Update on 2023 Proposed Healthcare Payment Rules

Valuation Implications

Over the past couple of months, the Centers for Medicare & Medicaid Services (CMS) released the proposed rules for several of its payment schedules, indicating the state of healthcare reimbursement for the next year. This article briefly summarizes these proposed payment rules and discusses their significance to healthcare valuation professionals.

The U.S. government is the largest payor of medical costs, through Medicare and Medicaid, and consequently has a strong influence on physician reimbursement. The prevalence of these public payors in the healthcare marketplace often results in their acting as a price setter, and being used as a benchmark for private reimbursement rates. Consequently, changes to Medicare and Medicaid payment rates are notable as they may indicate a shift in the greater healthcare reimbursement landscape.

Over the past couple of months, the Centers for Medicare & Medicaid Services (CMS) released the proposed rules for several of its payment schedules, indicating the state of healthcare reimbursement for the next year. This article briefly summarizes these proposed payment rules and discusses their significance to healthcare valuation professionals.

Medicare Physician Fee Schedule (MPFS)

Medicare pays for physician and other health professional services based on a list of services and their payment rates, i.e., the MPFS. Under this fee schedule, CMS determines the payment rate for each service based on various relative value units (RVUs): (1) the work required to provide the service (wRVUs); (2) expenses related to maintaining a medical practice (PE RVUs); and (3) medical malpractice insurance costs (MP RVUs). Those payment rates are adjusted to account for variations in the input prices in different markets, but may also be adjusted based on provider characteristics, additional geographic designations, and other factors.[i] Conversion factors are then applied to those RVUs to become payment rates.

The conversion factor has been decreasing over the past few years, as set forth in the below table, and seems to be poised to continue into 2023:

Although uikely, this decrease for 2023 could be compounded by an additional up-to-4% decrease because of the Pay-As-You-Go Act (PAYGO) sequestration scheduled to take effect on January 1, 2023. This law requires that “all new legislation changing taxes, fees, or mandatory expenditures, taken together … not increase projected deficits” and “is enforced by the threat of automatic across-the-board cuts in selected mandatory programs [including most Medicare payments] if legislation taken as a whole does not meet the PAYGO standard.”[ii] It is worth noting, however, that Congress has always intervened before a threatened PAYGO sequester has gone into effect.[iii]

In addition to payment rate updates, CMS also proposed updates to the Medicare Shared Savings Program (MSSP) that, if finalized, will “represent some of the most significant reforms since … ACOs began participating in 2012.”[iv] First, in order to provide smaller providers with no previous ACO experience more time to acclimate to two-sided risk, CMS proposes extending the amount of time during which these providers may participate in one-sided (no risk) shared savings models (up to seven years).[v] Second, CMS proposes incorporating advance shared savings payments (a $250,000 one-time payment and quarterly payments for two years thereafter based on “enrollee neediness”) to low-revenue ACOs, which can be used to address social needs of Medicare beneficiaries, e.g., improving provider infrastructure, increasing staffing, or caring for underserved enrollees.[vi] These funds would then be repaid to CMS through the ACO’s shared savings (if it earns any). If finalized, this will be one of the first times Traditional Medicare payments would be permitted for such uses.[vii] Third, CMS seeks to fix “glitches” in the MSSP’s benchmarks that make it progressively harder to top the previous year’s metrics. Toward that end, the agency proposes adding a prospective (rather than a historical) external factor; including a prior savings adjustment in historical benchmarks; and reducing the cap on negative regional adjustments, from 5% to 1.5% of national per capita expenditures.[viii] In total, these proposed changes could result in $650 million more in shared savings payments to ACOs and a $15.5 billion decrease in benefits spending (because of savings from efficiency).[ix] 

The MPFS final rule will likely be published in November or December 2022.

Outpatient Prospective Payment System (OPPS)

The OPPS sets payments for individual services provided in hospital outpatient departments (HOPDs) or ambulatory surgery centers (ASCs) using a set of relative weights, a conversion factor, and adjustments for geographic differences in input prices. Providers also can receive additional payments via outlier adjustments for extraordinarily high-cost services and pass-through payments for some new technologies.[x]

For 2023, CMS proposed increasing OPPS payment rates to HOPDs that meet specific quality reporting criteria by 2.7%.[xi] ASCs that meet the required quality criteria will also receive proposed payment rate increases of 2.4%, by way of the same calculation for OPPS payment rates[xii]

