MedPAC Recommends Increasing Hospital and Physician Payments for 2024

Reasons for the Recommendation and Responses

On March 15, 2023, the Medicare Payment Advisory Commission (MedPAC) published its annual Report to Congress regarding the status of the Medicare program. Among other areas, the report detailed policy recommendations for the Medicare fee-for-service (FFS) payment systems, the Medicare Advantage (MA) program, and the Medicare prescription drug program (Medicare Part D). This article will review the recommendations made by MedPAC and responses from industry stakeholders.

On March 15, 2023, the Medicare Payment Advisory Commission (MedPAC) published its annual Report to Congress regarding the status of the Medicare program.[1] Among other areas, the report detailed policy recommendations for the Medicare fee-for-service (FFS) payment systems, the Medicare Advantage (MA) program, and the Medicare prescription drug program (Medicare Part D). This article will review the recommendations made by MedPAC and responses from industry stakeholders.

MedPAC is an independent congressional agency that advises the U.S. Congress on issues affecting the Medicare program, such as “payments to private health plans participating in Medicare and providers in Medicare’s traditional fee-for-service program, [as well as] access to care, quality of care, and other issues affecting Medicare.”[2] Additionally, MedPAC is required by law to annually assess the adequacy of Medicare payments for various healthcare delivery sectors and make payment update recommendations.[3] In making that assessment, the commission analyzes factors such as patient access to care, quality of care, hospital access to capital, Medicare payments, and hospital costs.[4] 

In Chapter 3 of its Report to Congress, MedPAC reported that in 2021, the all-payor margins for hospitals participating in the Inpatient Prospective Payment System (IPPS) reached a record high of 8.7%, indicating a stronger access to capital.[5] However, hospitals’ average Medicare margins were -6.2% with federal relief funds, and -8.3% without federal relief.[6] MedPAC also noted that costs increased for hospitals in 2022, and will likely continue in 2023, resulting in lower Medicare margins of approximately -10%.[7] In fact, many industry experts have referred to 2022 as the worst year financially for hospitals.[8] While hospital margins are stabilizing, hospital groups assert the increase will hardly address inflation.[9] In consideration of the above, MedPAC suggested that Congress update the Medicare IPPS base payment rates for fiscal year (FY) 2024.[10] MedPAC additionally stated that the statutorily-required annual base payment rate increase should be increased by an additional 1.0% for FY 2024. Because MedPAC does not believe this 1.0% increase will be financially sustainable for safety-net hospitals (which typically have a poorer payor mix), the commission addressed these hospitals separately.[11] In addition, MedPAC recommended payments should be redistributed through a new Medicare Safety-Net Index (MSNI), which would calculate a score for each hospital based on the hospital’s proportion of Medicare beneficiaries, low-income Medicare beneficiaries, and uncompensated care.[12] MedPAC explains that the MSNI would be structured as a percentage add-on payment to current IPPS payments, so those safety-net facilities with a higher proportion of low-income patients would receive enhanced payments.[13] To fund the anticipated cost of MSNI add-on payments, MedPAC suggests that Congress “add $2 billion to the MSNI pool.”[14]

Notably, the Centers for Medicare & Medicaid Services (CMS) heeded MedPAC’s recommendations for increasing hospital payments in its proposed payment updates for FY 2024, released in April 2023. CMS proposed increasing the IPPS base rate by 2.8%, which would result in $3.3 billion in additional funding for FY 2024.[15] This percentage increase is comprised of a projected FY 2024 hospital market based increase of 3.0%, reduced by 0.2% due to a productivity adjustment.[16] This proposed increase is considerably lower than the FY 2023 payment increase of 4.3%.[17] Although CMS proposed increases in overall payments to hospitals, in contrast to MedPAC’s recommendation, it proposed decreases to payments that offset the cost of charity care for low income patients; disproportionate share hospital (DSH) payments and Medicare uncompensated care payments are expected to decrease by a combined $115 million.[18]

