Reduced post-acute care rates could save Medicare billions

A research brief out of think tank Urban Institute evaluates the prospect of reducing Medicare spending by reining in excessive post-acute care rates.

Right now, there are different payment structures in place for post-acute care in its different settings including skilled nursing facilities, inpatient rehabilitation facilities, long-term care hospitals and home health.

Home health serves 3 million people and results in $16.9 billion in Medicare spending, while 1.2 million people take advantage of skilled nursing facilities, costing the system $28.5 billion. Inpatient rehabilitation facilities and long-term care hospitals cost Medicare $11.9 billion, according to a Medicare Payment Advisory Commission (MedPAC) report to Congress in March.

Urban Institute’s report found several solutions to curbing Medicare’s spending including reducing payments to post-acute care providers, offering bundled payment policies for patients to better manage care of users at skilled nursing facilities and moving payments for home health services from Part A to Part B to mitigate the hospital insurance fund deficit.

The hospital insurance component of the Medicare program pays for post-acute services and receives its funding from payroll taxes imposed on workers’ earnings. A recent Medicare report projected that the Hospital Insurance Trust Fund would become insolvent around 2031, and its financing gap from 2023 to 2032 is approximately $333 billion. The Congressional Budget Office (CBO) pushed back its timeline, saying Medicare funds could be exhausted by 2033.

It is estimated a 5% reduction in payment rates for skilled nursing facilities, inpatient rehabilitation facilities and home healthcare would have saved Medicare $2.7 billion in 2021 had it been implemented that year.

“The actual payment rate changes for fiscal year 2024 are a 6.4% increase for skilled nursing facilities and a 3.7% increase for inpatient rehabilitation facilities,” the Urban Institute report said.

MedPAC had previously recommended a unified post-acute payment system for all four care settings, basing payments on patient characteristics rather than the setting. This would generate savings for Medicare while possibly reducing the payment rate, according to Urban Institute’s report. It cited a CBO report showing a unified payment system would save $79 billion over 10 years. The Centers for Medicare & Medicaid Services also analyzed (PDF) a unified PAC proposal in June 2022.

MedPAC called for a 3% rate reduction in skilled nursing facilities and inpatient rehabilitation facilities, and a 7% reduction in home health for 2024, but noted it would take Congress stepping in to reduce payment rates in line with MedPAC’s recommendations.

Shifting home health spending from Part A to Part B would transfer almost $6 billion in annual spending away from the Hospital Insurance Trust Fund.

“This would be more than just an accounting change, as it could raise Part B premiums and increase the general federal revenue needed for Part B,” said the report. “Such a policy could include a provision to limit premium increases, say, for enrollees with lower incomes. Though the shift would help address the near-term issue of HI solvency, it would not address the longer-term issue of Medicare sustainability.”

Other proposals include introducing a 10% coinsurance for home health use in traditional Medicare and introducing a copayment for home health use in traditional Medicare.

The report also revealed that cost-sharing obligations for post-acute care services would likely add to financial burdens for beneficiaries.

Urban Institute’s Medicare policy simulation model disclosed that of the 3.1 million members who used skilled nursing facilities or home health care in the prior 12 months, their average out-of-pocket cost was $1,800. Yet these enrollees are often older than other Medicare enrollees and have lower incomes.