As is the case every year, publication of CMS’ Notice of Proposed Rulemaking was eagerly anticipated by salivating policy wonks (mea culpa), anxious hospital managers and the people who sell to them. Add the current national economic crisis, with its impacts on capital availability and revenues, and the stakes seemed especially high this year. A major Medicare hospital reimbursement squeeze could have a chilling effect on overall hospital margins and purchasing power, and a consequent effect throughout the life sciences — diagnostics, therapeutic devices, hospital supplies and equipment.
CMS’ proposed rule for fiscal 2010 (beginning October 1, 2009) acute inpatient hospital reimbursement under Medicare’s Inpatient Prospective Payment System was published May 1.
At a staggering 1,228 pages of exposition, explanation, detailed data analysis and bureaucratic mumbo-jumbo, the NPRM contains a vast array of specifics about proposed changes to the MS-DRG system, recalibration of the relative value of DRGs, administrative requirements for hospitals, and — most importantly — the bottom line for hospital payments.
Overall, proposed changes are minor — a few new ICD9 codes, a few MS-DRG reassignments, a few new quality measures added to mandated hospital reporting, and a relatively small change in per-case Medicare reimbursement.
Not to worry — at least not a lot. At the highest level, the 3,513 U.S. acute hospitals paid under the IPPS will absorb a 0.5 percent reduction in per-case Medicare payments — primarily due to adjustments for coding and documentation associated with the introduction last year of Medicare’s new MS-DRG system and the need to maintain cost-neutrality between that system and the legacy MDG system. It seems that case acuity under the new system — which introduced formal reimbursement differentiation for cases based on the presence of complicating conditions — was higher than predicted, leading to the need to reduce per-case payments to compensate.
Rural hospitals are the hardest hit, with a 1.3 percent reduction compared to -0.4 percent for urban hospitals. Within those two major groupings, there are different impacts according to size (urban hospitals with more than 500 beds will see only a 0.2 percent reduction) and region (urban hospitals in the mountain states actually enjoy a 0.4 percent increase; rural hospitals in the Pacific region are hit with a 1.9 percent reduction), but the redistributive impact of the proposed rule is relatively minor when all is said and done. (You can review all of the detailed breakdowns of impacts in Table 1 of the NPRM’s regulatory impact analysis at p. 1,139 of the document.)
Can hospitals absorb this reduction? The Medicare Payment Assessment Commission (MedPAC), an independent Congressional agency established by the Balanced Budget Act of 1997 (P.L. 105-33) to advise the U.S. Congress on issues affecting the Medicare program, believes they can. In testimony (PDF) to the Health Subcommittee of the House Ways and Means Committee March 17, MedPAC chairman Glenn Hackbarth was clear:
Most indicators of payment adequacy for hospital services are positive; hospitals continue (despite the generally constrained fiscal environment) to expand the services they offer, and quality of care continues to improve. All this despite the fact that U. S. hospitals’ Medicare margins — the relationship between Medicare revenues and the cost of caring for Medicare patients — are negative (-5.9 percent in 2007 and as high as a projected -6.9 percent in 2009).
So why the optimism?
Hackbarth is remarkably forthright. Private insurers make up the difference. But it isn’t just a simple matter of cross-subsidies. MedPAC research shows that the hospitals with the highest private insurance margins have the highest Medicare per-case costs; those that can’t achieve high private-payer margins have lower costs across all classes of payer — with no discernable impact on quality:
“Hospitals’ costs are not immutable. MedPAC research shows that hospitals under financial pressure are able to constrain their costs. … [And] Medicare payments are still adequate to cover the costs of efficient hospitals.”
The news here for device manufacturers — particularly those focused on therapeutic devices implanted in an inpatient setting (cardiovascular, orthopedic, neurologic, etc. — is generally neutral. Hospitals will see a bit more pressure to control costs, but should be able to find necessary economies in administrative and non-clinical staffing areas.
Devices used in therapeutic procedures that generate revenue should not be affected by the 0.5 percent reduction. Nor should so minor a reduction meaningfully increase the fiscal constraints already in place for purchase of high-ticket diagnostics (MRI, PET, etc.), OR and other equipment. The proposed Medicare changes don’t help alleviate current pressures, but they don’t make things worse either.
Prospects for future years are muddier. Absent major policy changes, CMS anticipates somewhat greater downward pressure on per-case payment in 2011. In addition, hospitals will need to demonstrate adequate quality indicator performance, not simply compliance with quality reporting requirements, in order to avoid payment penalties.
And the specifics of healthcare reform remain a major unknown. In the increasingly constrained Medicare payment environment of the next 2-3 years, where is the money to pay for new investments required to implement the electronic health record, device inter-operability and other IT infrastructure initiatives that are integral to the Obama program? The challenges will be greater, for hospitals and for device companies, in the next few years.