In Chapter 4 of its Report to Congress, MedPAC further recommended that for FY 2024, Congress update the Medicare Physician Fee Schedule (MPFS) “by 50 percent of the projected increase in the Medicare Economic Index [MEI].”[19] The MEI was developed by CMS to measure annual changes in physicians’ operating costs and earnings levels, and is a significant factor in determining the annual payment update for Medicare fee schedules.[20] In making this recommendation, MedPAC cited concerns that current payment levels may make it difficult for clinicians to absorb increasing costs due to inflation.[21] Because half of the projected MEI is designated to practice expenses, MedPAC suggested increasing the payment rates by 50% of the MEI, or 1.45%, to account for those increased practice costs.[22] By doing so, MedPAC expects that the recommended increased payments will be able to sufficiently keep up with practice costs.[23]

As relates to Medicare Part C, also known as MA (where Medicare coverage is offered by private companies), MedPAC called for a “major overhaul of MA policies,” citing concerns that there is not enough financial pressure on MA plans to ensure they continue to reduce costs and improve quality of care.[24] While MedPAC reaffirmed their support for MA, they expressed concern that Medicare overpays MA plans.[25] Under the current payment policies, the report established that continuing to overpay MA plans would worsen the fiscal sustainability of Medicare overall, especially as the proportion of Medicare beneficiaries who enroll in MA plans grows.[26] The MA program enrolled 49% of Medicare beneficiaries in 2022, with Medicare paying MA an estimated $403 billion.[27] While MA plans have offered “a historically high level of benefits” to enrollees for the seventh straight year, with average rebates reaching $2,350 per enrollee in 2023 (double the rebate amounts in 2018), taxpayers are not realizing any savings from MA plan efficiencies.[28]

Reporting on the status of Medicare Part D, Medicare’s prescription drug program, MedPAC reported that in 2021, total Part D spending was $110.8 billion; of total, Part D enrollees paid $14.9 billion in premiums for basic benefits, $7.5 billion in premiums for enhanced benefits, and $17.9 billion in cost sharing, accounting for 55% of the total program spending.[29] Despite this extensive spending, the value of the benefits that enrollees have received through the program has “plummeted” in recent years.[30] Consequently, MedPAC renewed its previous recommendations significantly change Part D’s benefit design “to limit enrollee out-of-pocket spending; realign plan and manufacturer incentives to help restore the role of risk-based, capitated payments; and eliminate features of the current program that distort market incentives.”[31]

Stakeholders quickly responded to MedPAC’s report, with the general consensus that MedPAC’s suggested payment updates would not be sufficient. The American Medical Association (AMA) agreed with MedPAC’s acknowledgment of the rising costs to practice medicine, which it claimed to be a good first step.[32] The AMA feels “strongly that an update tied to just 50% of MEI will cause physician payment to chronically fall even further behind increases in the cost of providing care. Congress should adopt a 2024 Medicare payment update that recognizes the full inflationary growth in healthcare costs.”[33] The Medical Group Management Association (MGMA) agreed that this update would not be enough.[34] The senior vice president of government affairs of MGMA stated that “[i]n the best of times, such a nominal increase would not cover annual medical practice cost increases. In the current inflationary environment, it is grossly insufficient. Medical practices have been suffering from significant staffing shortages and cost increases across the board. An update of any amount less than the full MEI will not adequately remedy the negative impact of the broader economy on practices’ financial stability.”[35] The AMA, along with 134 other organizations, memorialized these sentiments in a letter that was sent to Congress urging legislators to tie future MPFS payment updates to the full MEI rate, rather than just half.[36] Congress’s response to the letter—and to MedPAC’s recommendations—will most likely be included in CMS’s proposed payment updates to the MPFS, which is typically released in the summer.

This article was previously published in HCC Newsletter, Volume 16, Issue No. 3 (March 2023), and is republished here by permission.

 

 

[1]             “March 2023 Report to the Congress: Medicare Payment Policy” Medicare Payment Advisory Commission, March 15, 2023, https://www.medpac.gov/document/march-2023-report-to-the-congress-medicare-payment-policy/ (Accessed 3/22/23).

[2]             “What We Do” Medicare Payment Advisory Commission, https://www.medpac.gov/what-we-do/ (Accessed 3/23/23).