Further, the 2023 OPPS proposed rule provided additional insight on the new Rural Emergency Hospital (REH) designation established by the Consolidated Appropriations Act of 2021. Beginning January 1, 2023, facilities that are a rural hospital or critical access hospital (CAH); have fewer than 50 beds; and do not provide acute care inpatient services (except for skilled nursing facility services in a distinct unity), can convert to an REH and receive an additional 5% on top of the OPPS payment rate for each service, as well as a monthly facility payment.[xiii] CMS also proposes “(1) a new exception for ownership or investment interests in an REH; and (2) revisions to certain existing exceptions to make them applicable to compensation arrangements to which an REH is a party.”[xiv] REHs will be required “to accept Medicare, have average lengths of stay of 24 hours or shorter, eliminate acute care inpatient services, have transfer agreements with Level I or Level II trauma centers, and meet federal employee training and certification requirements.”[xv]

The proposed rule also indicated CMS’s next move in the ongoing 340B Drug Pricing Program saga. The 340B Program allows hospitals and clinics that treat low-income, medically underserved patients to purchase certain “specified covered outpatient drugs” at discounted prices and then receive reimbursement under the OPPS at the same rate as all other providers.[xvi] In the 2018 OPPS final rule, CMS reduced the reimbursement rate from 340B participants only, from a drug’s average sales price (ASP) plus 6% to ASP minus 22.5%.[xvii] A subsequent court challenge resulted in a unanimous U.S. Supreme Court opinion that CMS exceeded its authority in changing the drug reimbursement rates, but did not address how CMS should repay those hospitals that received only a portion of the 340B reimbursement to which they were entitled.[xviii] While the Supreme Court decision was released in June 2022, too late for CMS to change the 340B reimbursement rate in the proposed rule, the agency did state that they “fully anticipate applying a rate of ASP plus 6% to such drugs and biologicals in the final rule for CY 2023 … [and] are still evaluating how to apply the Supreme Court’s recent decision to prior calendar years.”[xix]

The final rule will be published in November or December 2022.

Inpatient Prospective Payment System (IPPS)

The IPPS primarily pays hospitals fixed, per-discharge rates covering operating and capital expenses during an inpatient illness episode, which incentivizes providers to provide efficient, cost-effective care. These per-discharge payments are derived through a series of adjustments applied to those operating and capital base payment rates, which rates are then adjusted to reflect geographic factors, patient case mix, facility characteristics, and other factors.[xx]

For fiscal year (FY) 2023,[xxi] CMS proposed a 3.2% payment increase for hospitals that report quality data and are meaningful users of electronic health records.[xxii] This is a notable increase from the 2022 payment update of 2.5%[xxiii] and translates to a growth in Medicare spending on inpatient hospital services of approximately $1.1 billion in 2023.[xxiv]

The final rule will be published in August or September 2022.

Valuation Implications

These finalized payment rules may have several implications for healthcare-related valuations (both of entities and compensation arrangements). The value paid in a healthcare transaction, whether it be for a physician compensation arrangement or the acquisition of a healthcare business (or interest therein), is determined on the future economic benefits for the involved willing buyers. Therefore, employed valuation methodology must be forward-looking.

For instance, the market approach, i.e., the utilization of compensation amounts paid in comparable agreements to establish the value of the subject arrangement, is the most common valuation methodology employed for the valuation of physician compensation arrangements. There are numerous surveys available that report physician compensation benchmarks. However, these surveys report compensation practices that occurred in the past. If the amount of reimbursement that the buyer, or employer, of the physician services will receive for the services acquired from the physician(s) is expected to change, consideration must be given to the impact of the reimbursement change on historical survey data for the applicability to future compensation arrangements.

Similarly with the valuation of healthcare businesses, changes in future reimbursement for the subject business’s services or goods have a direct impact on the post-transaction earnings available to the buyer, and valuation methodology, such as earnings forecasts or adjustment to historical pricing multiples, must consider any future decreases, or increases, in reimbursement.

 

[i]       “Physician and Other Health Professional Payment System” Medicare Payment Advisory Commission, MedPAC Payment Basics, October 2020, http://medpac.gov/docs/default-source/payment-basics/medpac_payment_basics_20_physician_final_sec.pdf?sfvrsn=0 (Accessed 8/20/21).

[ii]      “The Statutory Pay-As-You-Go Act of 2010: A Description” Office of Management and Budget, The White House, https://obamawhitehouse.archives.gov/omb/paygo_description/ (Accessed 11/17/21).

