January, MedPAC, the Medicare Payment Advisory Commission, issued recommendations that hospital reimbursements be cut in 2006, to the dismay of hospitals across the country. This proposal, among others, will be included in MedPAC’s March report to Congress. Established in 1997 to advise legislators on Medicare, the commission commands the respect of lawmakers, and its recommendations often are accepted.

As the nation’s health insurance program for the elderly and disabled, Medicare covered 41 million Americans in 2004 at a cost of about $297 billion. More than a third of all hospital services in the United States are financed by Medicare. But rapid technological advancements and the aging of the population, combined with a decrease in the number of working adults per beneficiary and increased medical costs, have put intense pressure on the program and policymakers.

Medicare cost growth has outpaced inflation: in 2004, costs increased at a rate of 8.4 percent, and a 30 percent jump is expected by 2007. Of the program’s four parts, Part A, which covers expenses for inpatient hospital stays and other costs, accounted for almost half of all Medicare spending in 2004.

In response to the rise in hospital payments, MedPAC commissioners recommended last month that Medicare increase payments to hospitals by only 2.8 percent, which is less than the increase in expected costs and is therefore a cut in financing. If the recommendation is accepted, the action will save Medicare $800 million in 2006.

Wrong Number?
Hospitals, many of which are struggling to stay in the black, reacted negatively to MedPAC’s announcement. Don May, vice president for public policy at the American Hospital Association, believes that the recommendations, if accepted, “will continue to deteriorate the adequacy of Medicare payments to hospitals.” May believes that MedPAC’s recommendations will make it more difficult for hospitals in their constant quest to improve patient care. “Resources that could be invested in improving IT or upgrading a physical plant,” he said, “may now need to be shifted to ensure hospitals are still able to maintain their promise of caring for the communities they serve.”

May does not believe that the cuts in reimbursement will lead to greater efficiency at higher-cost hospitals. “In their December 2004 meeting, MedPAC’s own data showed the lowest Medicare margins for hospitals in several years,” he said. “Hospitals already strive to be as efficient as possible in spite of Medicare payments that are less than the cost of care. More cuts are not the answer.” The association will be lobbying Congress to reject MedPAC’s recommendations.

Commission Dissent
Even MedPAC’s members were not in complete agreement about the recommended cuts. Ralph Muller, CEO of the University of Pennsylvania Health Care System and a MedPAC commissioner, had urged the group to propose a full market basket update of 3.2 percent, in light of the fact that Medicare payments were not covering hospitals’ costs.

“Hospitals already strive to be as efficient as possible in spite of Medicare payments that are less than the cost of care. More cuts are not the answer.”

Muller says that while there is room for efficiency gains at hospitals, many of the cost drivers are beyond their control. He cites the increases in nursing costs and in malpractice expenses that are driven largely by increases in jury awards. “Hospitals losing money is not just about poor management,” he said, contending that a hospital’s financial health has more to do with its location and patient population, particularly its share of Medicaid patients. Muller is concerned that, faced with below-cost reimbursement, hospitals will reduce the number of nurses who care for patients. This, he said, will lead to a decline in quality and an increase in deaths at the nation’s hospitals.

“The federal government could spur hospitals to be more efficient through pay-for-performance initiatives and through tying payment to appropriate use of technology,” Muller argued. He cites research demonstrating that health care spending is a function of the supply of technology—the more technology we have, the more it will be used, regardless of whether it is medically necessary. He is in favor of the federal government working with private payers, specialty societies, and health outcomes researchers to set standards for the use of innovative diagnostic and therapeutic technologies. “Innovation is good,” he said, “but only when it’s used appropriately.”

—Erica Seiguer, a sixth-year MD–PhD student, is studying economics in Harvard’s Doctoral Program in Health Policy.

Related Websites
Kaiser Family Foundation–Medicare
MedPAC
American Hospital Association
National Bipartisan Commission on the Future of Medicare

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