[3]         “January 13-14, 2022: Public Meeting” Medicare Payment Advisory Commission, (Accessed 3/23/23).

[4]             “MedPAC: Increase hospital pay, no change for physicians in 2023” By Maya Goldman, Modern Healthcare, January 13, 2022, https://www.modernhealthcare.com/medicare/medpac-increase-hospital-pay-no-change-physicians-2023 (Accessed 3/23/23); “MedPAC votes on 2023 payment recommendations” American Hospital Association, https://www.aha.org/news/headline/2022-01-13-medpac-votes-2023-payment-recommendations (Accessed 3/23/23).

[5]             “Chapter 3: Hospital Inpatient and Outpatient Services” in “Report to the Congress: Medicare Payment Policy” Medicare Payment Advisory Commission, March 2023, https://www.medpac.gov/wp-content/uploads/2023/03/Ch3_Mar23_MedPAC_Report_To_Congress_SEC.pdf (Accessed 3/23/23), p. 56.

[6]             Ibid.

[7]             “MedPAC Releases March 2023 Report to Congress” American Association of Medical Colleges, March 17, 2023, https://www.aamc.org/advocacy-policy/washington-highlights/medpac-releases-march-2023-report-congress (Accessed 3/22/23).

[8]             “Hospitals get a slight pay boost” By Arielle Dreher and Maya Goldman, Axios, April 11, 2023, https://www.axios.com/2023/04/11/hospitals-get-a-slight-pay-boost?utm_campaign=KHN%3A%20Daily%20Health%20Policy%20Report&utm_medium=email&_hsmi=253835163&_hsenc=p2ANqtz-_2fpBaPWFjqTS_EfawsDCjBnN_i38UVMlBKyp457vNU0O_flDvjpbTtdAa_63RyoK0-SMpAC5ZpOT597zFQ_AdpUpweA&utm_content=253835163&utm_source=hs_email (Accessed 4/12/23).

[9]             Ibid.

[10]           “MedPAC Releases March 2023 Report to Congress” American Association of Medical Colleges, March 17, 2023, https://www.aamc.org/advocacy-policy/washington-highlights/medpac-releases-march-2023-report-congress (Accessed 3/22/23).

[11]           Ibid.

[12]           “Chapter 3: Hospital Inpatient and Outpatient Services” in “Report to the Congress: Medicare Payment Policy” Medicare Payment Advisory Commission, March 2023, https://www.medpac.gov/wp-content/uploads/2023/03/Ch3_Mar23_MedPAC_Report_To_Congress_SEC.pdf (Accessed 3/23/23), p. 56.

[13]           Ibid., p. 84–85.

[14]           Ibid., p. 91.

[15]           “Hospitals get a slight pay boost” By Arielle Dreher and Maya Goldman, Axios, April 11, 2023, https://www.axios.com/2023/04/11/hospitals-get-a-slight-pay-boost?utm_campaign=KHN%3A%20Daily%20Health%20Policy%20Report&utm_medium=email&_hsmi=253835163&_hsenc=p2ANqtz-_2fpBaPWFjqTS_EfawsDCjBnN_i38UVMlBKyp457vNU0O_flDvjpbTtdAa_63RyoK0-SMpAC5ZpOT597zFQ_AdpUpweA&utm_content=253835163&utm_source=hs_email (Accessed 4/12/23).

[16]           “FY 2024 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Proposed Rule – CMS-1785-P” Centers for Medicare and Medicaid Services, April 10, 2023, https://www.cms.gov/newsroom/fact-sheets/fy-2024-hospital-inpatient-prospective-payment-system-ipps-and-long-term-care-hospital-prospective (Accessed 4/12/23).

[17]           “CMS Releases FY 2023 IPPS and LTCH Final Rule” By Miranda Franco, Holland & Knight, August 11, 2022, https://www.hklaw.com/en/insights/publications/2022/08/cms-releases-fy-2023-ipps-and-ltch-final-rule (Accessed 4/12/23).