[iii]       “Medicare Sequester Cuts Possible Without Congressional Action” JD Supra, November 10, 2021, https://www.jdsupra.com/legalnews/medicare-sequester-cuts-possible-5800140/ (Accessed 11/16/21).

[iv]       “Calendar Year (CY) 2023 Medicare Physician Fee Schedule Proposed Rule” Centers for Medicare & Medicaid Services, July 7, 2022, https://www.cms.gov/newsroom/fact-sheets/calendar-year-cy-2023-medicare-physician-fee-schedule-proposed-rule (Accessed 7/18/22).

[v]        “CMS proposes major changes to Shared Savings Program” By Maya Goldman, Modern Healthcare, July 7, 2022, https://www.modernhealthcare.com/medicare/cms-proposes-major-changes-shared-savings-program (Accessed 7/18/22).

[vi]       “CMS Proposes Physician Payment Rule to Expand Access to High-Quality Care” Centers for Medicare & Medicaid Services, July 7, 2022, https://www.cms.gov/newsroom/press-releases/cms-proposes-physician-payment-rule-expand-access-high-quality-care (Accessed 7/18/22); “CMS proposes major changes to Shared Savings Program” By Maya Goldman, Modern Healthcare, July 7, 2022, https://www.modernhealthcare.com/medicare/cms-proposes-major-changes-shared-savings-program (Accessed 7/18/22).

[vii]      “CMS Proposes Physician Payment Rule to Expand Access to High-Quality Care” Centers for Medicare & Medicaid Services, July 7, 2022, https://www.cms.gov/newsroom/press-releases/cms-proposes-physician-payment-rule-expand-access-high-quality-care (Accessed 7/18/22).

[viii]     “Medicare and Medicaid Programs; CY 2023 Payment Policies under the Physician Fee Schedule and Other Changes to Part B Payment Policies; Medicare Shared Savings Program Requirements; Medicare and Medicaid Provider Enrollment Policies, Including for Skilled Nursing Facilities; Conditions of Payment for Suppliers of Durable Medicaid Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS); and Implementing Requirements for Manufacturers of Certain Single-dose Container or Single-use Package Drugs to Provide Refunds with Respect to Discarded Amounts” Proposed Rule (Unpublished Version), available at: https://public-inspection.federalregister.gov/2022-14562.pdf (Accessed 7/18/22), p. 872.

[ix]       “Medicare and Medicaid Programs; CY 2023 Payment Policies under the Physician Fee Schedule and Other Changes to Part B Payment Policies; Medicare Shared Savings Program Requirements; Medicare and Medicaid Provider Enrollment Policies, Including for Skilled Nursing Facilities; Conditions of Payment for Suppliers of Durable Medicaid Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS); and Implementing Requirements for Manufacturers of Certain Single-dose Container or Single-use Package Drugs to Provide Refunds with Respect to Discarded Amounts” Proposed Rule (Unpublished Version), available at: https://public-inspection.federalregister.gov/2022-14562.pdf (Accessed 7/18/22), p. 629.

[x]      “Outpatient PPS” American Hospital Association, https://www.aha.org/advocacy/current-emerging-payment-models/outpatient-pps (Accessed 8/20/21).

[xi]     Calculated from the proposed hospital inpatient market basket percentage increase of 3.1% minus the proposed productivity adjustment of 0.4%. “Medicare Program:  Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Organ Acquisition; Rural Emergency Hospitals: Payment Policies, Conditions of Participation, Provider Enrollment, Physician Self-Referral; New Service Category for Hospital Outpatient Department Prior Authorization Process; Overall Hospital Quality Star Rating” Centers for Medicare & Medicaid Services, July 15, 2022, unpublished version, available at:  https://public-inspection.federalregister.gov/2022-15372.pdf (Accessed 7/19/22), p. 77.

[xii]     “Medicare Program:  Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Organ Acquisition; Rural Emergency Hospitals: Payment Policies, Conditions of Participation, Provider Enrollment, Physician Self-Referral; New Service Category for Hospital Outpatient Department Prior Authorization Process; Overall Hospital Quality Star Rating” Centers for Medicare & Medicaid Services, July 15, 2022, unpublished version, available at:  https://public-inspection.federalregister.gov/2022-15372.pdf (Accessed 7/19/22), p. 559.

[xiii]     “CY 2023 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Proposed Rule (CMS 1772-P)” Centers for Medicare & Medicaid Services, July 15, 2022, https://www.cms.gov/newsroom/fact-sheets/cy-2023-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center (Accessed 7/19/22).