[18]           “Hospitals get a slight pay boost” By Arielle Dreher and Maya Goldman, Axios, April 11, 2023, https://www.axios.com/2023/04/11/hospitals-get-a-slight-pay-boost?utm_campaign=KHN%3A%20Daily%20Health%20Policy%20Report&utm_medium=email&_hsmi=253835163&_hsenc=p2ANqtz-_2fpBaPWFjqTS_EfawsDCjBnN_i38UVMlBKyp457vNU0O_flDvjpbTtdAa_63RyoK0-SMpAC5ZpOT597zFQ_AdpUpweA&utm_content=253835163&utm_source=hs_email (Accessed 4/12/23).

[19]           “MedPAC Releases March 2023 Report to Congress” American Association of Medical Colleges, March 17, 2023, https://www.aamc.org/advocacy-policy/washington-highlights/medpac-releases-march-2023-report-congress (Accessed 3/22/23); “March 2023 Report to the Congress: Medicare Payment Policy” Medicare Payment Advisory Commission, March 15, 2023, https://www.medpac.gov/document/march-2023-report-to-the-congress-medicare-payment-policy/ (Accessed 3/22/23).

[20]           “Report to the HHS Secretary: Review of the Medicare Economic Index” 2012 Medicare Economic Index Technical Advisory Panel, August 2021, available at: https://www.cms.gov/Regulations-and-Guidance/Guidance/FACA/Downloads/MEI-Review-Report-to-HHS.pdf (Accessed 5/25/21).

[21]           “MedPAC Releases March 2023 Report to Congress” American Association of Medical Colleges, March 17, 2023, https://www.aamc.org/advocacy-policy/washington-highlights/medpac-releases-march-2023-report-congress (Accessed 3/22/23).

[22]           Ibid.

[23]           Ibid.

[24]           “MedPAC Issues Report to Congress Recommending Medicare Policy, Payment Updates” Health Law Weekly, American Health Law Association, March 17, 2023, https://www.americanhealthlaw.org/content-library/health-law-weekly/article/b22170f4-27b6-45c9-a6f7-a5453b8ebaa2/MedPAC-Issues-March-Report-to-Congress?utm_campaign=Weekly+eNewsletters&Token=8b4b11c4-00dd-4401-afb6-aeecec653e94 (Accessed 3/22/23).

[25]           Ibid.

[26]           Ibid.

[27]           Ibid.

[28]           Ibid.

[29]           “MedPAC Releases March 2023 Report to Congress” American Association of Medical Colleges, March 17, 2023, https://www.aamc.org/advocacy-policy/washington-highlights/medpac-releases-march-2023-report-congress (Accessed 3/22/23).

[30]           Ibid.

[31]           “Medicare Payment Advisory Commission Releases Report To Congress On Medicare Payment Policy” Medicare Payment Advisory Commission, March 15, 2023, https://www.medpac.gov/wp-content/uploads/2023/03/March_2023_MedPAC_Report_Press_Release_SEC.pdf (Accessed 3/23/23).

[32]           “Industry groups agree MedPAC’s inflationary update is not enough” By Amy Baxter, HealthExec, March 15, 2023, https://healthexec.com/topics/professional-associations/healthcare-associations/american-medical-association-ama/industry (Accessed 3/22/23).

[33]           “AMA commends MedPAC for move to recognize costs of practicing medicine” American Medical Association, March 15, 2023, https://www.ama-assn.org/press-center/press-releases/ama-commends-medpac-move-recognize-costs-practicing-medicine (Accessed 3/22/23).

[34]           “Industry groups agree MedPAC’s inflationary update is not enough” By Amy Baxter, HealthExec, March 15, 2023, https://healthexec.com/topics/professional-associations/healthcare-associations/american-medical-association-ama/industry (Accessed 3/22/23).

[35]           “March 15, 2023: MGMA statement on March 2023 MedPAC report” By Anders Gilberg, Medical Group Management Association, March 15, 2023, https://www.mgma.com/news-insights/press/march-15,-2023-mgma-statement-on-march-2023-medpac (Accessed 3/22/23).

[36]           “Industry groups agree MedPAC’s inflationary update is not enough” By Amy Baxter, HealthExec, March 15, 2023, https://healthexec.com/topics/professional-associations/healthcare-associations/american-medical-association-ama/industry (Accessed 3/22/23).

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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.