[xiv]     “CY 2023 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Proposed Rule (CMS 1772-P)” Centers for Medicare & Medicaid Services, July 15, 2022, https://www.cms.gov/newsroom/fact-sheets/cy-2023-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center (Accessed 7/19/22).

[xv]      “CMS proposes CoP for new rural emergency hospital model” By Alex Kacik, Modern Healthcare, July 1, 2022, https://www.modernhealthcare.com/policy/cms-proposes-cop-new-rural-emergency-hospital-model (Accessed 7/25/22).

[xvi]     “Supreme Court Will Determine Whether 340B Hospitals Retain Discounts on Medicare Part B Drugs” Allison Hoffman, Commonwealth Fund, November 21, 2021, https://www.commonwealthfund.org/blog/2021/supreme-court-340b-hospitals-discounts-medicare-part-b (Accessed 12/15/21).

[xvii]    “Federal Court Says 2018 OPPS 340B Program Rate Cuts Unlawful, Orders Briefing to Avoid Havoc on Medicare Program” By Lee Nutini, JDSupra, January 3, 2019, https://www.jdsupra.com/legalnews/federal-court-says-2018-opps-340b-87971/ (Accessed 12/15/21); “CMS Issues Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System and Quality Reporting Programs Changes for 2018 (CMS-1678-FC)” Centers for Medicare & Medicaid Services, November 1, 2017, https://www.cms.gov/newsroom/fact-sheets/cms-issues-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center-payment (Accessed 12/20/21).

[xviii]   “American Hospital Association et al. v. Becerra, Secretary of Health and Human Services, et al.” 596 U.S. ___ (2022), Slip Opinion, Certiorari to the United States Court of Appeals for the District of Columbia Circuit, available at: https://www.supremecourt.gov/opinions/21pdf/20-1114_09m1.pdf (Accessed 6/15/22).

[xix]     “CY 2023 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Proposed Rule (CMS 1772-P)” Centers for Medicare & Medicaid Services, July 15, 2022, https://www.cms.gov/newsroom/fact-sheets/cy-2023-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center (Accessed 7/19/22).

[xx]     “Hospital Acute Inpatient Services Payment System” Medicare Payment Advisory Commission, MedPAC Payment Basics, October 2020, http://medpac.gov/docs/default-source/payment-basics/medpac_payment_basics_20_hospital_final_sec.pdf?sfvrsn=0 (Accessed 8/20/21).

[xxi]     The IPPS runs on a different schedule than the MPFS and OPPS (which align with the calendar year), from October 1 to September 30 each year.

[xxii]   “FY 2023 Hospital Inpatient Prospective Payment System (IPPS) and Long Term Care Hospitals (LTCH PPS) Proposed Rule – CMS-1771-P” Centers for Medicare and Medicaid Services, April 18, 2022, https://www.cms.gov/newsroom/fact-sheets/fy-2023-hospital-inpatient-prospective-payment-system-ipps-and-long-term-care-hospitals-ltch-pps (Accessed 5/3/22).

[xxiii] “Medicare Program: Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long Term Care Hospital Prospective Payment System and Policy Changes and Fiscal Year 2022 Rates; Quality Programs and Medicare Promoting Interoperability Program Requirements for Eligible Hospitals and Critical Access Hospitals; Changes to Medicaid Provider Enrollment; and Changes to the Medicare Shared Savings Program” Federal Register, Vol. 86, No. 154 (August 13, 2021), p. 44790.

[xxiv] “FY 2023 Hospital Inpatient Prospective Payment System (IPPS) and Long Term Care Hospitals (LTCH PPS) Proposed Rule – CMS-1771-P” Centers for Medicare & Medicaid Services, April 18, 2022, https://www.cms.gov/newsroom/fact-sheets/fy-2023-hospital-inpatient-prospective-payment-system-ipps-and-long-term-care-hospitals-ltch-pps (Accessed 5/3/22).

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Todd A. Zigrang, MBA, MHA, ASA, CVA, FACHE, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician owned hospitals as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.

Mr. Zigrang can be contacted at (800) 394-8258 or by e-mail to tzigrang@healthcapital.com.

Jessica Bailey-Wheaton, Esq., is vice president and general counsel for Heath Capital Consultants, where she conducts project management and consulting services related to the impact of both federal and state regulations on healthcare exempt organization transactions, and provides research services necessary to support certified opinions of value related to the fair market value and commercial reasonableness of transactions related to healthcare enterprises, assets, and services.

Ms. Bailey-Wheaton can be contacted at (800) 394-8258 or by e-mail to jbailey@healthcapital.com.